Chapter 3

Supply Chain performance: Achieving Strategic Fit and Scope

1-Competative Strategy
Defines the set of customer needs that company seek to satisfy through its products and services

2-product development Strategy

Defines the portfolio of new products that company will try to develop

3-Marketing and Sales Strategy

Specifies how the market will be segmented and product positioned, priced and
promoted

4-supply Chain Strategy

Determines the Nature of material procurement, transportation of material &

distribution of product, manufacture of product or creation of service

Two keys to success or failure of company

(a) Competitive and supply chain strategies should have
the same goals
(b) Consistency and support between Competitive Strategy
and supply Chain Strategy and other functional
strategies is very important to the success of company
(c) Lack of strategic fit
(d) Firm’s processes and resources do not provide the
capabilities to execute the desired strategy
The value chain
Linking the supply Chain and Business Strategy
Emphasizes the close relationship between all the functional strategies within a company

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Achieving Strategic Fit
Three basic steps to Achieving Strategic Fit

Strategic Fit means the consistency between the customer priorities of Competitive Strategy
and supply Chain capabilities specified by supply Chain Strategy

1- Understanding the customer and supply chain uncertainty

Identify the Needs of customer segment being served because it has great effect on
implied demand uncertainty

- Quantity of product Lot size (increase)

- Variety of products needed (increase)
- Response time customers will tolerate (decrease)
- Service Level required (increase)
- Desired rate of innovation in the product (increase)
- Price of product
2-Understanding the supply chain (It means how the firm best meet demand?)

Map the supply Chain on the responsiveness spectrum

Highly efficient somewhat efficient somewhat efficient highly responsive

O 0 o 0
Steel mill Hanes apparel most automotive Dell

It is related to what called Supply Chain responsiveness which means the ability to

- Respond to wide range of Quantities demanded

- Meet short lead times
- Handle a large variety of products
- Build highly innovative products
- Meet a very high service level

3- Achieving Strategic Fit

Ensure that what the supply chain does is consistent with target customer, s needs.
There are two different extreme supply chains
1- Efficient Supply chain ( Barilla) Lower cost and Lower margins
2- Responsive Supply chain (Dell) Quick response and Higher margins

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Expanding the scope of strategic fit

The functions and stages within a supply chain that device an integrated strategy with a
shared objective, There are two different extreme

(A)- Each function at each stage develop its own strategy

(B)- All functions in all stages devise a strategy jointly

Five categories
1-intra-company intra-operation scope

It is the most limited scope which is concerned with one operation within a functional
area inside the company

2-intra-company intra-functional scope

Includes all operations within a function inside the company

3-intra-company inter-functional scope

All functional strategies are developed to support both each other and the competitive
strategy in order to maximize company profit

4-inter-company inter-functional scope

Each company evaluate its actions in the context of the entire supply chain

5-Flexible-intercompany scope (agile)

A firm’s ability to achieve strategic fit when partnering with supply chain stages that
change over time

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Some important notes (True & False and MCQ Questions)
1- Supply chain strategy must evolve (change) over the product life cycle(PLC )

2- There is a close connection between the design and management of supply chain
flows and the success of a supply chain

3- A firm that is not on the cost –responsive frontier can improve both
responsiveness and cost performance

4- Supply chain capabilities includes

-frequent breakdowns
-Unpredictable and low yields
-Poor quality
-limited supply capacity
- Inflexible supply chain
- evolving production process

5- Supply chain efficiency: cost of making and delivering the product to the
customer

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 Chapter 4
Supply Chain performance Drivers and metrics
1-Facilities
- -places where inventory is stored, assembled or fabricated
- -production and storage sites

Role in the competitive strategy

- If efficiency is a strategic competitive priority, a firm can use economies of scale
- If responsiveness a strategic competitive priority, a firm can use a large numbers of
smaller facilities

The basic Trade-Off between efficiency and responsiveness

The most Trade-Off that managers face when making facilities decisions is between the
costs of numbers of facilities and type of facilities (efficiency) and the level of
(responsiveness) that these facilities provide
-increasing numbers of facilities increases facility and inventory cost but decreases
transportation cost and response time

Components of Facilities decisions

(a) Location
-centralization in one location (efficiency) vs. decentralization many numbers of
facilities (responsiveness) Toyota & Honda
-proximity to customers

(b) Capacity (the maximum amount a facility can process)

- Flexibility versus efficiency
- Manufacturing methodology Product focused vs. process focused

(c) Warehousing methodology

- SKU storage, job lot, cross docking

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2-Inventory
- Raw materials,WIP,finished goods within a supply chain
- Inventory policies

Role in the competitive strategy

- If efficiency is a strategic competitive priority, a firm can reduce the inventory level to
reduce cost and to be more efficient through centralized stocking
- If responsiveness is a strategic competitive priority, a firm can locate larger amount of
inventory closer to customers

The basic Trade-Off between efficiency and responsiveness

The most Trade-Off that managers face when making inventory decisions is between the
efficiency and responsiveness as increasing inventory level make the supply chain more
responsive to customers and reduce production and transportation cost because of
improved economies of scale ( Nordstrom)

Components of Inventory decisions

(a) Cycle inventory
-average amount of inventory used to satisfy demand between shipments
-depend on lot size

(b) Safety Inventory

- Inventory held in case demand exceeds expectations
- cost of carrying too much inventory versus cost of losing sales
(c) Seasonal Inventory
- Inventory built up to counter predictable variability in demand
- cost of carrying additional inventory versus cost of flexible production

(d) Level of product availability (high = high level of responsiveness)

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3-Transportation (moving product between different stages in supply chain)
Role in the competitive strategy
- If responsiveness is a strategic competitive priority, a firm can use faster transportation
modes which provide greater responsiveness to customers who are willing to pay for it
- If efficiency is a strategic competitive priority, a firm can use slower transportation
modes for customers whose priority is price.
The basic Trade-Off between efficiency and responsiveness
The most Trade-Off that managers face when making transportation decisions is cost of
transporting a given product ( efficiency) and the speed with that product is transported
(responsiveness) as using fast modes of transport raises responsiveness and
transportation cost but lowers the inventory holding cost

Components of Transportation decisions

(e) Modes of transportation
-air, truck, rail, ship, electronic………….etc
-vary in cost, speed, size of shipment, flexibilty

(f) Route and network selection

- Route: path along which a product is shipped
- Network: collection of location and routes

(g) In-house or Outhouse

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4-Information (data and analysis regarding inventory, facility, transportation )
Information is the biggest important driver that affects each of other drivers

Role in the competitive strategy

- allows supply chain to become more efficient (reduce cost) and in the same time to
become more responsiveness (improving responsiveness)

The basic Trade-Off between efficiency and responsiveness

Information is the most valuable driver that affects the supply chain responsiveness as
the good and accurate information reduce the need for a trade-off and improve both
efficiency and responsiveness

Components of Transportation decisions

(a) Push (MRP) versus Pull
(b) Coordination and information sharing
(c) Forecasting and aggregate planning
(d) Enabling technologies
- EDI - Internet – ERP- SCM software
5-Sourcing
Set of business process required to purchase goods and services

6-Pricing
The process by which a firm decides how much to charge customers for its products and services

Major obstacles to achieving strategic fit (increasing implied uncertainty)

1- Increasing product variety

2- Increasingly demanding customers
3- Decreasing PLC
4- Fragmentation of supply chain ownership
5- Globalization (local optimization and lack of global fit )
6- Difficulty executing new strategies
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 Chapter 5
Design the distribution network
- Distribution occurs between every pairs of stages in supply chain
- Distribution is moving and storing a product from the supplier stage to a
customer stage in supply chain.

- Distribution network performance evaluated along two dimensions at the

highest level
(a) Customers needs that are met (6 customer services)
(b) Cost of meeting customer needs (4 drivers)
The appropriate distribution network can be used to achieve a variety of supply
Chain objectives ranging from low cost to high responsiveness

Examples: Dell distributes its PCs directly to the end consumers

HP distributes through resellers
Gateway ship its PCS directly from factory to customers
Apple distribute its PCs through many retail stores
P&G distribute directly its products through large chains (supermarkets)

Elements of customer service

1- Response time :time between when a customer places an order and receive delivery
2- Product variety : number of different products that customer desires
3- Product availability: probability of having product in stock when order arrives
4- Customer experience: the ease with which customers can place and receive order as
well as other aspects of value chain that sales staff provide
5- Order visibility: the ability of customers to track his orders from placement to delivery
6- Return-ability: : the ease with which customers can return unsatisfactory merchandise

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How the design of distribution affects on cost of four main drivers??

As the number of facilities in a supply chain increases, the inventory and resulting inventory costs
also increase. To decrease inventory costs, firms try to consolidate and limit the number of facilities
in their supply chain network.

Outbound transportation costs per unit tend to be higher than inbound costs because
inbound lot sizes are typically larger. Increasing the number of warehouse locations decreases the
average outbound distance to a customer and makes outbound transportation distance a smaller
fraction of total distance travelled by the product. Thus, as long as inbound transportation
economies of scale are maintained, increasing the number of facilities decreases total transportation
cost. Facility costs decrease as the number of facilities is reduced, because a consolidation of
facilities allows a firm to exploit economies of scale.

As the number of facilities increases, total logistics costs first decrease and then increase.
Each firm should have at least the number of facilities that minimize total logistics costs.

As a firm wants to further reduce the response time to its customers, it may have to increase
the number of facilities beyond the point that minimizes logistics costs.

A firm should add facilities beyond the cost-minimizing point only if managers are confident
that the increase in revenues because of better responsiveness is greater than the increase in costs
because of the additional facilities.

In general, no distribution network will outperform others along all dimensions. Thus, it is important to
ensure that the strengths of the distribution network fit with the strategic position of the firm.

How the distributors add value to a supply chain and improve its performance??
Distributors add value to a supply chain between a supply stage and a customer stage if there are
many small players at the customer stage, each requiring a small amount of the product at a time.

The value added increases if distributors carry products from many manufacturers.

Improvement in supply chain performance occurs for the following reasons:-

1- Reduction in inbound transportation cost because of TL shipments from

manufacturers to distributor.
2- Reduction in outbound transportation cost because the distributor combines
products from many manufacturers into a single outbound shipment
3- Reduction in inventory cost because distributor aggregates safety inventory rather
than disaggregating at each retailer
4- Better response time than manufacturers By carrying inventory closer to the point
of sale
5- Offering one-stop shopping
Distributors are able to
6- More stable order stream to manufacturers compared to erratic orders from each
retailer)

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