CHAPTER 2:

SUPPLY CHAIN PERFORMANCE

(ACHIEVING STRATEGIC FIT &
SCOPE)
BPB32303
Learning Objectives
1. Explain why achieving strategic fit is critical to a
company’s overall success.
2. Describe how a company achieves strategic fit between
its supply chain strategy and its competitive strategy.
3. Discuss the importance of expanding the scope of
strategic fit across the supply chain.
4. Describe the major challenges that must be overcome
to manage a supply chain successfully.

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Competitive and Supply Chain Strategies
• Competitive strategy:
• The set of customer needs a firm seeks to satisfy
through its products and services, relative to its
competitors.
• Based on customer’s priorities.
• Targets one or more customer segments.

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The Value Chain

Finance, Accounting, Information Technology, Human Resources

New Product Marketing
Operations Distributions Service
Development & Sales

All functional strategies must support one

another and the competitive strategy

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Achieving Strategic Fit
• Strategic fit refers to consistency between the:
1. Customer priorities that the competitive
strategy hopes to satisfy, AND
2. Supply chain capabilities that the supply chain
strategy aims to build.
• Aligned goals – competitive & supply chain
strategies.

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Achieving Strategic Fit
1. Competitive strategy and functional strategies must
fit together to form a coordinated overall strategy.
2. All functional departments must appropriately
structure their processes and resources to be able to
execute these strategies successfully.
3. Align the overall supply chain design and the role of
each stage to support the supply chain strategy.

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 How is Strategic Fit Achieved?

Achieving strategic fit.

Understanding the
supply chain.

Understanding the
customer and supply
chain uncertainty.

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Step 1: Understanding the Customer and
Supply Chain Uncertainty
• Understand Customer needs for each targeted segment
and the uncertainty these needs impose on supply chain.
• Uncertainty – demand, disruption & delay etc.
• Customer demand from different segment varies:
• Desired rate of innovation in the product
• Quantity of product needed in each lot
• Response time customers will tolerate
• Variety of products needed
• Service level required
• Price of the product

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Step 1: Understanding the Customer and
Supply Chain Uncertainty
• Demand uncertainty – uncertainty of customer demand
for a product.
• Implied demand uncertainty – resulting uncertainty for the
portion of the demand the supply chain plans to satisfy
based on the attributes the customer desires.

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 Customer Needs vs. Implied Demand Uncertainty
Customer Need
 Range of quantity required
 Lead time
 Variety of products required
 Number of channels to
acquire product
 Rate of innovation increases
 Required service level
Causes Implied Demand Uncertainty to:
, a wider range of the quantity required implies
greater variance in demand
, there is less time in which to react to orders
, demand per product becomes more
disaggregate
, the total customer demand is now
disaggregated over more channels
, new products tend to have more uncertain
demand
, the firm now has to handle unusual surges in
demand
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Implied Uncertainty and Other Attributes

Low Implied High Implied

Uncertainty Uncertainty
Product margin* Low High
Average forecast error 10% 40% to 100%
Average stock-out rate+ 1% to 2% 10% to 40%
Average forced season-end 0% 10% to 25%
markdown^

* Uncertain demand, less mature & have less competition  margin high
+
Difficulty to match demand & supply
^
Oversupply

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Impact of Supply Source Capability
Supply Source Capability Supply Uncertainty
Frequent breakdowns Increase
Unpredictable and low yields Increase
Poor quality Increase
Limited supply capacity Increase
Inflexible supply capacity Increase
Evolving production process Increase

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Levels of Implied Demand Uncertainty

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Step 2: Understanding Supply Chain Capabilities

• How does the firm best meet demand?

• Supply chain responsiveness is the ability to:
• Respond to wide ranges of quantities demanded.
• Handle a large variety of products.
• Build highly innovative products.
• Meet a very high service level.
• Meet short lead times.

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Step 2: Understanding Supply Chain Capabilities

• Responsiveness comes at a
cost.
• Supply chain efficiency – the
inverse to the cost of making
and delivering the product to
the customer.
• The cost-responsiveness
efficient frontier curve shows
the lowest possible cost for a
given level of responsiveness.

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Responsiveness Spectrum

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Step 3: Achieving Strategic Fit
• Ensure that the degree of supply chain responsiveness is
consistent with the implied uncertainty.
• Assign roles to different stages of the supply chain that
ensure the appropriate level of responsiveness.
• Ensure that all functions maintain consistent strategies
that support the competitive strategy.

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 Zone of Strategic Fit
Supply chain strategy

For high level of performance

a company should move its
competitive strategy (and resulting
implied uncertainty) & SC strategy
(and resulting responsiveness)
toward strategic fit zone

Competitive strategy

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Roles and Allocations

e.g. IKEA
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 Efficient & Responsive Supply Chains
Efficient Supply Chains Responsive Supply Chains

Primary goal Supply demand at the lowest cost Respond quickly to demand

Create modularity to allow

Product design Maximize performance at a
postponement of product
strategy minimum product cost
differentiation
Lower margins because price is a Higher margins because price is
Pricing strategy
prime customer driver not a prime customer driver
Maintain capacity flexibility to
Manufacturing
Lower costs through high utilization buffer against demand/supply
strategy
uncertainty
Inventory Maintain buffer inventory to deal
Minimize inventory to lower cost
strategy with demand/supply uncertainty
Lead-time Reduce, but not at the expense of Reduce aggressively, even if the
strategy costs costs are significant
Select based on speed, flexibility,
Supplier strategy Select based on cost and quality
reliability, and quality

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Tailoring the Supply Chain
• Achieve strategic fit while serving many customer
segments with a variety of products across multiple
channels.
• Requires sharing some links in the supply chain with
some products, while having separate operations for other
links.
• e.g. Dell (customized & responsive) vs. Dell x Wal-Mart
(low cost & efficient)

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Expanding Strategic Scope
• Scope – in terms of supply chain stages, across
which the strategic fit applies.
• Scope of strategic fit – the functions within the
firm and stages across the SC that devise an
integrated strategy with an aligned objective.

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Expanding Strategic Scope
• Intraoperation scope – minimize local cost view; each stage of the
supply chain devises strategy independently, e.g. sales,
production.
• Intrafunctional view – minimize total functional cost; firms align all
operations within a function, e.g. supply chain.
• Interfunctional scope – maximize company profit; functional
strategies are aligned with one another and the competitive
strategy, e.g. sales & marketing and production & distribution.
• Intercompany scope – maximize supply chain surplus; supplier
and customer work together and share information to reduce total
cost and grow supply chain surplus, e.g. Wal-Mart & P&G plan
promotions jointly.
• Agile intercompany scope – a firm’s ability to achieve strategic fit
when partnering with supply chain stages that change over time.

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Challenges
• Increasing product variety and shrinking life cycles:
• Greater product variety and shorter life cycles increase
uncertainty,
• Reduce the window of opportunity within which the
supply chain can achieve fit.
• Globalization and increasing uncertainty:
• Significant fluctuations in exchange rates, global
demand, and the price of crude oil.

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Challenges
• Fragmentation of supply chain ownership:
• Firms are less vertically integrated.
• Able to take advantage of supplier and customer
competencies they did not have.
• New ownership structure, however, makes aligning and
managing the supply chain more difficult.
• Aligning all members of a supply chain has become
critical to achieving supply chain fit

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Challenges
• Changing technology and business environment:
• Customer needs and technology change may force a
firm to rethink their supply chain strategy.
• The environment and sustainability:
• Growing in relevance and must be accounted for when
designing supply chain strategy.
• Opportunities may require coordination across different
members of the supply chain.

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Summary of Learning Objectives
1. Explain why achieving strategic fit is critical to a
company’s overall success
2. Describe how a company achieves strategic fit between
its supply chain strategy and its competitive strategy
3. Discuss the importance of expanding the scope of
strategic fit across the supply chain
4. Describe the major challenges that must be overcome
to manage a supply chain successfully

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THE END
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