SUPPLY CHAIN MANAGEMENT

Chapter 2 – SC Performance: Achieving Strategic Fit

Session 3
 Competitive Strategy
• Set of customer needs a firm seeks to satisfy through its
products and services
– Wal-Mart (variety and cost) vs. McMaster-Carr (variety and
response time)
– Blue Nile (variety and cost) vs. Zales (response time and sales
service)
• Defined based on customer preferences

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 The Value Chain
F i n a n c e , I n f o r m a t i o n Te c h n o l o g y, A d m i n i s t r a t i o n , H u m a n R e s o u r c e
New Product Marketing
Operations Distribution Service
Development and Sales

• 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 & promoted
• Supply chain strategy:
– determines the nature of material procurement, transportation of materials, manufacture
of product or creation of service, distribution of product
• DELL – Direct Sales (initially) and PCs through resellers (2007)
• Amazon – Warehouses to stock and partial distribution through third party
• Toyota – Production facility in major markets

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 Strategic Fit
• Strategic Fit
– Competitive Strategy (customer priorities) and SC strategy
(capabilities) must have aligned goals
• A company’s failure – conflict
– Lack of strategic fit, or
– Processes/resources do not provide execution capabilities to
support the fit
• Dell (1993 to 2006 and then 2007 onwards)

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 Achieving Strategic Fit
Implied
• Identify customer Demand
segment’s needs Uncertainty
• Quantity & variety
of product Understanding the
• Response time SC
• Service level • The degree of SC
• SC Responsiveness to
required responsiveness
customer requirements
• Price of the product vs. must match the
• Desired rate of • SC Efficiency on cost implied uncertainty
innovation from demand and
• Efficiency vs. supply
Understanding the Responsiveness (frontier)
Customer and SC Achieving Strategic
Uncertainty Fit

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 Implied Demand/ Supply Uncertainty
• Implied Demand Uncertainty may increase if:
– Quantity or variety increases
– Lead time decreases
– Channels for distribution increase
– Rate of innovation increases
• When there is high Implied Demand Uncertainty, product margins, forecasting
error, stock-outs and forced markdowns are also higher
• Implied Supply Uncertainty may increase due to:
– Frequent breakdowns
– Unpredictable and low yields
– Limited or inflexible capacity
– Evolution of the production process
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 Efficient vs. Responsive SC
Efficient Responsive
Primary goal Lowest cost Quick response

Product design strategy Minimum product cost Modularity to allow postponement

Pricing strategy
Manufacturing strategy
Inventory strategy
Lead time strategy
Lower margins – price sensitive
customer
Low cost through high utilization
Minimize inventory to lower cost
Reduce but not at the expense of
greater cost
Higher margins
Capacity flexibility - uncertainty cushion
Buffer inventory – uncertainty cushion
Aggressively reduce even if costs are
significant

Supplier selection strategy Based on cost and quality Based on speed, flexibility, reliability
and quality
Transportation strategy Greater reliance on low cost Greater reliance on responsive (fast)
modes modes

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 Zone of Strategic Fit
Responsive SC

Responsiveness
Spectrum

Efficient SC

Certain Implied Uncertainty Uncertain

Demand Spectrum Demand

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 Roles Across the SC
Supplier absorbs
the least implied Manufacturer absorbs Retailer absorbs most of
uncertainty and less implied the implied uncertainty
must be very uncertainty and must and must be very
efficient be somewhat efficient responsive

Supplier Manufacturer Retailer SC 1

Extent of Implied Uncertainty for the SC

Supplier Manufacturer Retailer SC 2

Supplier absorbs Manufacturer absorbs Retailer absorbs

less implied most of the implied the least implied
uncertainty and uncertainty and must be uncertainty and
must be somewhat very responsive must be very
efficient efficient

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 Other Issues Affecting Strategic Fit
• Multiple products and customer segments
– Different products to different customer segments – Different Implied Uncertainty
– SC’s ability to balance efficiency and responsiveness given a diverse portfolio
– Two approaches:
• Different SCs
• Tailor SC to best meet the needs of each product’s demand

• Product life cycle

– SC strategy must evolve throughout the life cycle
• Early: uncertain demand, high margins, product availability is critical, low emphasis on cost
• Late: predictable demand, lower margins, cost becomes important
• SC must change from emphasizing responsiveness to emphasizing efficiency

• Globalization and Competitive changes over time

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 Expanding Strategic Scope
• IKEA:
– Competitive Strategy: Offer reasonable variety at low prices
– Transfers final assembly and last-mile delivery to customer (product and stores)
– All functions focus on efficiency and growing SC surplus
• Supplier – large volumes, few modules, low cost
• Transportation – ship large quantities of unassembled modules to large stores and low cost

• Scope of Strategic Fit – all functions within the firm and stages across
the SC that devise an integrated strategy with an aligned objective
– Intra-company Intra-operation Scope: Minimize Local Cost
– Intra-company Intra-functional Scope: Minimize Functional Cost
– Intra-company Inter-functional Scope: Maximize Company Profit
– Inter-company Inter-functional Scope: Maximize SC Surplus
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 Next Session
• Go through chapter 3
• Prepare Case Study on 7-eleven Japan Co.
(Page 69 – 75 of the course textbook)

PLEASE BE WELL PREPARED!!

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