Strategic decisions in SCM

It’s a matter of survival

Do we need Customer
relationship Management
 Who cares sale is a sale, make one sale
and move on to another.
 Can we satisfy customers on individual
basis.
 Exceed the expectations or at least
meet them.
Who is competing?
 Companies? Or
 The supply chains.
 And the success and failure of supply
chains is ultimately determined by the
end customer in the market place.
 Getting the right product at the right
place at the right time is key to survival.
Cont…
 Service/ support
 Why customers leave their suppliers?
 09% because of competition
 12% because of relocation
 28% because of no special reason
 51% because of complaints that were
not handled.
Strategy
 A set of plan and policies by which a
company aims to gain long term
competitive advantage.
 E.g. of long term SCM decisions
 The number location and size of distribution center
 Terms and conditions of long term contracts with the
suppliers
 Outsourcing
 Personnel and system selection.
But…
 All the above depends upon what kind
of strategic fit you are looking for
 As supply chain integrates lots of
functions
 Competitive and Supply
Chain Strategies
 Competitive strategy: defines the set of customer needs a firm seeks to satisfy through its products and
services
 Product development strategy: specifies the portfolio of new products that the company will try to develop
 Marketing and sales strategy: specifies how the market will be segmented and product positioned, priced,
and promoted
 Supply chain strategy:
 determines the nature of material procurement, transportation of materials, manufacture of product or

creation of service, distribution of product

 Consistency and support between supply chain strategy, competitive strategy, and other functional

strategies is important
 The Value Chain: Linking Supply
Chain and Business Strategy

Finance, Accounting, Information Technology, Human Resources

New Marketing
Product and Operations Distribution Service
Development Sales

Supply chain
Achieving Strategic Fit
 How is strategic fit achieved?
Achieving Strategic Fit
 Strategic fit:
 Consistency between customer priorities of

competitive strategy and supply chain capabilities

specified by the supply chain strategy
 Competitive and supply chain strategies have the

same goals
 A company may fail because of a lack of strategic fit
or because its processes and resources do not provide
the capabilities to execute the desired strategy
 Example of strategic fit -- Dell
How is Strategic Fit Achieved?
 Step 1: Understanding the customer
and supply chain uncertainty
 Step 2: Understanding the supply chain
 Step 3: Achieving strategic fit
Step 1: Understanding the Customer and
Supply Chain Uncertainty

 Identify the needs of the customer segment

being served
 Quantity of product needed in each lot
 Response time customers will tolerate
 Variety of products needed
 Service level required
 Price of the product
 Desired rate of innovation in the product
Step 1:Cont…
 Overall attribute of customer demand
 Demand uncertainty: uncertainty of
customer demand for a product
 Implied demand uncertainty: resulting
uncertainty for the supply chain given
the portion of the demand the supply
chain must handle and attributes the
customer desires
Step 1:Cont…
 Implied demand uncertainty also related to
customer needs and product attributes
 First step to strategic fit is to understand
customers by mapping their demand on the
implied uncertainty spectrum
What is this implied demand
uncertainty?
 Consider the following products…
 Unbranded Salt
 Indicab car
 Nokia E63
Achieving Strategic Fit
 Understanding the Customer
 Lot size
 Response time
Implied
 Service level Demand
 Product variety Uncertainty
 Price
 Innovation
Impact of Customer Needs on Implied
Demand Uncertainty

Customer Need Causes implied demand

uncertainty to increase because …
Range of quantity increases Wider range of quantity implies
greater variance in demand
Lead time decreases Less time to react to orders
Variety of products required Demand per product becomes more
increases disaggregated
Number of channels increases Total customer demand is now
disaggregated over more channels
Rate of innovation increases New products tend to have more
uncertain demand
Required service level increases Firm now has to handle unusual
surges in demand
 Levels of Implied Demand
Uncertainty
Predictable Predictable supply and uncertain Highly uncertain
supply and demand or uncertain supply and supply and demand
demand predictable demand or somewhat
uncertain supply and demand

Salt at a An existing A new

supermarket automobile communication
model device
Correlation Between Implied Demand
Uncertainty and Other Attributes

Attribute Low Implied High Implied

Uncertainty Uncertainty
Product margin Low High

Avg. forecast error 10% 40%-100%

Avg. stockout rate 1%-2% 10%-40%

Avg. forced season- 0% 10%-25%

end markdown
Now the question is at what
cost?
 There is a cost to achieving responsiveness
 Supply chain efficiency: cost of making and
delivering the product to the customer
 Increasing responsiveness results in higher
costs that lower efficiency
 Second step to achieving strategic fit is to
map the supply chain on the responsiveness
spectrum
Step 2: Understanding the
Supply Chain
 How does the firm best meet demand?
 Dimension describing the supply chain is supply chain
responsiveness
 What is this responsiveness?
 Supply chain responsiveness -- ability to
 respond to wide ranges of quantities demanded

 meet short lead times

 handle a large variety of products

 build highly innovative products

 meet a very high service level

Understanding the Supply Chain: Cost-
Responsiveness Efficient Frontier
Responsiveness

High

Low
Cost
High Low
Achieving Strategic Fit Shown on the
Uncertainty/Responsiveness Map
Responsive
supply chain

Responsiven of Fit
o ne ic
ess spectrum Z teg
t ra
S

Efficient
supply chain

Certain Implied Uncertain

demand uncertainty demand
spectrum
Step 3: Achieving Strategic Fit
 Step is to ensure that what the supply
chain does well is consistent with target
customer’s needs
 Uncertainty/Responsiveness map
 Zone of strategic fit
 Examples: Dell,
Step 3: Cont…
 All functions in the value chain must support the
competitive strategy to achieve strategic fit
 Two key points
 there is no right supply chain strategy

independent of competitive strategy

 there is a right supply chain strategy for a given

competitive strategy
Comparison of Efficient and Responsive
Supply Chains

Efficient Responsive
Primary goal Lowest cost Quick response
Product design strategy Min product cost Allow postponement
Pricing strategy Lower margins Higher margins
Mfg strategy High utilization Capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Supplier selection strategy Cost and low quality Speed, flexibility, quality
Transportation strategy Greater reliance on low cost Greater reliance on
modes responsive (fast) modes
Other Issues Affecting Strategic Fit

 Multiple products and customer

segments
 Product life cycle
 Competitive changes over time
Multiple Products and
Customer Segments
 Firms sell different products to different customer
segments (with different implied demand
uncertainty)
 The supply chain has to be able to balance efficiency
and responsiveness given its portfolio of products
and customer segments
 Two approaches:
 Different supply chains

 Tailor supply chain to best meet the needs of each

product’s demand
Product Life Cycle
 The demand characteristics of a product and the needs of
a customer segment change as a product goes through
its life cycle
 Supply chain strategy must evolve throughout the life
cycle
 Early: uncertain demand, high margins (time is
important), product availability is most important, cost is
secondary
 Late: predictable demand, lower margins, price is
important
 pharmaceutical firms, Intel
Other considerations for
strategic fit…
 Supplier
Competitive Changes Over
Time
 Competitive pressures can change over time
 More competitors may result in an increased emphasis
on variety at a reasonable price
 The Internet makes it easier to offer a wide variety of
products
 The supply chain must change to meet these changing
competitive conditions
 Supply chain Communities

 Leverage the core competences of each partner

 For increased growth and unparalleled
efficiency.
 Optimize each others efforts.
 Flow of information.
Customer relationship
Management strategy

Superior business
Supply chain strategy
performance

Supplier relationship
Management strategy Results in
Why has it become such an
important issue?
 In an era where high quality standards
are a minimum requirement just to
compete, quality no longer becomes a
competitive differentiator.
 Paying attention to customers after the
sale with responsive and proactive
service and support can set a company
apart from its competition.
Dells Business Model.
 Direct selling
 Direct relationship with customers
 First hand information
 Building computers based on components
available in the market.
 Less burden of owning assets, research and
development risks.
 Spread the development and manufacturing
risk among the various suppliers.
How?
 Accumulating inventory in the fast moving PC
industry is high risk proposition since the
components can become obsolete very
quickly.
 Virtual integration.
 Linking the suppliers and customers on real
time.
 Sony monitors are picked up at Sony's
Mexican factory and matched at Texas facility
and delivered to customers.
Essentials for supply chain to
become strategic for CRM.
 Technology:
 Front line employees ability to manage customers relations
effectively.
 Atmosphere of innovation:

Strategic superiority ultimately comes from innovation.
 Organizational environment.
 Act locally and think globally
 Decentralized and flexible
 Shared vision