Summary of Learning Objectives

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Why is achieving strategic fit critical to a companys

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?

S.Chopra/Logistics Strategy with modifications by S. DeLurgio

CHAPTER 2
SCM - STRATEGIC FIT

CUSTOMERS DEMAND PRODUCTS WITH

DIFFERENT CHARACTERISTICS
Cost

Customization

Quantity

Quality

Speed

Service

Flexibility

Features
(C, Q, S, F)2

These requirements can vary dramatically for customers

and products. Consider some examples.

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S.Chopra/Logistics Strategy with modifications by S. DeLurgio

Competitive & Supply Chain Strategies

Competitive strategy: defines the target market/customer needs.

Product Development strategy: portfolio of new products to achieve
competitive strategy.
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

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S.Chopra/Logistics Strategy with modifications by S. DeLurgio

SCM - STRATEGIC FIT

ACHIEVING FIT - UNDERSTANDING:
1. THE CUSTOMER/PRODUCT REQUIREMENTS
CQSF2
ALSO - IMPLIED DEMAND UNCERTAINTY
2. THE SUPPLY CHAIN RESPONSIVE VS. EFFICIENT
3. STRATEGIC FIT THE ZONE OF STRATEGIC FIT
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S.Chopra/Logistics Strategy with modifications by S. DeLurgio

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

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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
S.Chopra/Logistics Strategy with modifications by S. DeLurgio

The Value Chain: Linking Supply

Chain and Business Strategy
Business Strategy
New Product Marketing
Strategy
Strategy

New
Product
Development

Supply Chain Strategy

Marketing
and
Operations Distribution
Sales

Service

Finance, Accounting, Information Technology, Human Resources

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S.Chopra/Logistics Strategy with modifications by S. DeLurgio

Step 1: Understanding the Customer and

Supply Chain Uncertainty

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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

S.Chopra/Logistics Strategy with modifications by S. DeLurgio

Achieving Strategic Fit

Why is Implied Demand Uncertainty So Important?

Understanding the Customer, CQSF2

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Lot size
Response time
Service level
Product variety
Price
Innovation

Implied
Demand
Uncertainty

S.Chopra/Logistics Strategy with modifications by S. DeLurgio

Impact of Customer Needs on Implied

Demand Uncertainty (Table 2.1)
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

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S.Chopra/Logistics Strategy with modifications by S. DeLurgio

Levels of Implied Demand Uncertainty

Detergent
Long lead time steel

High Fashion
Emergency steel

Customer Need
Price

Responsiveness

Low

High

Implied Demand Uncertainty

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S.Chopra/Logistics Strategy with modifications by S. DeLurgio

10

Correlation Between Implied Demand Uncertainty

and Other Attributes (Table 2.2)
Attribute

Low Implied
Uncertainty

High Implied
Uncertainty

Profit margin

Low

High

Avg. forecast error

10%

40%-100%

Avg. stockout rate

1%-2%

10%-40%

Avg. forced season- 0%

end markdown

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10%-25%

S.Chopra/Logistics Strategy with modifications by S. DeLurgio

11

SUPPLY CHAINS
EFFICIENT VS. RESPONSIVE

GOAL: LOWEST COST

PRODUCT:MAX. PERF. AT
MIN COST
PRICING: LOWER PRICE
AND MARGIN
MANU: HIGH EFFICIENCY
INVENT: MIN. INVENTORY
LEADTIME: REDUCE
LEADTIME
SUPPLIERS: COST/QUALITY
TRANSPORTATION: COST

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QUICK RESPONSE
ASSEMBE TO ORDER
HIGHER PRICE AND
MARGINS
FLEX. CAPACITY
MAINTAIN BUFFER
REDUCE EVEN WITH
HIGHER PRICE
SPEED, FLEX., QUALITY
QUICK& RESPONSIVIE

S.Chopra/Logistics Strategy with modifications by S. DeLurgio

12

Step 2: Understanding the

Supply Chain

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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
Figure 2.3: cost-responsiveness efficient frontier
Figure 2.4: supply chain responsiveness spectrum
Second step to achieving strategic fit is to map the
supply chain on the responsiveness spectrum
S.Chopra/Logistics Strategy with modifications by S. DeLurgio

13

Understanding the Supply Chain: CostResponsiveness Efficient Frontier (Fig. 2-3)

Responsiveness
High

BOSE RADIO
DELL

WAL-MART
BARILLA

Low
High
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Low

Cost

S.Chopra/Logistics Strategy with modifications by S. DeLurgio

14

Responsiveness Spectrum
(Figure 2.4)

Highly
efficient

Integrated
steel mill

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Somewhat
efficient
Hanes
apparel

Somewhat
responsive
Most
automotive
production

Highly
responsive
Dell

S.Chopra/Logistics Strategy with modifications by S. DeLurgio

15

Step 3: Achieving Strategic Fit

All functions in the value chain must support the

competitive strategy to achieve strategic fit Fig. 2.7
Two extremes: Efficient supply chains (Barilla) and
responsive supply chains (Dell) Table 2.3
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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S.Chopra/Logistics Strategy with modifications by S. DeLurgio

16

Achieving Strategic Fit

Responsive
supply chain

of it
e
F
n
Zo egic
t
ra
t
S

Responsiveness
spectrum

Efficient
supply chain
Certain
demand
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Implied
uncertainty
spectrum

Uncertain
demand

S.Chopra/Logistics Strategy with modifications by S. DeLurgio

17

Achieving Strategic Fit with

Same Firm with Various Products
Responsive
supply chain

PRODUCT LINE B
CUSTOMER B
PRODUCT LINE A
CUSTOMER A

of it
e
F
n
Zo egic
t
ra
t
S

Responsiveness
spectrum

PRODUCT LINE A CUSTOMER B

Efficient
supply chain

PRODUCT LINE B
CUSTOMER A

Certain
demand
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Implied
uncertainty
spectrum

Uncertain
demand

S.Chopra/Logistics Strategy with modifications by S. DeLurgio

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Achieving Strategic Fit

Product Life Cycle Progresses/Competition
Responsive
supply chain

INTRODUCTION

of it
e
F
n
Zo egic
t
ra
t
S

Responsiveness
spectrum

MATURING COMMODITY

Efficient
supply chain
Certain
demand
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Implied
uncertainty
spectrum

Uncertain
demand

S.Chopra/Logistics Strategy with modifications by S. DeLurgio

19

Strategic Scope

LOCAL OPTIMAL BY
FUNCTION

Suppliers Manufacturer Distributor

VERY LOCAL OPTIMAL

BY OPERATION W/I

Retailer

Customer

Competitive
Strategy
Product Dev.
Strategy
Supply Chain
Strategy
Marketing
Strategy
FUNCTIONALLY OPTIMAL
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S.Chopra/Logistics Strategy with modifications by S. DeLurgio

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Intracompany
Interfunctional Scope

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All functional strategies within a company are

developed to support each other and the companys
competitive strategy
Strategic fit is expanded to include all functions in a
firm
Goal is to maximize company profit
Figure 2.11

S.Chopra/Logistics Strategy with modifications by S. DeLurgio

21

Strategic Scope
GLOBALLY OPTIMAL STRATEGY
Suppliers Manufacturer Distributor

Retailer

Customer

Competitive
Strategy
Product Dev.
Strategy
Supply Chain
Strategy
Marketing
Strategy

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S.Chopra/Logistics Strategy with modifications by S. DeLurgio

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Intercompany
Interfunctional Scope

The only positive cash flow for the supply chain

occurs when the customer pays for the product
all other cash flows are resettling of accounts
within the chain and add to total supply chain cost
Supply chain surplus
Difference between what the customer pays and total
supply chain cost
Total profit to be shared among all members of the
supply chain

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S.Chopra/Logistics Strategy with modifications by S. DeLurgio

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Intercompany
Interfunctional Scope

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Increasing supply chain surplus increases the amount

to be shared
All stages coordinate strategy across all functions to
ensure that they best meet the customers needs and
maximize supply chain surplus
Also provides more speed by managing the interfaces
between supply chain stages
Each company must evaluate its actions in the context
of the entire supply chain
Figure 2.12
S.Chopra/Logistics Strategy with modifications by S. DeLurgio

24