Swiss Federal Institute of Technology Zurich (ETH Zurich)

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Supply Chain Strategy

• Swiss Federal Institute of Technology Zurich (ETH
  Zurich)
• Kühne-Stiftung, Führungskräfte-Qualifikationsprogr
  amm Netzwerkmanagement für logistische Prozesse
  (NetloP) 2010
• Zurich, April 22, 2010
• Univ.-Prof. Dr. Stephan M. Wagner
• Chair of Logistics ManagementSwiss Federal
  Institute of Technology Zurich (ETH Zurich)

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Content

1. Supply chain and competitive strategy
2. Empirical results Top management must be
   concerned

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1. Supply chain and competitive strategy
Achieving strategic fit
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A "typical" value chain
Competitive strategy
Product development strategy
Supply chain strategy
Marketing and sales strategy
New product development
Purchasing and Supply
Operations
Distribution
Marketing and sales
Support Finance, accounting, information
technology, human resources

• Consistency and support between competitive
  strategy, supply chain strategy, and other
  functional strategies is important

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Competitive, supply chain and functional
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 the product
  positioned, priced, and promoted
• Supply chain strategy determines the nature of
  material purchasing, the supply and
  transportation of material, the production of
  products, and the distribution of products

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Achieving strategic fit

• Strategic fit
• Consistency between customer priorities of the
  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

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How is strategic fit achieved?

• Step Understanding the customer and supply
  chain uncertainty
• Step Understanding the supply chain
• Step Achieving strategic fit

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2
3
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Understanding customer needs
1

• Identification of the needs of the customer
  segment being served, based on individual
  attributes such as
• Quantity of products needed per lot
• Response time customers will tolerate
• Variety of products needed
• Service level required
• Price of the product
• Desired rate of innovation in the product
• Needs of customers within a particular segment
  very similar
• Needs of customers in different segments very
  different

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Impact of customer needs on implied demand
uncertainty
Customer need Causes implied demand uncertainty to increase because
Range of quantity increases a wider range of quantity implies greater variance in demand
Lead time decreases there is less time to react to orders
Variety of products required increases demand per product becomes more disaggregated
Required service level increases firm now has to handle unusual surges in demand
Number of channels through which products may be acquired increases total customer demand is now disaggregated over more channels
Rate of innovation increases new products tend to have more uncertain demand
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The implied demand uncertainty spectrum
Certain (predictable) supply and demand
Highly uncertain (unpredictable) supply and
demand
Implied demand uncertainty
Low
High

• Examples
• Tomato soup
• Noodles
• Long lead time steel
• Purely practical products

• Examples
• Trendy purses
• High fashion
• Mobile phones
• Entirely new products

Functional products
Innovative products
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Implied demand uncertainty is often correlated
with other characteristics of demand
Attribute Functional products(low implied demand uncertainty) Innovative products(high implied demand uncertainty)
Product margin Low (5-20) High (20-60)
Product life cycle Long (more than 2 years) Short (3 month to 1 year)
Avg. forecast error 10 40-100
Avg. stock out rate 1-2 10-40
Avg. forced season-end markdown 0 10-25
Source Fisher (1997)
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Understanding the supply chain
2

• After understanding implied demand uncertainty,
  the next question is How does the firm best meet
  demand?
• Dimension describing the supply chain is supply
  chain responsiveness
• 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
• Increasing responsiveness results in higher costs
  that lower supply chain efficiency (i.e., cost of
  making and delivering the product to the customer)

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The responsiveness spectrum
Highly efficient
Highly responsive
Somewhat efficient
Somewhat responsive
Supply chain responsiveness

• Example

Example

• Example

Example
Custom-made PCs
Noodles
Underwear
Automobiles
Efficient supply chains
Responsive supply chains
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The cost-responsiveness efficient frontier
Responsiveness
High
Low
Efficiency
Low
High
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Achieving strategic fit
3

• Goal is to ensure that what the supply chain does
  well is consistent with target customer's needs
• All functions in the supply chain must support
  the competitive strategy to achieve strategic
  fit, e.g.
• Purchasing and supply
• Operations
• Distribution
• 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

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Achieving strategic fit
Responsive supply chain
Zone of strategic fit
Responsiveness spectrum
Efficient supply chain
Implied uncertainty spectrum
Predictable demand (functional products)
Unpredictable demand (innovative products)
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Supply chain strategy for different products
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Design principles Comparison of efficient and
responsive supply chains
Criterion Efficient Responsive
Primary goal Lowest cost Quick response
Product design strategy Integral design to minimize product cost Modular design to allow postponement
Pricing strategy Lower margins Higher margins
Manufacturing 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 "Sufficient" quality and cost Speed, flexibility, quality
Transportation strategy Greater reliance on low cost modes Greater reliance on responsive (fast) modes
Source Fisher (1997)
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Other issues affecting strategic fit
Multiple products and customer segments
Competitive changes over time
Product life cycle

• Firms sell different products to different
  customer segments (with different implied demand
  uncertainty)
• Supply chain has to be able to balance efficiency
  and responsiveness given its portfolio of
  products and customer segments
• Two approaches(1) Different supply chains(2)
  Tailored supply chain to best meet the needs of
  each product's demand

• Competitive situation and competitive strategy
  can change over time
• More competitors or increasing Internet sales,
  for example, may result in an increased emphasis
  on variety at a reasonable price
• The supply chain must change to meet these
  changing competitive conditions

• Demand characteristics of a product and needs of
  a customer segment change as a product goes
  through its life cycle
• Supply chain must evolve throughout the life
  cycle
• Early uncertain demand, high margins, product
  availability is most important, cost is secondary
• Late predictable demand, lower margins, price is
  important

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Achieving strategic fit over the product life
cycle
Responsive supply chain
Zone of strategic fit
Responsiveness spectrum
Efficient supply chain
Implied uncertainty spectrum
Predictable demand (functional products)
Unpredictable demand (innovative products)
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Achieving strategic fit becomes increasingly
difficult

• Implied demand uncertainty increases, e.g.
• Increasingly demanding customers
• Decreasing product life cycles
• Increasing variety of products
• Diminishing "control" over the supply chain, e.g.
• Fragmentation of supply chain ownership
• Globalization with more widespread supply chains
• Defining strategy is important, however,
  successful implementation and execution is key.
  This requires, e.g.
• Adequate management
• Talented employees
• Culture (change management)

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2. Empirical results Top management must be
concerned
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We conducted a global supply chain and surveyed
234 mostly stock-listed manufacturing companies

• Global supply chain study conducted from end of
  2007 until mid of 2008 in cooperation with the
  Stanford University and Roland Berger Strategy
  Consultants
• Surveying mainly stock listed manufacturing
  companies in Europe and USA on product and supply
  chain characteristics based on a standardized
  questionnaire1)
• Survey results were combined with publicly
  available financial data
• Total sample consists of 234 different
  companies2) from 16 countries, 5 industry groups,
  with average sales of approx. EUR 11.5 bn

Financial data
Questionaire
1) Focusing on the main product line (sales
driver) of the firm 2) Respondents Top
management of SCM, Purchasing or Logistics
Department
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The main objective was to analyze the impact of
strategic supply chain fit on firm performance

• Identify relevant supply chain design
  characteristics corresponding to the existing
  product characteristics 
• Analyze, if companies design their supply chain
  according their product characteristics to
  achieve "supply chain fit"
• Analyze if companies with supply chain fit
  achieve higher firm performance (measured in
  return on assets, EBIT, sales growth, return on
  capital employed) than companies without fit

Key question How should supply chains be
structured to achieve superior performance?
Product charac- teristics
Firm perfor-mance
Supply chain fit
Supply chain structure
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The focus was on large European and US
manufacturing companies in various industries
Sample composition
Countries
Industries
Revenues
234 Companies
Other
0-50 mio.
Automotive
50-100 mio.
AUT
Engineeredproducts
10 bn and more
4
7
9
CH
100-250 mio.
USA
Electrical equipment
7
6
29
8
29
32
5
18
UK
250-500 mio.
9
9
8
13
500-1,000 mio.
21
23
FRA
28
35
Consumergoods
Process industry
GER
1-10 bn
Survey was conducted mainly in USA and Western
Europe
Focus on manufacturing industries
64 of blue chips with sales turnover gtEUR 1 bn
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The responses include blue chips in all industry
clusters Examples
Consumer goods (49)
Process industry (54)
Engineered products (66)
Electrical equipment (43)
Automotive products (22)
( ) Total number of companies per industry segment
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Firm performance ROA significantly higher for
companies with supply chain fit
ROA (2004-2006, average, )
Standardized products
Customized products
SC structure
Firm performance Avg. ROA
SC structure
Firm performance Avg. ROA
No. of companies
No. of companies
FIT
114 (63)
21 (39)
Efficient
11
Efficient
5
FIT
66 (37)
33 (61)
Responsive
5
Responsive
9
Total
180
? 6 points
Total
54
? 4 points
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Companies with a supply chain fit also outperform
on ROCE, sales growth and EBIT margin
ROCE, sales growth, EBIT margin (2004-2006,
average, )
Standardized products
Customized products
ROCE value1)
Sales growth
EBIT margin
ROCE value1)
Sales growth
EBIT margin
SC structure
SC structure
FIT
Efficient
25
14
10
Efficient
14
8
8
FIT
Responsive
11
6
6
Responsive
31
13
10
? points
14
8
4
? points
17
5
2
1) ROCE EBIT / Capital employed (Net fixed
assets current assets current liabilities)
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Companies with strategic supply chain fit
outperform on all performance indicators (1)

• Out of 180 companies with standardized products,
  63 achieve a strategic supply chain fit. They
  have designed their supply chains according
  efficient design characteristics and prioritize
  cost, inventory reduction and improvement of
  utilization rates. Compared to companies without
  supply chain fit
• ROA 6 points
• ROCE 14 points
• Sales growth 8 points
• EBIT margin 4 points

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Companies with strategic supply chain fit
outperform on all performance indicators (2)

• Out of 54 companies with customized products, 61
  achieve a strategic supply chain fit. They have
  designed their supply chains according responsive
  design characteristics and prioritize
  flexibility, delivery reliability and service
  levels. Compared to companies without supply
  chain fit
• ROA 4 points
• ROCE 17 points
• Sales growth 5 points
• EBIT margin 2 points

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Summary of supply chain challenges 2009-2010
identified by the firms
Source Wagner/Erhun/Grosse-Ruyken (2009)