Chapter 3 - Discussion Questions - Answers

1. What information do strategic planners expect to get from performing exter-nal and internal business environmental scanning?Answer:External and internal environmental scanning provide planners with a window into the enterprise's marketplace and the strengths and weaknesses of its re-sources and capacities. External environmental scanning reveals the busi-ness's competitive strengths, the forces driving marketplace change, the ac-tions of competitors, opportunities for future success, and attractiveness of the firm to customers. An effective understanding of the marketplace enables planners to understand how closely the firm's strategies, value propositions, products, services, and supply channel delivery systems match the needs of the customer. The purpose of internal environmental scanning is assessing the degree to which the enterprise's current internal capabilities match the needs of its market strategies. Often, the failure of companies to survive and prosper is the result of the failure of their productive resources (people competencies, capital, plant and equipment, and other assets) to execute the strategies the firm has tried to pursue in the marketplace. In the end, the goal of internal business scanning is to measure how far the organization's resources and in-ternal strategies are out of synchronization with the external business strate-gies guiding their marketplace efforts.

2. Detail the steps used to craft a corporate business strategy.Answer:The development of effective corporate-level plans involves five steps. The first step is the definition of the enterprise's long-term vision and corporate mission culminating in the formulation of the objectives management wants to achieve as well as serving as the basis for tracking the company's progress and performance. The second step is concerned with determining the concrete courses of action the enterprise must follow if it is to realize the corporate mission and objectives. In the next step, the corporate strategy is translated into business unit mission, goals, and strategies. Step four is concerned with the development of functional business unit strategies. In this area, the func-tional business departments (marketing, sales, production, logistics, and so on) must each have a strategy that details how departmental competencies and capabilities will support the business unit strategy. The final level of corpo-rate-level planning is the creation of business unit operating strategies. Oper-ating strategies are concerned with the management of operating units, such as plants, distribution warehouses, and transportation, and specific operating activities such as logistics, marketing campaigns, product development, and budgeting.

3. Discuss Michael Porter's five generic competitive strategies.Answer:

Porter maintains that there are five competitive strategies. Low-cost provider. In this strategy, the business pursues tactical and op-

erational strategies that will enable it to achieve low production and dis-tribution costs so that it can capture competitive price leadership and win market share. The source of cost advantage may focus on economies of scale, proprietary technologies, supply chain efficiencies, geography, out-sourcing of processes, and other factors. This strategy is best when there are rival sellers with similar pricing and products, product differentiation is hard to achieve, buyers can easily switch, and buyers have the power to bargain down prices.

Broad differentiation. In this strategy, the firm seeks to offer some prod-uct or service that is unique and highly valued by a broad base of cus-tomers. Differentiation can be based on products, the delivery systems by which the product is transacted, the marketing approach, and intangible features of the product or service, such as image and prestige, the buying experience, and service. This strategy depends on having a unique strate-gic competency in efficient product, distribution, design and engineering quality, innovation, or technical superiority that protects the differentia-tion strategy. This strategy is best when there are many ways to differen-tiate the product and customers perceive these differences as providing value; customers wants and needs are diverse; and there are few com-petitors possessing a similar product/service differentiation.

Best-cost provider. In this hybrid approach, a company seeks to blend product with high differentiation with a lower cost than what competitors can match. The product offered is significantly better than competing low-cost products and sometimes almost as good as a high-cost alterna-tive. The customer base is value- and price-conscious and constitutes a sizeable part of the overall market.

Focused low-cost provider. In this strategy, the business focuses its prod-uct and service offerings on a well-defined, but narrow market segment and seeks to underprice competitors by utilizing operations that have lower production, services, and distribution costs. Market focus is charac-terized by geographical uniqueness, specialized requirements, or special product/service attributes appealing to a small market niche.

Focused differentiation. In this strategy, the business unit offers highly differentiated products with customized attributes to a well-defined, but narrow market segment. The product/service appeals to specialized cus-tomer wants and needs. Customers normally are willing to pay a pre-mium for the product or service.

4. Why is a supply chain strategy so important for an effective corporate busi-ness strategy?Answer:Supply chain strategy has arisen in response to a multitude of factors ranging from globalization, new technologies, and outsourcing to the growth of chan-

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nel partnerships and the "leaning" of channels of supply that affect the busi-ness on a strategic level. Because of the impact of these and other factors, three key facets of the importance of the supply chain to the success of the business strategy have emerged. First, the scope of supply chain management is much larger than just the execution of daily operations functions−it is also concerned with the strategic coordination and collaboration of the business with supply channel partners. Second, supply chain management is not lim-ited to just optimizing the performance of logistics functions−it also is a pow-erful strategy that not only supports but also drives sustainable competitive advantage. The objective of this dynamic is creating net value, building a competitive supply and delivery infrastructure, synchronizing supply with de-mand, and measuring performance globally. And third, supply chain strategy is the function where the business's objectives and the capabilities of the sup-ply chain network are reconciled. This dynamic is, in fact, perhaps the central goal of supply chain strategy.

5. How does supply chain strategy create value?Answer:Supply chain strategy creates value through five functions. Operating cost reduction. Operating cost reduction through effective sup-

ply chain management is crucial to the success of the business strategy. Value creation levers include supply chain efficiency in old and new markets, response time to react, risk plans, and suppliers willing to take favorable terms.

Value creation through increasing revenues. The supply chain has a very important role in increasing revenues. Value creation levers include dif-ferentiation from competition with value-added services and increasing customer loyalty.

Competitive advantage through differentiated customer service capabili-ties. Competitive advantage achieved through differentiated customer service. Value creation levers include customer value of on-time, depend-able delivery; quick response; flexibility in executing schedule and order changes; and influencing the customer's purchasing decisions.

Competitive advantage through strategic supplier engagement. Value creation levers include strength of collaborative relationships, strength of supplier loyalty, product development cycle time reduction, on-schedule product introduction, and fast production ramp up.

Value creation through long-term equity improvement (e.g. brand eq-uity). The importance of the supply chain's ability to grow the company's equity in the eyes of the marketplace.

6. Explain the basic trade-off between responsiveness and efficiency for each of the six supply chain performance drivers discussed in the text.Answer:

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The fundamental trade-off when making customer focus decisions is be-tween the cost of providing order winning products and services and the level of responsiveness that these products and services provide the com-pany’s customers.

The fundamental trade-off when making channel design decisions is be-tween the cost of the number, location, and type of facilities (efficiency) and the level of responsiveness that these facilities provide the com-pany’s customers.

The fundamental trade-off when making product sourcing decisions is between the cost of acquiring and running production plants, process choices, the level of capacities, the amount of production inventories, and the depth of backward vertical integration and the level of responsiveness gained by outsourcing product sourcing.

The fundamental trade-off when making inventory decisions is the in-creased responsiveness attained by stocking more inventory in the chan-nel system and the decline in efficiencies caused by the cost of addi-tional facilities, extra safety stocks, and outbound transportation.

The fundamental trade-off for transportation is between the cost of trans-porting a given product (efficiency) and the speed with which that prod-uct is transported (responsiveness). The transportation choice influences other drivers such as inventory and facilities.

Good information systems can help a firm improve both responsiveness and efficiency. The information driver is used to improve the perfor-mance of other drivers. Accurate information can help a firm improve ef-ficiency by decreasing inventory and transportation costs. Accurate infor-mation can improve responsiveness by helping a supply chain better match supply and demand.

7. Explain the role of each of the supply chain performance drivers in supply chain strategy.Answer: Customer focus. This resource driver contains the strategy as to how sup-

ply chain resources support market requirements. Being responsive to the market strategy requires that the supply chain possess the ability to meet both the daily requirements as well as the long-term needs of the cus-tomer by developing a distinct set of competencies and capabilities that supply the market strategy with a unique source of competitive advan-tage.

Channel design. The design of the supply channel is a fundamental com-ponent in structuring strategies related to responsiveness and efficiency. Design decisions are important because they determine the overall per-formance of the supply chain configuration. Several design decisions must be taken into consideration. First, what is the role each facility is to play in the supply chain strategy? Included are decisions regarding what processes, inventories, and transportation functions are to be performed

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by each channel node. Second, how is channel network design to balance efficiency with responsiveness? As the number of supply chain facilities are reduced and inventories consolidated, supply chain efficiency in-creases and vice versa. Third, decisions regarding the number and loca-tion of facilities are very critical since they represent a long-term com-mitment. And finally, what are the types and capacities of supply chain resources needed to meet strategic performance targets.

Sourcing. Companies must acquire inventories either through purchase or internal production. The choice between the two or a mixed strategy im-pacts the competitive performance attributes of the supply chain strategy. The decision to purchase inventories is the result of cost trade-off analy-sis where it is found that outsourcing production is more competitive, provides access to missing core competencies, and decreases overall plant and operations costs than performing production using company-owned resources. The decision to source internally or externally should be based on responsiveness and efficiency goals.

Inventory. Inventory contributes to supply chain strategy in several ways. For example, if the marketing strategy requires high levels of responsive-ness, the supply chain can locate a complex supply network with quanti-ties and delivery points close to the customer. On the other hand, for a firm pursuing a low-cost strategy, inventory costs would be reduced by centralized stocking. Inventories can also be driven by manufacturing strategies. Make-to-stock production would result in potentially large fin-ished good and safety stock inventories. Assemble-to-order and make-to-order strategies would result in almost no finished goods but potentially extensive inventories of production inventories. The basic trade-off when designing supply chain inventory strategy is establishing the cost of a level of desired inventory against potential lost customer sales.

Transportation. The availability of inexpensive, efficient, and easily ac-cessed transportation activates several critical drivers of competitive ad-vantage. To begin with, transportation enables companies to bridge the geographical gap between the place where products are produced and the place where they are consumed. Second, the more developed the trans-portation system, the greater the ability of businesses to compete with other companies in distant markets on an equal footing. Third, the wider the product distribution and the greater the demand, the more producers can leverage economies of scale in production and channel transportation costs. Finally, the more efficient and the lower the cost of transportation, the lower the selling price. Because transportation costs to the producer are normally calculated into the price of products, as costs decline and delivery capabilities rise, producers and distributors normally pass on the savings to their customers in the form of lower prices, thereby increasing marketplace advantage.

Technology. Technology enables supply chains to perform two essential tasks. The first is the collection and application of information to facili-tate the improvement of the efficiency and responsiveness of supply

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chain resources and assets. The value and utility of information is depen-dent on the supply chain structure and the markets served. Information enables supply chains to position inventory at the optimal points in the supply channel, ensure inventory is available to meet customer demand and the lowest cost, and source product from the most appropriate suppli-ers. Technology enables companies to share vital information with their customers and suppliers, develop forecasts to project demand into the fu-ture, and to validate the availability of productive capacities. The second task of technology is to either directly drive or provide the supporting in-frastructure for supply chain transformational, marketing, sales and ser-vice, financial, and distribution processes.

8. Establishing strategic "fit" can be undertaken from two directions. What does this mean?Answer:The first direction implies that there is a low level of existing fit between mar-ket requirements and supply chain capabilities. In this environment, market requirements drive supply chain resource. Achieving strategic fit begins with a comprehensive definition of the market requirements and competitive posi-tion. Next, the market requirements must be translated into meaningful con-tent that describes how the performance attributes of the existing supply chain resources will respond to market objectives. Finally, gaps occurring in supply chain performance drivers must result in the enhancement of resource capa-bilities to meet responsiveness targets. The second direction implies, on the other hand, that the supply chain possesses unique and strategic competitive capabilities and that markets should be shaped that fully exploit these core ca-pabilities. The direction of achieving strategic fit is not absolute: the ongoing interplay between markets and supply chain resources continually expose the company to new challenges and opportunities.

9. What are some of the obstacles planners face when attempting to establish a strategic fit?Answer:There are many obstacles inhibiting the achievement of strategic fit. Some of these obstacles are the result of growing uncertainty in demand and supply caused by market decisions. For example, a company may decide to increase its market responsiveness by reducing delivery lead times. Such a decision will require potentially significant changes to supply chain performance at-tributes and resource drivers. Possible responses would be to development postponement processes to delay product differentiation, increased manufac-turing capacity flexibility, increased buffer inventories to deal with growing demand and supply uncertainty, increased number of locations, and the selec-tion of transportation functions based on speed, flexibility, reliability, and

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quality. Other obstacles are increases in customer demand for shorter delivery times, lower cost, and higher product performance; globalization of the sup-ply base; changing business and technology environments; and the develop-ment of new business and marketplace strategies.

10. Why is supply chain risk management important?Answer:Supply chain risk management is important for the several reasons. To begin with, risk management stimulates supply chain best practices. For example, risk management is a key driver in the implementation of lean concepts and practices. Second, risk management generally improves supply chain partner relationships as risk sharing and risk information improves. It also increases trust among channel members since risk management practice demonstrates commitment and capability the supply chain can count on. Visibility to supply chain-wide risk stimulates recognition of the reality of the constant exposure to risk experienced by internally and external supply chain functions. Third, risk management creates a heightened sense of the reality of soft risk (risk that is difficult to measure) and unintended consequences in business manage-ment and the need for constant awareness and vigilance toward decisions, practices, and goals that may unintentionally increase or decrease risk in the supply chain. Finally, every business faces the balance point of risk and re-ward. Conventionally, earning a greater reward generally requires enduring a greater risk. Risk management ensures that risk exposure is minimized while the organization seeks optimal reward by efficiently and effectively leverag-ing its people, assets, capabilities, and resources

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