Supply Chain Strategic Fit PDF

Supply Chain Management These slides are only for the learning purposes of the Global Supply Chain Management course. Do not distribute these slides. Slides are not a substitute for readings / textbook and are only meant to complement the textbook and readings. Achieving Strategic Fit and Sco...

Supply Chain Management These slides are only for the learning purposes of the Global Supply Chain Management course. Do not distribute these slides. Slides are not a substitute for readings / textbook and are only meant to complement the textbook and readings. Achieving Strategic Fit and Scope 2-1  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: 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, and promoted Supply chain strategy: – determines the nature of material procurement, transportation of materials, manufacture of product or creation of service, distribution of product – Consistency and support between supply chain strategy, competitive strategy, and other functional strategies is important 2-2 The Value Chain: Linking Supply Chain and Business Strategy Finance, Accounting, Information Technology, Human Resources New Marketing Product and Operations Distribution Service Development Sales 2-3  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 A company may fail because of a lack of strategic fit or because its processes and resources do not provide the capabilities to execute the desired strategy Example of strategic fit -- Dell 2-4 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 2-5 Step 1: Understanding the Customer and Supply Chain Uncertainty Identify the needs of the customer segment being served Quantity of product needed in each lot Response time customers will tolerate Variety of products needed Service level required Price of the product Desired rate of innovation in the product 2-6 Step 1: Understanding the Customer and Supply Chain Uncertainty Overall attribute of customer demand Demand uncertainty: uncertainty of customer demand for a product Implied demand uncertainty: resulting uncertainty for the supply chain given the portion of the demand the supply chain must handle and attributes the customer desires 2-7 Step 1: Understanding the Customer and Supply Chain Uncertainty Implied demand uncertainty also related to customer needs and product attributes First step to strategic fit is to understand customers by mapping their demand on the implied uncertainty spectrum 2-8  Achieving Strategic Fit Understanding the Customer – Lot size – Response time – Service level Implied – Product variety Demand – Price Uncertainty – Innovation 2-9 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 2-10  Levels of Implied Demand Uncertainty Predictable Predictable supply and uncertain Highly uncertain supply and demand or uncertain supply and supply and demand demand predictable demand or somewhat uncertain supply and demand Salt at a An existing A new supermarket automobile communication model device Figure 2.2: The Implied Uncertainty (Demand and Supply) Spectrum 2-11  Correlation Between Implied Demand Uncertainty and Other Attributes Attribute Low Implied High Implied Uncertainty Uncertainty Product margin Low High Avg. forecast error 10% 40%-100% Avg. stockout rate 1%-2% 10%-40% Avg. forced season- 0% 10%-25% end markdown Fisher, 1992 2-12  Step 2: Understanding the Supply Chain How does the firm best meet demand? Dimension describing the supply chain is supply chain responsiveness 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 2-13  Step 2: Understanding the Supply Chain There is a cost to achieving responsiveness Supply chain efficiency: cost of making and delivering the product to the customer Increasing responsiveness results in higher costs that lower efficiency Cost-responsiveness efficient frontier Supply chain responsiveness spectrum Second step to achieving strategic fit is to map the supply chain on the responsiveness spectrum 2-14 Understanding the Supply Chain: Cost- Responsiveness Efficient Frontier Responsiveness High Low Cost High Low 2-15  Step 3: Achieving Strategic Fit Step is to ensure that what the supply chain does well is consistent with target customer’s needs Uncertainty/Responsiveness map Zone of strategic fit 2-16  Achieving Strategic Fit Responsive THE DEGREE OF SUPPLY CHAIN RESPONSIVENESS supply chain MUST BE CONSISTENT WITH THE IMPLIED DEMAND UNCERTAINTY Responsiveness spectrum ? Efficient supply chain Certain Implied Uncertain demand uncertainty demand spectrum Source: Chopra & Meindl 2-17  Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map Responsive supply chain Responsiveness spectrum Efficient supply chain Certain Implied Uncertain demand uncertainty demand spectrum 2-18  Step 3: Achieving Strategic Fit All functions in the value chain must support the competitive strategy to achieve strategic fit Two extremes: Efficient supply chains (Barilla) and responsive supply chains (Dell) Two key points – there is no right supply chain strategy independent of competitive strategy – there is a right supply chain strategy for a given competitive strategy 2-19  Efficient vs. Responsive Supply chains: Fisher's Framework Products Functional Innovative Efficient Match Mismatch Supply Chain Responsive Supply Chain Mismatch Match 2-20  Hau Lee’s Supply Chain Uncertainty Framework Demand Uncertainty Low High Supply Chain Strategy Responsive SC Supply Efficient SC Low 1 3 Ex.: Fashion Ex.: Toothpaste Clothing High Risk-Hedging SC Agile SC Uncertainty 4 Ex.: Oil reserve 2 Ex.: Hi tech components 2-21  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 Aggressively reduce even if of greater cost costs are significant Supplier selection strategy Cost and low quality Speed, flexibility, quality Transportation strategy Greater reliance on low cost Greater reliance on modes responsive (fast) modes 2-22 Other Issues Affecting Strategic Fit Multiple products and customer segments Product life cycle Competitive changes over time Growing SC uncertainty Environment & Sustainability 2-23  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 given its portfolio of products and customer segments Two approaches: – Different supply chains – Tailor supply chain to best meet the needs of each product’s demand 2-24  Multiple Products & Customer Segments A departmental store may sell seasonal products with high implied demand uncertainty (SKI JACKETS) along with products with low implied demand uncertainty (T-Shirts) A large firm is much more likely to be concerned with price given the large volumes they generate for Grainger, whereas a smaller company is apt to go to Grainger because it is responsive. [Grainger sells MRO products to large firms like Ford and Boeing] Levi Strauss sells both customized and standard-sized jeans. Both segments served map to different positions along the implied uncertainty spectrum. 2-25  Tailoring the Supply Chain Therefore, the key issue for a company is to create a supply chain that balances efficiency and responsiveness given its portfolio of products and customer segments. All products may share the same line but products requiring high responsiveness may be shipped using FedEx. Levi’s has set up a very flexible manufacturing process for customized jeans and a more efficient manufacturing process for standard-sized jeans. W.W.Grainger holds fast moving items in its decentralized locations close to customer and slow-moving items with high implied demand uncertainty in a centralized warehouse. 2-26  Product Life Cycle Beginning Stages of a Product: 1. Demand is very uncertain 2. High margins; and time is crucial to gaining sales 3. Product availability is crucial to capture market share 4. Cost is of secondary consideration Example: Pharmaceutical firm introducing a new drug Supply Chain Goal Responsiveness with high product availability 2-27  Product Life Cycle Later Stages of a Product: 1. Demand has become more certain 2. Low margins due to increased competition 3. Price becomes a significant factor in customer choice In Pharmaceutical firm ➔ drug goes out of patent and generic drugs are introduced Supply Chain Goal Efficiency becomes the most important characteristic 2-28  Changes in Supply Chain Strategy (over the PLC) Responsive supply chain Responsiveness spectrum As products mature, the supply chain strategy should, in general, move from being responsive to being efficient. Efficient supply chain Certain Implied Uncertain demand uncertainty demand spectrum Source: Chopra & Meindl 2-29  Key Point To achieve strategic fit, a firm must tailor its supply chain to best meet the needs of different customer segments. To retain strategic fit, supply chain strategy must be adjusted over the life cycle of a product and as the competitive landscape changes. 2-30 Competitive Changes Over Time Competitive pressures can change over time More competitors may result in an increased emphasis on variety at a reasonable price The Internet makes it easier to offer a wide variety of products The supply chain must change to meet these changing competitive conditions 2-31 Supply Chain Levers to Deal with Uncertainty Capacity Inventory Time Information Price 2-32  Expanding Strategic Scope Scope of strategic fit – The functions and stages within a supply chain that devise an integrated strategy with a shared objective – One extreme: each function at each stage develops its own strategy – Other extreme: all functions in all stages devise a strategy jointly Five categories: – Intracompany intraoperation scope – Intracompany intrafunctional scope – Intracompany interfunctional scope – Intercompany interfunctional scope – Flexible interfunctional scope 2-33  Expanding Strategic Scope Intra-company Intraoperation: The minimize local cost view Intracompany Intrafunctional: Minimize functional cost view Intracompany Interfunctional: Maximize company profit view Intercompany Interfunctional: Maximize supply chain surplus view Flexible Intercompany Interfunctional Scope The intercompany scope of strategic fit requires firms to evaluate every action in the context of the entire supply chain. The broad scope increases the size of surplus to be shared among all stages of the supply chain. 2-34  Strategic Scope (Intracompany Intraoperation: Minimize Local Cost View) Suppliers Manufacturer Distributor Retailer Customer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy Source: Chopra & Meindl 2-35  Strategic Scope (Intracompany Intrafunctional: Minimize Functional Cost View) Suppliers Manufacturer Distributor Retailer Customer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy Source: Chopra & Meindl 2-36  Strategic Scope (Intracompany Interfunctional: Maximize Company Profit View) Suppliers Manufacturer Distributor Retailer Customer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy Source: Chopra & Meindl 2-37  Strategic Scope (Intercompany Interfunctional: Maximize Supply Chain Surplus) Suppliers Manufacturer Distributor Retailer Customer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy Source: Chopra & Meindl 2-38  We have so far learnt….. Why is achieving strategic fit critical to a company’s overall success? How does a company achieve strategic fit between its supply chain strategy and its competitive strategy? What is the importance of expanding the scope of strategic fit across the supply chain? 2-39