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Supply Chain Management:

Strategic Fit and Scope


(Source: Supply Chain Management, Strategy, Planning
and Operation, By Sunil Chopra, Peter Meindl, D. V.
KalraPearson)
For academic purpose and private circulation only

Competitive strategy
Competitive

strategy defines, relative to its


competitors, the set of customer needs a firm seeks to
satisfy through its products and services.

Competitive strategy is defined based on how the customer

prioritizes product cost, delivery time, variety and quality.


WalMart & Seven Eleven Japan
WalMart: Low price , product availability, variety
Seven Eleven: Convenience, availability and responsiveness
Blue Nile (online diamond retailing model), Zales (Diamond retail stores)
Blue Nile low cost, variety
Zales responsiveness, help in product selection
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Competitive strategy
Competitive strategy of a firm will be defined by

customers priorities.
Competitive strategy targets one or more customer

segments and aims to provide products and services


that satisfy customer needs.

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The Value Chain for a typical organisation


To execute a companys competitive strategy, various functions
in a firm play a role and each develops its own strategy.

Supply chain strategy defines broad structure of supply chain


and includes long term decisions regarding facilities,
transportation, outsourcing etc.

Competitive strategy
All functional strategies as well as supply chain

strategy must support


competitive strategy.

one

another

and

the

E.g. Seven Eleven Japan success can be attributed to excellent

fit among functional strategies including supply chain strategy.


Marketing strategy- convenience, product availability, variety.
Product development strategy: exploits frequent customer
visits to stores, make use of existing infrastructure
Operations and distribution strategy: focuses on high density
of stores, very responsive, excellent information networks
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Achieving Strategic Fit


Strategic fit

It requires that both competitive and supply chain strategies have

aligned goals.

It refers to the consistency between the customer priorities


that the competitive strategy hopes to satisfy and the
supply chain capabilities that the supply chain strategy
aims to build.

A company may fail because of a lack of strategic fit i.e supply


chain do not provide the capabilities to support the desired
strategy fit.

Achieving Strategic Fit


Dell and its Supply Chain
1993-2006:
Competitive strategy was to provide large variety of customised
products at reasonable price.
With focus on customisation, Dells supply chain focus was
designed to be very responsive.
Assembly facilities were designed to be flexible rather than
focussing on low cost and producing large volumes.
Dell PCs were designed to use common components and allow
rapid assembly.
Dell was able to produce customised products with low
inventory.
Because of low inventory, suppliers and carriers were highly
responsive.
4-7

Achieving Strategic Fit


2007 onwards:
Changed its competitive strategy and supply chain
While it continued to offer customisation, it also started

selling PCs through retail stores like Wal-Mart.


In retail sales, focus is on low cost as against customisation
in Direct Sales Channel
Changes were made in earlier flexible and responsive
supply chain that satisfied customisation
Dell increased contract manufacturing in low cost
countries. Also increased inventory levels.

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Steps in Achieving Strategic Fit

To achieve strategic fit, a company must ensure that its

supply chain capabilities support its ability to satisfy the


needs of targeted customer segments.

Three basic steps in achieving strategic fit are:

1. Understanding the customer needs and uncertainty


faced by supply chain
2. Understanding the supply chain
3. Achieving strategic fit

Understanding the customer and supply chain uncertainty

To understand the customer, a company must identify the

needs of the customer segment being served.


Each customer in a particular segment will tend to have

similar needs, whereas customer in different segments can


have different needs.

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Understanding the customer and supply chain uncertainty

Company must also understand uncertainity these needs

impose on the supply chain.


E.g. For the same product, demand varies along certain

attributes for customer making a purchase at:


Seven Eleven- Customer need of convenience
Wall-Mart- Customer need of low cost

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Step 1: Understanding the Customer and Supply Chain


Uncertainty
Customer Demand from different segments varies
along several attributes:

Quantity of product needed in each lot


Response time customers will tolerate
Variety of products needed
Service level required (e.g. high product availability)
Price of the product
Desired rate of innovation in the product
Above are the attributes of demand along which demand
may vary giving rise to demand uncertainty.

Step 1: Understanding the Customer and Supply Chain


Uncertainty

One key measure which combines different attributes of


the demand is Implied demand uncertainty

It is the resulting uncertainty for only the portion of the

demand that the supply chain plans to satisfy and handle


based on the attributes the customer desires.

It is the demand uncertainty imposed on the supply chain


because of the customer needs it seeks to satisfy.

e.g. a firm supplying emergency orders for a product will face a higher
implied demand uncertainty than a firm supplying the same product
with long lead time

Customer Needs and Implied Demand Uncertainty


Customer Need

Causes Implied Demand Uncertainty to

Range of quantity required increases

Increase because a wider range of the quantity required


implies greater variance in demand

Lead time decreases

Increase because there is less time in which to react to orders

Variety of products required increases

Increase because demand per product becomes more


disaggregate

Number of channels through which


product may be acquired increases

Increase because the total customer demand is now


disaggregated over more channels

Rate of innovation increases

Increase because new products tend to have more uncertain


demand

Required service level increases

Increase because the firm now has to handle unusual surges


in demand (but the underlying demand uncertainty may not
change)
Table 2-1

Supply Uncertainty

Supply Source Capability

Causes Supply Uncertainty to...

Frequent breakdowns

Increase

Unpredictable and low yields

Increase

Poor quality

Increase

Limited supply capacity

Increase

Inflexible supply capacity

Increase

Evolving production process

Increase
Table 2-3

Implied Uncertainty
Thus

uncertainty from customer (implied demand


uncertainty) and supply chain (supply uncertainty) can be
combined on an implied uncertainty spectrum.

Implied uncertainty is the uncertainty which a company

faces in achieving a strategic fit between competitive


strategy and supply chain strategy.

4-16

Levels of Implied Uncertainty (Demand and Supply)

Step 2: Understanding Supply Chain Capabilities

Creating a strategic fit requires creating a supply chain strategy

that best meets the demand a company has targeted given the
uncertainty.

This requires understanding and building capabilities /


characteristics in the supply chain

Supply chain responsiveness : It 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

Step 2: Understanding Supply Chain Capabilities

Responsiveness comes at a cost e,g, to wide ranges of


quantities demanded shall require high capacity.

Supply chain efficiency is the inverse of the cost of


making and delivering the product to the customer.

Increases in cost lowers the efficiency.

For every strategic choice to increase responsiveness, there


are additional costs that lower efficiency.

Cost-Responsiveness Efficient Frontier

Step 2: Understanding Supply Chain Capabilities


The cost-responsiveness efficient frontier curve shows the

lowest possible cost for a given level of responsiveness.


It represents the cost-responsiveness performance for the

best supply chains.


It shows trade-off between responsiveness and costs.
Supply chains range from those that focus solely on being

responsive to those that focus on producing and supplying


at low cost.
Thus a key strategic decision for a company is to map

it on responsiveness spectrum i.e. choose the level of


responsiveness it seeks to provide.
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Responsiveness Spectrum

Supply chain strategy is the find the correct balance between

responsiveness and efficiency that fits the competitive


strategy.

Step 3: Achieving Strategic Fit

Ensure that the degree of supply chain responsiveness is

consistent with the implied uncertainty.

Goal is to target high responsiveness for a supply

chain facing high implied uncertainty and efficiency


for a supply chain facing low implied uncertainty.

Increased implied demand uncertainty from customers

and

supply

chain

responsiveness.

is

best

served

by

increasing

Zone of Strategic Fit

Companies should move their competitive strategy (and


resulting implied uncertainty) and supply chain strategy (and
resulting responsiveness) towards zone of strategic fit

Step 3: Achieving Strategic Fit


For achieving strategic fit, 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.


E.g IKEA
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Step 3: Achieving Strategic Fit


IKEA : a Swedish furniture retailer, Stores in 20 countries
Competitive strategy: Target customers who want stylish furniture with
reasonable variety at low prices.
Supply Chain Strategy:
Limits variety of furniture style through modular design, products easy

to assemble. Modular design of products allow moving final assemble


to customer.
Have large stores with large inventory, stocks all styles in stores and
serves customer through stock.
Manufacturers produces large volumes of few modules and focus on
efficiency.
Transportation focuses on shipping large quantities of unassembled
modules at low cost o large stores.

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Step 3: Achieving Strategic Fit


Large stores allow replenishment orders to its manufacturers to be

more stable and predictable. Hence large stores inventory and


modular design decreases the implied demand uncertainty faced by
supply chain.
Stores inventory absorb most of the implied uncertainty and passes

little uncertainty to manufacturers.


Manufacturers are located in low-cost countries and focus on

efficiency.
Thus IKEA provides responsiveness in supply chain with the stores

absorbing most of the uncertainty and being responsive.


Manufacturers and suppliers absorb little uncertainty and are efficient.
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Step 3: Achieving Strategic Fit


England Inc : a furniture manufacturer
Manufactures sofas, chairs etc to order and deliver them furniture
stores across the country within 3 weeks.
Large variety and promise of quick delivery imposes high implied
demand uncertainty on supply chain.
Retailers do not carry much inventory and hence pass on implied
uncertainty to manufacturer.
Thus retailer can be efficient because of less implied uncertainty faced
by them.
Manufacturers have flexible manufacturing process to absorb implied
demand uncertainty and be responsive.
Manufacturer hold more raw material inventory and supplier focus on
efficiency.
If manufacturer decreases its raw material inventory, then supplier
must become more responsive.
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Roles and Allocations

Supply chain can achieve a given level of responsiveness and


efficiency by adjusting roles of each stage. Making one stage
more responsive allow other stage to become more efficient.

Efficient and Responsive Supply Chains

Efficient Supply Chains

Responsive Supply Chains

Primary goal

Supply demand at the lowest cost

Respond quickly to demand

Product design
strategy

Maximize performance at a minimum


product cost

Create modularity to allow


postponement of product differentiation

Pricing strategy

Lower margins because price is a prime


customer driver

Higher margins because price is not a


prime customer driver

Manufacturing
strategy

Lower costs through high utilization

Maintain capacity flexibility to buffer


against demand/supply uncertainty

Inventory strategy

Minimize inventory to lower cost

Maintain buffer inventory to deal with


demand/supply uncertainty

Lead-time strategy

Reduce, but not at the expense of costs

Reduce aggressively, even if the costs are


significant

Supplier strategy

Select based on cost and quality

Select based on speed, flexibility,


reliability, and quality
Table 2-4

Tailoring the Supply Chain

When supplying multiple customer segments with a wide


variety of products through several channels, a firm must
tailor its supply chain to achieve strategic fit.

E.g. Dell: Built responsive supply chain for customised PCs.

For low cost channel (e.g for Wall Mart) designed a low cost

supply chain.

Requires sharing some links in the supply chain with some


products, while having separate operations for other links. (e.g.
Various products may be manufactured at the same plant but those products
requiring responsiveness may be shipped by faster mode of transportation like
courier.

Tailoring the Supply Chain:


Changes Over Product Life Cycle
Beginning stages:
Demand

is very uncertain, and supply may be

unpredictable.
Margins are often high, and time is crucial to gaining

sales.
Product availability is crucial to capturing the market.
Cost is often a secondary consideration.

In this case responsiveness is the most important

characteristic of supply chain.

Changes Over Product Life Cycle

Later stages:
Demand has become more certain, and supply is

predictable.
Margins are lower as a result of an increase in competitive

pressure.
Price becomes a significant factor in customer choice.

In this case efficiency is the most important

characteristic of supply chain.

A Framework for Structuring Drivers

Expanding Strategic Scope

Scope of strategic fit the functions within the firm

and stages across the supply chain that devise an


integrated strategy with an aligned objective.

It refers to the supply chain stages across which


strategic fit applies.

Expanding Strategic Scope

Intraoperation scope minimize local cost view

Each stage of the supply chain devises strategy independently

Intrafunctional scope minimize total functional cost

Firms align all operations within a function

Interfunctional scope maximize company profit

Functional strategies are developed to align with one another


and the competitive strategy

Expanding Strategic Scope

Intercompany scope maximize supply chain surplus


Supplier

and customer work together and share

information to reduce total cost and grow supply chain


surplus.
Competitive playing field has shifted from company

versus company to supply chain versus supply chain

Agile intercompany scope a firms ability to achieve


strategic fit when partnering with supply chain stages that
change over time.

Different Scopes of Strategic Fit Across a Supply Chain

Figure 2-7

Challenges to Achieving and Maintaining Strategic Fit

Increasing product variety and shrinking life cycles

Greater product variety and shorter life cycles increase uncertainty


while reducing 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.
Contd

Challenges to Achieving and Maintaining Strategic Fit

Fragmentation of supply chain ownership

Firms are less vertically integrated

Take advantage of supplier and customer competencies they did


not have

New ownership structure makes aligning and managing the supply


chain more difficult

Aligning all members of a supply chain has become critical to


achieving supply chain fit

Contd

Challenges to Achieving and Maintaining Strategic Fit

Changing technology and business environment

Customer needs and technology change may force a firm to rethink


their supply chain strategy

The environment and sustainability

Issues of environment and sustainability are growing in relevance


and must be accounted for when designing supply chain strategy

Opportunities may require coordination across different members


of the supply chain