Supply Chain Performance: Achieving Strategic Fit

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Supply Chain PerformanceAchieving Strategic Fit
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Strategic Decisions

• Strategic Decisions are ones that keep an
  organisation matched to its environment.
• Motivation
• Assure long term survival
• Ensure profit growth

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The Value Chain in a company
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Competitive Strategy

• A companys competitive strategy defines the set
  of customer needs that it seeks to satisfy
  through its products and services.
• Compaq (immediate availability) vs. Dell
  (customisation)
• ParkNShop vs. CitiSuper
• Based on the customers priorities
• Targets one or more customer segments
• Aim provide goods/services to satisfy these
  customers needs

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Competitive Dimensions

• Cost
• Quality
• Time
• Flexibility/Variety
• Strategic Positioning
• Defines those positions that a firm wants to
  occupy in the competitive product space.

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Corporate Strategy, Competitive Priorities and
Functional Inter-relationships

• Market analysis
• segmentation
• needs assessment

Socioeconomic and business environment

• Corporate strategy
• missions
• goals
• distinctive

• Future directions
• global strategy
• new products/services

• Competitive priorities
• cost
• quality
• time
• flexibility

• Capabilities
• current
• needed
• plans

Functional area strategies
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Terry Hill (London Business School) Order
Winners Qualifiers

• Order Qualifiers are those (minimum) criteria
  that a company must meet to be considered as a
  possible supplier (e.g. ISO 9000).
• Order winners are those criteria that wins the
  orders.
• Invariably due to re-directing competitive
  priorities

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Functional Strategies

• Product development
• Product portfolio? Outsourced or internal
  development?
• Marketing
• Customer segments? Products/price/promotion?
  Competitors?
• Finance
• Acquisition and allocation of resources
• Supply Chain
• Procurement, production, delivery and service

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Developing an Operations Strategy (Terry Hill)

• 1. Define corporate objectives.
• 2. Determine marketing strategies (strategic
  positioning).
• 3. Assess how different products qualify in their
  respective markets and win orders against
  competitors.
• 4. Establish appropriate operational processes
  for product manufacture and delivery.
• 5. Provide the operational infrastructure to
  support production/delivery.

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Strategic Fit

• Strategic fit means consistency between the
  competitive advantage that a firm seeks and the
  process capabilities and managerial policies that
  it uses to achieve that advantage.
• Key to success
• Competitive strategy and functional strategies
  must support each other and fit as a co-ordinated
  overall strategy.
• Each function must structure its processes to be
  able to execute these strategies well.

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Achieving Strategic Fit

• Understand the customer
• Customer needs for targeted segments?
• Define service requirements and desired costs
• Understand the supply chain
• Operational characteristics
• Performance vs. customer needs
• Achieving strategic fit
• Re-structure supply chain
• Alter competitive strategy

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Understanding the customer

• Lot size
• Response time
• Service level
• Product variety
• Price
• Innovation

Implied Demand Uncertainty
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Implied vs. real demand uncertainty

• Implied demand uncertainty is the uncertainty
  that exists due to the portion of demand that the
  supply chain is required to meet.
• Affected by
• Portion of demand (Market segment) handled by
  supply chain
• Attributes desired by customers

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Implied Uncertainty Spectrum
Low Implied Demand Uncertainty
Somewhat Certain Demand
High Implied Demand Uncertainty
Somewhat Uncertain Demand
Purely functional products
Established products
New models of existing goods
Entirely new products
Crest toothpaste
Gasoline
New Ford Taurus
Palm Pilot
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Relationship between Demand Characteristics and
Implied Demand Uncertainty (Fisher)
Attribute Low Implied Uncertainty High Implied Uncertainty
Profit margin Low High
Average forecast error 10 40 to 100
Average stockout rate 1 to 2 10 to 40
Average forced end-of-season markdown 0 10 to 25
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Achieving Strategic Fit

• Understand the customer
• Map where their demand is located on the implied
  uncertainty spectrum
• Understand the supply chain
• Achieving strategic fit

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Understanding the Supply Chain

• Supply chain responsiveness is its ability to
• Respond to wide range of quantities demanded
• Meet short lead times
• Manufacture large variety of products
• Meet high service level
• Innovate anticipate customers demand
• Responsiveness comes at a cost

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Understanding the Supply Chain

• Supply chain efficiency is the cost of making and
  delivering a product to the customer.
• Responsiveness cost efficient frontier
• Tradeoff between cost efficiency and
  responsiveness gt
• Supply chain strategy -gt level of responsiveness
  offered

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Responsiveness Spectrum
Highly efficient
Somewhat efficient
Highly responsive
Somewhat Responsive
Advance production schedule low variety or
flexibility
Make-to-stock Long production lead time (months)
Mix model production Production lead time in
weeks
Make-to-order Lead time in days
Automobile production
Dell PC
Glass production
MS underwear
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Achieving Strategic Fit

• Understand the customer
• Map where their demand is located on the implied
  uncertainty spectrum
• Understand the supply chain
• Map where the supply chain capability is located
  on the responsiveness spectrum
• Achieving strategic fit

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Achieving Strategic Fit
Responsive Supply Chain
Strategic Fit
Efficient Supply Chain
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Efficient vs. Responsive Supply Chains
Strategy Efficient Supply Chains Responsive Supply Chains
Primary goal Meet (predictable) demand at low cost Respond quickly to demand
Product design Max performance at min cost Flexible design (modularity, mix--match)
Pricing Lower margin Higher margin
Manufacturing High facility utilisation (low average cost) Capacity flexibility and cushion
Inventory Minimise inventory levels Maintain buffer inventory to meet unexpected demand
Lead Time Reduce, but not at the expense of production costs Aggressively reduce
Supplier Select based on cost and quality Select based on speed, flexibility and quality
Transportation Low costs modes Responsive and speedy modes
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Achieving Strategic Fit

• Understand the customer
• Map where their demand is located on the implied
  uncertainty spectrum
• Understand the supply chain
• Map where the supply chain capability is located
  on the responsiveness spectrum
• Achieving strategic fit
• Match supply chain responsiveness to implied
  demand uncertainty in zone of strategic fit.
• Other functional strategies must also be
  coordinated.

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Outputs of Strategy (Terry Hill)

• Review of implications for manufacturing
  processes and infrastructure support for current
  and future products
• Assess degree of match between capabilities and
  order-winning and order-qualifying needs
• Continual monitor changes in match and mismatch
• Necessary operational re-design, infrastructure
  investments, change schedule integrated into
  corporate strategy in co-ordination with other
  functional strategies

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• There is no SINGLE right supply chain for
  everyone
• There is only a right supply chain for your given
  competitive strategic position.

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Other issues affecting Strategic Fit

• Company offers multiple products to different
  customer segments
• Grainger machine parts to Boeing, Ford and also
  small manufacturers
• Fast-moving products warehouses dispersed slow
  moving items stored centrally
• Product life cycles
• Demand characteristics different at different
  stages of life cycle
• Competitive strategic positioning will also
  change
• Supply chain and other functional strategies must
  adapt as product enters different stages of its
  life cycle
• Competitors actions change over time
• New products/services
• Customers expectations changes

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Drivers of Supply Chain Performance

• inventory
• transportation
• facilities
• information
• impact on supply chain performance
• role in competitive strategy
• decision components

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Inventory

• Present throughout the supply chain Raw
  materials, work-in-process, finished goods at
  manufacturers/distributors/retailers, etc.
• Supply Chain role
• Inventory reflects a mismatch of supply and
  demand
• Purposeful economies-of-scale, anticipate future
  demand
• Related to throughput and flow time
• Competitive Strategy role
• location and amount of finished goods inventory
  impacts product availability (responsiveness)
• centralised/distributed storage impacts costs
• Decision Components
• cycle inventory inventory to meet demand
  between shipments
• safety stock inventory held to meet unexpected
  demand
• seasonal inventory inventory to meet predictably
  variable demand

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Transportation

• Supply Chain role
• Moves product between different stages in a
  supply chain
• Faster transportation modes decreases flow time
• Competitive Strategy role
• More frequent deliveries increases responsiveness
• Transportation system structure and operation
  must match the efficiency-responsiveness balance
  to competitive strategic position
• Decision Components
• Transportation mode
• air, truck, rail, ship, pipeline, Electronic
  delivery
• Network design and route selection
• In-house or out-source

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Facilities

• Supply Chain role
• Locations where value-added takes place in a
  supply chain
• Manufacturing (transformation), Warehousing
  (storage)
• Competitive Strategy role
• Number and dispersion of warehouses affects costs
• facilities, management, inventory, transportation
• Location proximity to customers affects
  responsiveness
• Global and local presence affects customers
  perception
• Decision Components
• Location
• Capacity
• Manufacturing Structure (Process Choices)
• Warehousing Operations
• storage by SKU or job-lots
• cross-docking

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Information

• Supply Chain role
• Information connects the various stages of a
  supply chain
• Daily operational decisions based on information
  about forecasted demand and product availability
• Competitive Strategy role
• New info channels (e.g. Internet B2B platforms)
  allow customers to design their customised
  products (increases responsiveness)
• Data collection increases understanding of
  customers preference
• target market segments
• improves demand forecasts
• Decision Components
• Choice of enabling technologies
• EDI, Internet, ERP (SCM) software, mobile
  networks, RFID
• Push vs pull supply chains impacts info system
  design
• Co-ordination and information sharing
• Forecasting

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Major Obstacles to Achieving Fit

• Multiple owners and/or incentives in a supply
  chain
• Local optimisation and lack of global fit
• Customer fragmentation
• Increased product variety
• Shortening life-cycles
• Increasingly demanding customers
• Increasing implied demand uncertainty
• Higher service expectations
• Globalisation
• Complexity of supply chain
• Increased competition
• Increased difficulty in executing new strategies

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Dealing with obstacles

• Multiple owners
• Contractual co-ordination
• Information co-ordination
• Customer fragmentation
• Mass customisation
• Tailored logistics
• Globalisation
• Global companies, strategic partnerships
• First-mover advantage
• Company culture, investment in human resources

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Summary

• Competitive Strategic Positioning
• Order-winners and qualifiers
• Supply Chain Performance
• Efficiency vs. Responsiveness
• Co-ordinated strategies
• Strategic Fit
• customers implied demand uncertainty spectrum
• supply chain responsiveness-cost spectrum
• Challenges

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References

• Chopra, S. and P. Meindl, Supply Chain
  Management Strategy, Planning and Operations,
  2nd Edition, Prentice-Hall, 2004.
• Marien, E.J., The four supply chain enablers,
  Supply Chain Management Review, Mar-Apr, 2000,
  60-68.
• Hill, T., Manufacturing Strategy Text and Cases,
  3rd Edition, McGraw-Hill, 2000.
• Fisher, M. L., What is the right supply chain
  for your product?, Harvard Business Review,
  Mar-Apr 1997.