Unit 5: Supply Chain performance: Achieving Strategic fit

Topic Covered in Syllabus:

Competitive and supply chain strategies achieving strategic fit

Understanding the customer

Understanding the supply chain

Achieving strategic fit

Obstacles in achieving strategic fit

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Competitive and Supply Chain Strategy

• Competitive strategy: defines the set of customer needs a firm seeks to satisfy through its products and services. It is defined based on how the customer priorities product cost, delivery time, variety and quantity. The competitive strategy targets one or more customer segments and aims to provide products and services that satisfy these customers’ needs.
• Product development strategy: specifies the portfolio of new products that the company will try to develop. It also dictates whether the development effort will be made internally or outsourced.
• 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, and manufacture of product or creation of service, distribution of product ans operation to provide the service.
  • Consistency and support between supply chain strategy, competitive strategy, and other functional strategies is important.
  • Also termed traditionally as “supplier strategy”, operations strategy” and “logistic strategy”.

The Value Chain

To see the relationship between competitive strategy and supply chain strategy we start with the value chain for a typical organization.

New Product Development: creates specifications for the product.
Marketing and Sales: generate demand by publishing the customer priorities that the product and services will satisfy. It also brings customer input back to new product development.
Operations: converts inputs to outputs to create a product using new product specifications.
Distribution: either take the product to the customers or bring the customers to the product.
Services: respond to customer requests during or after the sale

Finance, account, information technology and human resources support and facilitate the functioning of the value chain.

Achieving 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.
• All processes and functions that are part of company’s value chain contribute to its success or failure. A company’s success or failure depends on the following keys.
  • The competitive strategy and all functional strategy must fit together to form a coordinated overall strategy.
  •  The different functions in a company must appropriately structure their process and resources to be able to execute these strategies successfully.
  • The design of the overall supply chain and the role of each stage must be aligned to support the supply chain strategy.
• Example of strategic fit: Dell

How is Strategic Fit Achieved?

There are three basic steps to achieving this strategic fit, which are discussed below.
Step 1: Understanding the customer and supply chain uncertainty
First, a company must understand the customer needs for each targeted segments and the uncertainty these needs impose on the supply chain. To understand the customer, a company must identify the needs of the customer segment being served. The following are the attributes of customers to be served.

• The quantity of product needed in each lot
• The response time that customers are willing to tolerate
• The variety of products needed
• The service level required
• The price of the product
• The desired rate of innovation in the product

Demand Uncertainty is the uncertainty of customer demand for a product. Implied demand uncertainty, in contrast, is the resulting uncertainty for only the portion of the demand that the supply chain plans to satisfy based on the attributes the customer desires.

• Implied demand uncertainty also related to customer needs and product attributes
• The first step to strategic fit is to understand customers by mapping their demand on the
  implied uncertainty spectrum.

In general customer demand from different segments varies along several attributes as follows:

As each individual customer need contributes to the implied demand uncertainty, we can use implied demand uncertainty as a common metric with which to distinguish different types of demand.

Implied Demand Uncertainty is demand uncertainty imposed on the supply chain because of the customer needs it seeks to satisfy.

The following table shows the 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

The first step in achieving strategic fit between competitive and supply chain strategies is to understand customers and supply chain uncertainty. Uncertainty from the customer and the supply chain can be combined and mapped on the implied uncertainty spectrum.

According to fisher (1997), the implied demand uncertainty is correlated with other characteristics of demand.

• Products with uncertain demand are often less mature and have less direct competition. As a result, margins tend to be high.
• Forecasting is more accurate when the demand has less uncertainty.
• Increased implied demand uncertainty leads to increased difficulty in matching supply with demand. For a given product, this dynamic can lead to either a stock out or an oversupply situation.
• Markdowns are higher for products with high implied demand uncertainty because oversupply often results.

Step 2: Understanding the supply chain capabilities
There are many types of supply chains, each of which is designed to perform different task as well. A company must understand what its supply chain is designed to do well. After
understanding the uncertainty that the company faces, the next question is:

• How does the firm best meet demand in the uncertain environment?

The next step is to consider the characteristics of supply chain and categorize them based on different characteristics that influence their responsiveness and efficiency.

Supply chain responsiveness is the 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
• handle supply uncertainty

Responsiveness, however, comes at a cost. To respond to a wider range of quantity demanded, capacity must be increased, which increases cost. This increase in cost leads to second definition:

 

Supply chain efficiency is the inverse of the cost of making and delivering the product to the customer. Increases in cost lower the efficiency.

• Increasing responsiveness results in higher costs that lower efficiency.
• The second step to achieving strategic fit is to map the supply chain on the responsiveness spectrum.
• For every strategic choice to increase responsiveness, there are additional costs that lower the efficiency.

The Cost-Responsive efficient Frontier is the curve showing the lowest possible cost for the given level of responsiveness. The lowest cost is defined based on existing technology; not every firm is able to operate on an efficient frontier. The efficient frontier represents the cost responsiveness performance of the best supply chain

Step 3: Achieving strategic fit

After mapping the level of implied demand uncertainty and understanding the supply chain position on the responsive spectrum, the third and final step is to ensure that the degree of supply chain responsiveness is consistent with the implied demand uncertainty. The goal is to target high responsiveness for a supply chain facing high implied demand uncertainty and efficiency for a supply chain facing low implied uncertainty. The relationship is represented by the “Zone of strategic fit” in the following figure.

• This step is to ensure that what the supply chain does well is consistent with target customer’s needs.
• All functions in the value chain must support the competitive strategy to achieve strategic fit.
• To achieve complete strategic fit, a firm must also ensure that all its functions maintain consistent strategies that support the competitive strategy. All functional strategy must support the goals of the competitive strategy.

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 of greater cost	Aggressively  reduce  even  if  costs  are significant
Supplier selection strategy	Cost and low quality	Speed, flexibility, quality
Transportation strategy	Greater  reliance  on  low cost modes	Greater   reliance   on   responsive (fast) modes

Other Issues Affecting Strategic Fit

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:

o   Different supply chains

o   Tailor supply chain to best meet the needs of each product’s demand

Product life cycle

• The demand characteristics of a product and the needs of a customer segment change as a product goes through its life cycle
• Supply chain strategy must evolve throughout the life cycle
• Early: uncertain demand, high margins (time is important), product availability is most important, cost is secondary
• Late: predictable demand, lower margins, price is important
• Examples: pharmaceutical firms, Intel

As the product goes through the life cycle, the supply chain changes from one emphasizing responsiveness to one emphasizing efficiency

Globalization and 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

Growing supply chain uncertainty

•  Fluctuations in  exchange  rate,  global  demand,  price  impact  supply  chain performance.

The environment and sustainability

• Issues related to environment and sustainability has grown in relevance and must account for when designing supply chain strategy.
• In some instance regulations and perception acts as a risk factor.

Obstacles to achieving strategic fit

1. An increasing variety of products
2. Decreasing product life cycles
3. Increasingly demanding customers
4. Fragmentation of supply chain ownership
5. Globalization
6. Changing business environment
7. Difficulty executing new strategies

 

Questions

1. Define competitive and supply chain strategy.
2. What is value chain? Why it is important to achieve strategic fit?
3. What is strategic fit in supply chain? Explain the various steps to achieve strategic fit.
4. What is supply chain efficiency and responsiveness? Compare efficient and responsive supply chain.
5. Differentiate between demand uncertainty and implied demand uncertainty.
6. What are the various attributes of customer demand? Explain the impact of customer needs on implied demand uncertainty.
7. According to Fisher (1997), how implied demand uncertainty is correlated with other characteristics of demand?
8. What are the abilities of supply chain responsiveness? Explain cost-responsiveness efficient frontier with diagram.
9. Explain the various issues affecting strategic fit.
10. What are the obstacles to achieve strategic fit?