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Strategic Fit and Supply Chain

Integration

Dr. R K Singh

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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

Marketing and sales strategy

Supply chain strategy:

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The Value Chain: Linking Supply Chain and

Business Strategy

New

Product

Development

Marketing

and

Sales

Operations Distribution Service

Finance, Accounting, Information Technology, Human Resources

Business Strategy

New Product

Strategy Marketing

Strategy Supply Chain Strategy

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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

Example of strategic fit -- Dell

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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

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Achieving Strategic Fit

Understanding the Customer

Lot size

Response time

Service level

Product variety

Price

Innovation

Implied

Demand

Uncertainty

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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

increases

Demand per product becomes more

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

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Levels of Implied Demand

Uncertainty

Low High

Price Responsiveness

Customer Need

Implied Demand Uncertainty

Detergent

Long lead time steel

Purely functional products

High Fashion

Palm top computer

Entirely new products

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Correlation Between Implied Demand

Uncertainty and Other Attributes

Attribute Low Implied

Uncertainty

High Implied

Uncertainty

Product margin Low High

Avg. forecast error 10% 40%-100%

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

Avg. forced season-

end markdown

0% 10%-25%

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Step 2: Understanding the

Supply Chain How does the firm best meet demand?

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

Handle supply uncertainty

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Understanding the Supply Chain: Cost-

Responsiveness Efficient Frontier

High Low

Low

High

Responsiveness

Cost

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Step 3: Achieving Strategic Fit

Step is to ensure that what the supply

chain does well is consistent with target

customer’s needs

Examples: Dell, Barilla

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Responsiveness Spectrum

Integrated

steel mill

Dell

Highly

efficient

Highly

responsive

Somewhat

efficient

Somewhat

responsive

Hanes

apparel

Most

automotive

production

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Step 3: Achieving Strategic Fit

All functions in the value chain must support

the competitive strategy

Two extremes: Efficient supply chains (Salt)

and responsive supply chains (Dell)

There is no right supply chain strategy

independent of competitive strategy

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Achieving Strategic Fit Shown on the

Uncertainty/Responsiveness Map

Implied

uncertainty

spectrum

Responsive

supply chain

Efficient

supply chain

Certain

demand

Uncertain

demand

Responsiven

ess spectrum

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Comparison of Efficient and Responsive

Supply Chains Efficient Responsive

Primary goal Lowest cost Quick response

Product design

strategy

Min product cost Modularity to allow

postponement

Pricing strategy Lower margins Higher margins

Mfg strategy High utilization Capacity flexibility

Inventory strategy Minimize inventory Buffer inventory

Lead time strategy Reduce but not at expense

of greater cost

Aggressively reduce even

if costs are significant

Supplier selection

strategy

Cost and low quality Speed, flexibility, quality

Transportation

strategy

Greater reliance on low

cost modes

Greater reliance on

responsive (fast) modes

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Other Issues Affecting Strategic

Fit Multiple products and customer segments

Product life cycle

Competitive changes over time

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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

Two approaches:

Different supply chains

Tailor supply chain to best meet the needs of

each product’s demand

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Product’s Life Cycle

Introduction Growth Maturity Decline

Time

Sales

• Best period to increase market share

•R&D engineering critical

•Practical to

change price

or quality

image

•Strengthen

niche

•Poor time to

change image,

price or quality

•Competitive costs

become critical

•Defend market

position

•Cost control

critical

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SC Strategy during Product Life cycle

The demand characteristics of a product

change as a product goes through its 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

Examples: pharmaceutical firms, Intel

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Changes in Supply Chain strategy over a

Product life cycle

Implied

uncertainty

spectrum

Responsive

supply chain

Efficient

supply chain

Product

Maturity

Product

introduction

Responsiven

ess spectrum

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Competitive Changes Over

Time Competitive pressures can change over time

Increased emphasis on variety at a reasonable

price

The Internet makes it easier to offer a wide

variety of products

The supply chain strategy must change for

strategic fit.

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Expanding Strategic Scope

Scope of strategic fit

The functions and stages within a supply chain that devise

an integrated stategy with a shared objective

Five categories:

Intracompany intraoperation scope

Intracompany intrafunctional scope

Intracompany interfunctional scope

Intercompany interfunctional scope

Flexible interfunctional scope

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Strategic Scope

Suppliers Manufacturer Distributor Retailer Customer

Competitiv

e Strategy

Product Dev.

Strategy

Supply Chain

Strategy

Marketing

Strategy

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Strategic Scope:

Intracompany Intraoperation Scope

Suppliers Manufacturer Distributor Retailer Customer

Competitiv

e Strategy

Product Dev.

Strategy

Supply Chain

Strategy

Marketing

Strategy

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Strategic Scope:

Intracompany Intrafunctional

Scope Suppliers Manufacturer Distributor Retailer Customer

Competitiv

e Strategy

Product Dev.

Strategy

Supply Chain

Strategy

Marketing

Strategy

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Strategic Scope:

Intracompany Interfunctional

Scope Suppliers Manufacturer Distributor Retailer Customer

Competitiv

e Strategy

Product Dev.

Strategy

Supply Chain

Strategy

Marketing

Strategy

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Intercompany

Interfunctional Scope

All stages coordinate strategy across all

functions

Each company must evaluate its actions in

the context of the entire supply chain

Increasing supply chain surplus or profit

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Strategic Scope:

Intercompany Interfunctional

Scope Suppliers Manufacturer Distributor Retailer Customer

Competitiv

e Strategy

Product Dev.

Strategy

Supply Chain

Strategy

Marketing

Strategy

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Flexible Intercompany

Interfunctional Scope

Ability to achieve strategic fit when partnering with

stages that change over time in the supply chain

Customer needs and members of the supply

chain change over time

A firm may have to partner with many different

firms over time

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Drivers of Supply Chain

Performance Facilities

places where inventory is stored, assembled, or fabricated

production sites and storage sites

Inventory raw materials, WIP, finished goods within a supply chain

inventory policies

Transportation moving inventory from point to point in a supply chain

combinations of transportation modes and routes

Information data and analysis regarding inventory, transportation, facilities

throughout the supply chain

potentially the biggest driver of supply chain performance

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A Framework for

Structuring Drivers

Efficiency Responsiveness

Facilities Transportation Inventory Information

Supply chain structure

Drivers

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Obstacles to Achieving

Strategic Fit Increasing variety of products

Decreasing product life cycles

Increasingly demanding customers

Fragmentation of supply chain ownership

Globalization

Difficulty executing new strategies

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Major Obstacles to Achieving Fit

Multiple owners / incentives in a supply

chain

Increasing product variety / shrinking life

cycles / customer fragmentation

Increasing implied uncertainty

Local optimization and lack of global fit

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Definitions of Some SCM Practices

Outsourcing- It is the act of moving some of a firms internal activities and decision responsibility to outside providers (Sink and Langley, 1997). Firm can focus on its core competencies.

Design for Logistic- It involves consideration of material procurement and distribution costs during product design phase.

VMI- Supplier decides on the appropriate inventory levels of each of the products and appropriate inventory policies to maintain the level.

Ex- P&G- Wal-Mart

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Mass customization- Ability of company to deliver highly customized products and services to different customers around the world . Key for it is postponing the task of differentiating a product for a specific customer until the latest possible point in the supply network.-Asian Paints

3PL- It is use of an outside company to perform all or part of firm’s materials management and product distribution functions.

Cross-Docking-Warehouses function as inventory coordination points rather than storage points.-Wal-Mart delivers about 80% of its goods utilizing cross docking technique.

SCM Practices

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SCM Practices

CPFR- Focuses on information sharing among supply chain trading partners for purpose of planning, forecasting, and inventory replenishment. Ex-Wal-Mart and Proctor & Gamble

Electronic data interchange (EDI)-is the direct, computer to computer transmission of interorganisational transactions, including purchase orders, shipping notices, debit or credit memos, and more. Ex-Wal-Mart has a satellite network for electronic data interchange that allows vendors to directly access point of sales data in real time enabling them to better forecasting and inventory management.

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SCM Practices Quick Response- Suppliers receive point of sales

(POS) data from retailers and use this information

to synchronize their production and inventory

activities with actual sales at the retailer.

Risk pooling- Demand across different locations

is aggregated. It reduces demand variability.

Strategic Partnership- Two or more business

organizations that have complementary products

or services join so that each may realize a strategic

benefit.

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Type of industry

• Chemicals • Food

Length of product life

cycle

Level of customization

Type of product • Functional • Innovative

Supply Chain Strategy

Selection of SCM practices

Supply chain capabilities and Resources

• Logistics •Supplier relations •Process capability •Customer service •Information sharing •Organizational structure •E-business readiness

Review of Supply chain

Performance

Model for Selection of SCM Practices

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Thank You