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IMDS
112,9
1274
Received 22 April 2012
Revised 13 May 2012,
8 June 2012
Accepted 9 June 2012
Industrial Management & Data
Systems
Vol. 112 No. 9, 2012
pp. 1274-1291
q Emerald Group Publishing Limited
0263-5577
DOI 10.1108/02635571211278929
Differentiation focused supply
chain design
Per Hilletofth
Department of Industrial Engineering and Management, School of Engineering,
Jönköping University, Jönköping, Sweden
Abstract
Purpose – The purpose of this paper is to develop a framework for differentiation focused supply
chain design (SCD).
Design/methodology/approach – This research uses a literature review and case study approach to
develop a framework for differentiation focused SCD. The proposed framework has been developed
based on the literature review and evaluated against the case study. The case study describes SCD at two
Swedish companies; one from the appliance industry and the other from the furniture industry, both
having a significant international presence. Empirical data have been collected, mainly from in-depth
and semi-structured interviews with key persons representing senior and middle management in the
case companies.
Findings – This research suggests that differentiation-focused SCD can be organized into a five-stage
process. It is essential that this process is aligned with new product development (NPD), so they
exchange information, and operate based on the same segmentation model. The main benefits of a
differentiated supply chain are enhanced competitiveness, as supply chain management (SCM) changes
from being a cost center to being a value generating function, and increased profitability, by allowing
differentiated customer needs to be satisfied cost-efficiently. To succeed with developing a differentiated
supply chain, logisticians must be extensively involved with both the NPD process and the strategic
marketing process.
Research limitations/implications – Current models of SCD are simplistic and not well
developed. By combining theory with practical applications, this research provides researchers and
decision makers with detailed tools for developing a differentiation-focused SCD process. The research
is explorative in nature therefore empirical data from similar and other research settings should be
gathered to reinforce the validity of the findings.
Practical implications – This research provides knowledge and insights on how a differentiated
supply chain may be developed. The main implication is that SCD needs to be closely aligned with
NPD and marketing in order to gain competitive advantage. Companies may also be able to employ
labor closer to the consumption market by focusing on supply chain differentiation.
Originality/value – This research contributes by developing a process for differentiation-focused
SCD, and by demonstrating the main benefits and requirements of a differentiated supply chain.
Keywords Sweden, Supply chain management, Design, Product development, Supply chains, Strategy
Paper type Case study
1. Introduction
Competitive and fragmented markets force companies to pursue rapid innovation,
where new products are introduced at an ever-increasing pace (Carillo and Franza, 2006).
The principal reason for this is the continuously shortening product life cycles, which
companies need to follow, lest they be stuck with obsolete products (Zacharia, 2001).
Other reasons are that first-to-market products may command higher initial prices, and
also lead to a dominant market position, while reduction of the time-to-market (TTM)
may result in major cost reductions (Droge et al., 2000). Furthermore, recently introduced
products claim a growing share of companies’ total revenue, in many markets Differentiation
amounting to 40 percent or more (Handfield and Hichols, 2002). Therefore, many focused SCD
companies consider rapid and innovative new product development (NPD) as a key
strategic activity, and TTM reduction as a key to long-term success and profitability.
In the approach above, the value or demand generating side of the company is
emphasized, while the supply side is completely ignored. This may be a grave mistake,
since it is well known that physical distribution plays an important role in value creation. As 1275
early as 1972, Christopher (1972) showed that physical distribution may create competitive
advantage by adding customer value to the product. Competitiveness is therefore not solely
based on offering desirable products (e.g. innovative, customized, and affordable), but also
relies on customer service (supply chain capabilities). This is particularly the situation in
markets where there is a trend towards commoditization. In these markets, it is critical to
enhance overall customer value by providing tailored customer service through the
development of a differentiated supply chain (Jüttner et al., 2007).
The previous debate within the supply chain design (SCD) field has centered on the
ability of the supply chain to be either “lean” (Womack and Jones, 1996) or “agile”
(Goldman et al., 1995). Since companies’ offer a variety of products to many different
markets, it may not be suitable to fit an entire supply chain within a “lean” or “agile”
context. Instead, it may be better to identify separate value streams, and to configure
these independently. This type of solution is not well explored, but may prove fruitful,
especially when considering fragmented markets (Hilletofth, 2009). This means that
research seeking to increase the understanding of supply chain differentiation is
needed (Kemppainen and Vepsalainen, 2007).
The purpose of this research is to develop a framework for differentiation focused
SCD. The framework consists of a process for the development of a differentiated
supply chain. The specific research questions are:
RQ1. What are the main stages and activities of differentiation focused SCD?
RQ2. What are the main benefits and requirements of a differentiated supply chain?
The framework has been developed using a literature review and case study approach.
In essence, the proposed framework has been developed based on the literature review
and evaluated against the case study. The case study describes SCD at two Swedish
companies: one from the appliance industry (called Alpha for anonymity) and the other
from the furniture industry (called Beta for anonymity), both having a significant
international presence. Empirical data has been collected during the five-year period of
2006-2010, mainly from in-depth and semi-structured interviews with key persons
representing senior and middle management in the case companies.
The remainder of this paper is structured as follows: to begin with, a literature review
on issues related to supply chain strategy is presented in Section 2. In this section, the
supply chain paradigms of interest are described as well as some models for supply
chain strategy selection. After that, the proposed framework for differentiation focused
SCD is presented and discussed in Section 3. In this section, the motivation of the
framework and its general description are given. Thereafter, the case study is presented
and analyzed in Section 4. The case study includes two companies who have begun to
develop a process for differentiation focused SCD. After that, the research findings are
presented and discussed in Section 5. Finally, the research is concluded and further
research avenues are proposed in Section 6.
IMDS 2. Literature review
112,9 In this section, a literature review on issues related to supply chain strategy is
presented. To begin with, the supply chain paradigms of interest are described. After
that, some typologies of supply chain strategy selection are presented.

2.1 Supply chain strategies

1276 There is an essential difference between lean supply chains that focus primarily on
efficiency and agile supply chains that focus primarily on effectiveness or responsiveness.
Supply chains emphasizing efficiency carry the risk of production not being able to meet
customer demand, while supply chains emphasizing effectiveness create a risk for low
efficiency and high unit cost (Fearne and Fowler, 2006; Warburton and Stratton, 2002).
This implies that the constraints of the market must be known to identify the best starting
point for the development of an effective and efficient supply chain. Only when the
possibilities of the market are known and understood, an organization can develop a
supply chain that is both efficient and effective (Christopher and Towill, 2001).
Lean supply chains focus on doing “more with less” by reducing waste or “muda”
across the supply chain through inventory, lead-time, and supplier-base reduction, lean
manufacturing, as well as a just-in-time approach (Christopher and Towill, 2001). It is
about developing an efficient supply chain that reduces all waste, including time, to
enable a level schedule (Naylor et al., 1999). A lean supply chain emphasizes the role of
the efficient supply of the product to a greater degree than the role of responding rapidly
to changes in demand (de Treville et al., 2004). It has been suggested that lean supply
chains are applicable in markets where demand is high and relatively stable, hence
predictable, and where requirements for product variety are low (Christopher, 2000).
Agile supply chains focus on responding rapidly to changes in demand, both in
terms of volume and variety, by increasing flexibility through lead-time reduction,
coordinated planning, improved communication, and increased transparency of
demand information (Christopher and Towill, 2001). It concerns the use of market
knowledge to exploit profitable opportunities in volatile markets (Naylor et al., 1999).
An agile supply chain emphasizes market mediation to a greater degree than the role of
ensuring the efficient physical supply of the product (de Treville et al., 2004); hence, it is
about being demand-driven rather than forecast-driven. It has been suggested that the
agile supply chain is applicable in markets where demand is volatile and the customer
requirement for variety is high (Christopher, 2000).
Although lean and agile supply chains are often discussed as opposing paradigms,
they share a common objective, meeting customer demands at the least total cost
(Goldsby et al., 2006). It is in terms of the characteristics of this demand and the basis of
meeting customer demand that the two approaches differ (Goldsby and Garcia-Dastuage,
2003). Several researchers have suggested that the lean and agile paradigms can be
integrated in a variety of ways to create so-called “leagile” supply chains (Stratton and
Warburton, 2003). Thus, it is not really a question of choosing between lean and agile, but
rather the thoughtful selection and integration of suitable aspects of these paradigms
appropriate to the specific supply chain (Christopher et al., 2006).
Christopher and Towill (2001) visualize three lean-agile hybrids. The first is
founded on the Pareto rule, recognizing that 80 percent of a company’s revenue is
generated from 20 percent of its products. It is suggested that the dominant 20 percent
of the product assortment should be managed in a lean manner, given that demand
is relatively stable for these items and efficient replenishment is the appropriate Differentiation
objective, while the remaining 80 percent should be managed in an agile manner focused SCD
(Goldsby et al., 2006). The second lean-agile hybrid is founded on the principle of base
and surplus demand, recognizing that most companies experience a base level of
demand over the course of a year. It is suggested that the base demand can be managed
in a lean manner, while demand peaks, over the course of peak seasons or heavy
promotion periods, can be managed in an agile manner (Goldsby et al., 2006). The third 1277
lean-agile hybrid is founded on the principle of postponement, recognizing that delayed
product differentiation (form, identity and inventory location) may improve supply
chain efficiency. Risk and uncertainty costs are linked to the differentiation and these
costs can be reduced, by postponing certain activities in the supply chain (e.g. logistics
and manufacturing) until customer orders are received (Pagh and Cooper, 1998).
Normally, companies have conducted their business according to a make-to-stock
(MTS) approach. This means that forecasts and speculations are used as the basis for all
supply chain activities, including design, sourcing, manufacturing, assembly, packaging,
labeling and distribution, before any customer order has been received (Zinn and
Bowersox, 1988). These activities are best implemented when following lean principles
(planned and standardized). The aim of logistics (time and place) postponement is to
maintain a full-line of anticipatory inventory at one or a few strategic locations (Bowersox
and Closs, 1996), that is, to postpone inventory location upstream the supply chain to the
latest possible point. This implies that companies delay the forward movement
(distribution) of products as long as possible in the chain of operations, and that products
are kept in storage at central locations in the distribution chain (deliver-to-order (DTO)).
Manufacturing (form) postponement aims to retain the product in a neutral and
non-committed status as long as possible in the supply chain (Bowersox and Closs,
1996), in other words, to postpone the differentiation of form to the latest possible point.
This means that companies delay assembly (assemble-to-order (ATO)), production
(make-to-order (MTO)), sourcing (source-to-order (STO)), and even design
(engineer-to-order (ETO)) until a customer order has been received. Thus,
postponement is about deciding which activities should be performed after orders are
received and managed according to agile principles and which activities should be
performed before orders are received and managed according to lean principles. In other
words, the customer order decoupling point (CODP) is moved upstream the supply chain
(Figure 1). The CODP (also known as the order penetration point) is the point at which
the customer orders (demand) penetrate the supply chain. Here, forecast-driven
activities end and order-driven activities begin. To buffer between the two modes of
production, a strategic inventory must exist at the CODP (Olhager et al., 2006).

2.2 Typologies for supply chain strategy selection

A number of classification models have been proposed in the literature to guide the
choice of supply chain strategy. One of the first and probably one of the most cited
models of supply chain strategy selection is Fisher’s (1997) model on how type of
product influences SCD (Figure 2(a)). In this model, products are classified as either
functional (standard) or innovative (special). Innovative products refer to products
with low volume and erratic demand, short life cycles, and possibly a high level of
customization. In contrast, functional product refers to a product with a more stable
demand, longer life cycle, and with little or no customization. Fisher suggests that
IMDS
112,9

1278

Figure 1.
Different leagile supply
chain approaches based on
postponement of the
customer order decupling
point upstream the
supply chain
Source: Hilletofth (2009)

functional products should be supplied with efficient (lean) supply chains while
innovative products should be supplied with responsive (agile) supply chains.
A second model of supply chain strategy selection is the one proposed by
Mason-Jones et al. (2000), shown in Figure 2(b). In this model, markets are classified
according to the required market qualifiers and market winners. The model specifies
that the minimum requirements for competing in a market (market qualifiers) and the
specific requirements for winning an order (market winners) both must be understood
and applied to capture a share of the market. The definition of market qualifiers and
market winners determine how an appropriate supply chain should be specified; hence,
the supply chain should be tailored to match the required “winning criteria” of the
market. It is argued that the lean supply chain is most powerful when cost is the order
winner, while the agile supply chain is most powerful when service is the market winner.
A third model of supply chain strategy selection is the one proposed by Christopher
(2000), shown in Figure 2(c). In this model, markets (also applicable to products and
customers) are classified according to three parameters: volume, variety, and variability.
However, since variety and variability tend to be related, the typology is simplified into
two dimensions. It is suggested that the lean supply chain is most powerful in markets
where demand is relatively stable, and therefore predictable, and variety is low, while
the agile supply chain is most powerful in markets where demand is volatile and the
customer requirements for variety are high. One limitation of this model is that it does
not address all possible groups of the market segmentation.
A final model, and the most recent one, is the one proposed by Christopher et al. (2006),
shown in Figure 2(d). In this model, markets (or products, or customers) are classified
according to three parameters: type of product, type of demand, and replenishment lead-time.
 Differentiation
Effcient
supply chain
Effcient
supply chain
1. Quality focused SCD
Match Mismatch 2. Lead-time 1. Cost
{lean} {lean} 3. Service level

Responsive
Mismatch Match
Responsive 1. Quality
1279
supply chain supply chain 2. Cost 1. Service level
{agile} {agile} 3. Lead-time

Functional products Innovative products Market qualifiers Market winners

(a) (b)

Agile
Agility is needed in less Long
High lead-time Lean Leagile
predictable environments
Supply characterlstics
Variety & variability

(plan and execute) (postponement)

where demand is volatile
and the requirement for
variety is high.

Lean
Lean Agile
Low Lean works best in high short
volume, low variety and lead-time (continues replenishment) (quick response)
predictable environments

Low High Predictable Unpredictable

Volume Demand characteristics Figure 2.
(c) (d) Typologies for supply
chain strategy selection
Sources: Fisher (1997); Mason-Jones et al. (2000); Christopher (2000); Christopher et al. (2006)

Since predictability often is related to type of product it is possible to simplify the typology
to only two dimensions: predictability and replenishment lead-time. The model suggests
that there are four possible supply chain approaches. When demand is predictable and
replenishment lead-times are short, a lean continuous replenishment approach is
appropriate. When demand is unpredictable and replenishment lead-times are long,
a lean-agile hybrid (leagile) supply chain is suitable. When lead-times are long and demand
is predictable, a lean supply chain is appropriate. Finally, when demand is unpredictable
and lead-times are short, an agile supply chain, based on rapid response, is required.

3. Proposed framework
In this section, the proposed framework for differentiation focused SCD is presented. To
begin with, the motivation of the framework is given. After that, the general framework
is described.

3.1 Motivation
As shown in the pervious section many models of supply chain strategy
selection have been proposed, to guide the choice of the most appropriate supply chain
approach (Fisher, 1997; Mason-Jones et al., 2000; Christopher, 2000; Christopher et al.,
2006). These models emphasize that one should select the supply chain strategy that
best matches the strategy’s supply characteristics (efficiency, responsiveness,
IMDS and supply lead-time) with the market’s demand characteristics (type of product, volume,
112,9 variety, variability, and required lead-time).
It can be argued that these models are far too simplistic, due to three major issues. First,
they are too general, suggesting that it is only a question of choosing a supply chain
strategy (lean, agile, or leagile). It is rather a question of choosing the appropriate
manufacturing strategy and combining it with a suitable sourcing and distribution strategy
1280 (Hilletofth, 2009). The type of manufacturing strategy chosen then determines whether the
different supply chain activities are best managed according to lean or agile principles.
Second, these models link each supply chain strategy to a specific market context
(Fisher, 1997; Mason-Jones et al., 2000; Christopher, 2000). However, research has shown
that certain supply chain strategies could be more suitable in particular environments.
Nevertheless, they are not limited to those environments, since different supply chain
strategies can be successfully applied in similar market environments (Hilletofth and
Hilmola, 2008). It is rather a question of how the firm would like to conduct its business.
Finally, most of the models imply that it is a question of choosing two supply chain
solutions for the whole company. These models usually propose a segmentation of
markets (also applicable to customers and products) into two segments and suggest a
specific supply chain strategy (lean or agile) for each one (Fisher, 1997; Mason-Jones et al.,
2000; Christopher, 2000). Nevertheless, one of the most recent models proposed
distinguishes between four market segments (Christopher et al., 2006). However, the
segmentation in this model is also very simplistic.
The main issue is that these models regard markets as homogeneous, assuming that all
customers want to purchase each type of product in a similar way (similar demand
characteristics). However, research has shown that customers purchase similar products
rather differently. For example, some customers prefer to purchase fashionable quality
clothing at the lowest possible price, while others prefer to purchase the most recent fashion
clothing at affordable prices (Hilletofth and Hilmola, 2008). Both these types of products
could be categorized as special, given that their demand characteristics are distinguished
by high variety, high volume, and high variability. Accordingly, it can be argued that these
segmentation and supply chain strategy selection approaches are inadequate, since
markets are becoming more fragmented. Customers are increasingly seeking individual
solutions to their needs, and this concerns both products and supply chain solutions.
One proposed strategy for dealing with the increased demand variability, product
variety, and customization (competitive and fragmented markets) is postponement
(the leagile supply chain strategy). Indeed, delaying certain supply chain activities
until orders are received (e.g. switch from MTS to ATO environment) will enable
companies to create a responsive and cost-efficient supply chain. However, a
one-size-fits-all postponement strategy is not the best option for all markets, products, or
customers. Instead, companies should recognize the need to use several supply chain
solutions concurrently, to stay strong in competitive and fragmented markets. This
corresponds well with current views in the literature and the conducted case study. Still,
the subject is not well researched, which is exemplified by the small number of case
studies reporting on companies that utilize more than two supply chain solutions.

3.2 Framework
It can be argued that differentiation focused SCD can be organized into a process of five
stages: development of a segmentation model, collection of market information as well as
specification, selection, and implementation of supply chain solutions (Figure 3). In essence, Differentiation
the first four stages of the SCD process concern strategy formulation, while the last stage of focused SCD
the process concerns strategy implementation (Chopra and Meindl, 2010). This process
should be initiated when a new product (or product category) is in the process of being
developed (Hilletofth, 2009). It is important that the SCD process is addressed in parallel
with the NPD process (Pero et al., 2010; Van Hoek and Chapman, 2007), and that
information is exchanged between these processes, for example, through the involvement 1281
of supply chain representatives in the NPD process (Hilletofth and Eriksson, 2011).
In the first stage of the differentiation focused SCD process (development of
segmentation model), the objective is to develop a segmentation model based on those
parameters that affect the selection of the most appropriate supply chain solution. It is
important to collaborate with marketing, since the segmentation model should preferably
be developed on the basis of market knowledge gained from market intelligence
(Hilletofth, 2011). It can be argued that the SCD process should be directed on the basis of
the same segmentation model as the NPD process. This is because these processes should
have the same goal, satisfying the customers, as well as a common view of customer needs
and requirements, in order to create a customer-oriented business. Consequently, this
requires that these processes are directed on the basis of a common segmentation model,
preferably a needs-based segmentation model, where customers are grouped into different
market segments based on the similarity of needs and benefits sought by the customers
(Best, 2005). The overall segmentation model needs to be adapted with regard to the
included information for each type of process. It is important to note that this stage is not
conducted each time the process is initiated; instead, the company should develop a
segmentation model and evaluate it continuously. However, the target is always one or
more of the specified market segments.
In the second stage of the differentiation focused SCD process (collection of market
information), the objective is to identify how the different market segments, within the
segmentation model, want to acquire a particular product, or, in other words, identify the
preferred supply chain solutions. It is important to note that each market segment may
require more than one supply chain solution. Sometimes a product is only intended for a
particular market segment within the segmentation model, the investigation is then
restricted to this segment. Collaboration with marketing is important, as the required
information should be gathered through market intelligence. It is also crucial because

Figure 3.
Differentiation focused
SCD process
IMDS marketing has the knowledge and skills regarding how customer needs are identified
112,9 and how customer value is created.
In the third stage of the differentiation focused SCD process (specification of supply
chain solutions), the objective is to specify all the solutions that can be provided
cost-efficiently, or in other words identify the capabilities needed to serve the market.
First, the capabilities of the sourcing, production, and distribution systems (existing and
1282 possible through investment) are defined. Then, the possible supply chain solutions are
specified. This is a matter of choosing an appropriate manufacturing strategy and
combining it with a suitable sourcing and distribution strategy. In essence this is
completed in three steps. To begin with the most appropriate manufacturing strategies
are selected (Figure 4). Thereafter, the most appropriate distribution strategies for the
chosen manufacturing strategies are selected. Finally, the most appropriate sourcing
strategies for the chosen manufacturing strategies are selected. It is possible to develop
several differentiated supply chain solutions by combining relatively few strategies.
The type of manufacturing strategy chosen determines whether the different supply
chain activities are best managed according to lean or agile principles.
In the fourth stage of the differentiation focused SCD process (selection of supply
chain solutions), the objective is to select the supply chain solutions necessary to satisfy
most customers within each market segment. It may be necessary to utilize several
supply chain solutions for each segment, to satisfy most of the customers (Hilletofth,
2009). However, it is important to note that each solution may be used in several
segments as well as for other products. The number of utilized supply chain solutions is
normally a question of finding a balance between customer satisfaction and
cost-efficiency. However, this equation could be made more favorable by using
differentiated service prices, based on cost-to-serve, in the supply chain solutions
provided. In this case, it is a matter of finding a balance between revenues and costs.

Figure 4.
Different supply chain
solutions based on the
selection of appropriate
manufacturing strategy
In the final stage of the differentiation focused SCD process (implementation of Differentiation
supply chain solutions), the objective is to implement the selected supply chain solutions. focused SCD
If the company proceeds with implementation, it will face its highest costs to date
(Chopra and Meindl, 2010). Sometimes a new product will only utilize existing supply
chain capabilities and solutions, consequently, implementation, in such a case, concerns
ramp-up of the supply processes. Other times, new supply chain capabilities and
solutions have been selected and thus need to be developed. Accordingly, the scope of 1283
this stage can vary greatly.

4. Case study
In this section, the case study of differentiation focused SCD is presented. To begin
with, the research method is described. After that, the research environment and
findings are presented in turn.

4.1 Methodology
This research uses a literature review and case study approach to develop a framework for
differentiation focused SCD. The proposed framework has been developed based on the
literature review and evaluated against the case study. The case study approach was
considered appropriate since the studied events are contemporary, complex, and not under
the control of the researchers (Yin, 2009). Case studies may be utilized for several purposes
and fit the theory building approach of this research well (Voss et al., 2002). The case study
is not a data collection method; it is rather a method for combining several data sources in a
certain setting (Yin, 2009). Hence, it is not limited to the rigid limits of surveys and models
(Voss et al., 2002), and can thus have a very high impact on theory development.
The case study includes two firms who have begun to develop a process for
differentiation focused SCD. Several aspects related to marketing, NPD and SCD have been
investigated at each company separately. This case study may therefore be described as a
multiple case study, containing two embedded single case studies (Yin, 2009). The case
companies were chosen for their similarity in business strategy, i.e. to be customer-oriented;
for the diverse nature of their industries; and for their position within the industry. The
required data has been collected during the five-year period of 2006-2010, mainly from
in-depth and semi-structured interviews with key persons representing senior and middle
management in the case companies. The interviews lasted for 90-120 minutes and included
people from many departments, such as logistics, procurement, production, sales and
marketing, and information technology. The data collection also included a review of
secondary data, such as internal documentation and economic reports.
The quality of the research has been ensured by using multiple sources of evidence and
by allowing key informants to review reports, transcripts and findings. Internal validity
has been ensured by testing explanations derived from the findings, against rival
explanations with informants as well as research colleagues. The external validity is
ensured by the theoretical foundation of this study while case study reports ensure
the reliability (Yin, 2009). The triangulation of data, methods and theory has contributed
to the rigor, depth, and breadth of the results (Flick, 2009). This can be compared with
validation (Yin, 2009), and also help the researcher to form a more whole understanding of
the studied phenomenon (Scandura and Williams, 2000). Since the case companies have
been chosen due to their unique characteristics, and the findings are based on contemporary
events, the findings are generalizable to theoretical propositions (Yin, 2009).
IMDS 4.2 Environment
112,9 Case company Alpha operates in a fast moving appliance industry and holds a leading
position in its market. It aims to combine cost-efficient production in low-cost countries
with manufacturing as close as possible to major final markets. In reality, it has come
to focus on increasing the number of products produced in low-cost countries. Alpha’s
supply chain and strategies are shown in Figure 5. It conducts business with retailers,
1284 who sell Alpha’s products to customers. In addition, the company does business with
direct suppliers. Alpha has chosen to carry out all sourcing, manufacturing, assembly,
warehousing, and distribution operations in-house.
The case company is currently using three supply chain strategies. For standard
products with short customer required lead-time, Alpha uses two lean supply chain
strategies, based on the manufacturing strategies MTS and DTO. This means that the
case company, based on forecasts and speculations, performs all supply chain operations,
including sourcing, manufacturing, assembly, packaging, labeling, and distribution
(not included in DTO approach), before it has received any customer orders. In both of
these supply chain configurations, Alpha focuses on operating efficiency. For customized
and more complex products, Alpha employs a leagile supply chain strategy, based on the
MTO manufacturing strategy. This means that the design and sourcing processes are
decoupled from the production, assembly, and distribution processes. In other words,
production, assembly, and distribution activities do not occur before customer orders
are received. The activities performed after orders are received (downstream of the CODP)
are managed according to agile principles, while activities performed before orders are
received (upstream of the CODP) are managed according to lean principles.
Case company Beta operates in a slow moving furniture industry and its
performance is mediocre when compared with its competitors. It aims to combine
cost-efficient production in China with final assembly and warehousing close to the
consumption market. Beta’s supply chain and strategies are shown in Figure 6. It
conducts business with retailers, who sell Beta’s products to customers. In addition,
Beta conducts business with direct suppliers that are responsible for all manufacturing

Figure 5.
Alpha’s supply
chain and strategies
 Differentiation
focused SCD

1285

Figure 6.
Beta’s supply chain
and strategies

and the related sourcing of raw materials and components. Accordingly, Beta has
chosen to outsource all sourcing and manufacturing to the suppliers. Some assembly,
packaging, and labeling is also outsourced to the suppliers but may also be conducted
at the case company or by the retailers, depending on the type of furniture and
strategy. The case company is in charge of transport to the retailers, and the retailers
are responsible for the delivery to the customers.
The company has separated its supply chain into two main directions, key account
and private label. Key account orders are full containers shipped directly to the retailer.
The suppliers are responsible for the sourcing, and it is hard to trace if materials are
sourced before (MTO) or after the order is placed (STO). Key account is performed
without any speculation. However, contribution margins for these products are low, and
efficient supply chain operations is a necessity. Private label is always shipped to Beta’s
warehouse. The product type determines if it should be delivered complete (MTS), or as
components that are to be assembled at Beta’s facilities (ATO). Private label products
are ordered based on forecasts and speculations. This supply chain has a strict focus on
operational efficiency and unit cost. After a customer order is placed at the retailer, a fast
responding approach is used to either deliver (MTS), or to assemble and deliver products
(ATO). In essence, this is a leagile approach, meaning that final assembly and
distribution are postponed until a customer places an order.

4.3 Findings
Both the case companies have begun to develop a process for differentiation focused
SCD very similar to one another as well as to the framework proposed in this paper.
IMDS In essence, the overall stages of the case companies processes are the same with some
112,9 minor variances within them. The SCD process consists of three stages:
(1) understanding the market we serve;
(2) understanding the capabilities to serve the market; and
(3) developing the necessary supply chain solutions.
1286 In the first stage, the case companies try to understand the market they serve by identifying
how customers, via retailers, want to acquire products. This is achieved through market
intelligence, where important information that may affect the companies’ service to the
retailers is collected. Many strategic considerations need to be made regarding the retailers.
Both Alpha and Beta considers a number of characteristics before deciding how to serve the
retailers, such as product range, required lead-time, location, and volumes.
In the second stage, the case companies try to understand their capabilities to serve
the market. This involves defining the production and delivery system capabilities. It
is essential to understand the capability of the production system to produce according
to demand, and the capability of the distribution system to deliver the output to
customers. Apart from this, a secure supply of raw materials and components is
important for the stability and reliability in manufacturing. This activity differs a
bit between the case companies due to the level of outsourcing in manufacturing. In
essence, it concerns whether the production system includes internal or external actors,
or both.
In the final stage, the case companies identify suitable approaches to serve the
customers via the retailers, commonly referred to as supply chain solutions. A supply
chain solution matches a supply method, reflecting the production system capabilities,
with a delivery method, reflecting the delivery system capabilities. Alpha believes that
combining supply and delivery methods into various supply chain solutions creates a
differentiation advantage through the freedom of choice, while at the same time
maintaining the efficiency of operations in the production and distribution systems. Beta
has found it necessary to combine several supply and delivery methods to provide the
best solution for the whole supply chain and at the same time to maintain operational
efficiency in production and delivery. There may be more than one solution chosen for
each customer. For example, Alpha may supply both own label products and private
labels at the same retail outlet.
The used supply chain solutions within the case companies are shown in Table I.
As can be noted, one of the applied supply chain solutions within Alpha combines the
MTS supply method with the “self collect” delivery method. This means that Alpha

Supply method
Delivery method MTS DTO ATO MTO STO

Factory direct A AB B
Bulk A A
Small drop AB A B
Table I. Self collect AB A B AB
Used supply chain Home delivery A
solutions within the
case companies Note: A denotes Alpha and B denotes Beta
produces in advance, according to a demand plan and stock keeping, until the retailer Differentiation
collects the goods from one of the company’s regional distribution centers, which in this focused SCD
case becomes the CODP. This supply chain solution is also used by Beta but the retailers
collect the goods from the central warehouse and external manufacturers take care of the
production. Both case companies stress that self-collection must be implemented
carefully to maintain loading efficiency in the distribution centers.
In another supply chain solution, Alpha combines the MTO supply method with the 1287
“factory direct” delivery method. This solution is possible when retailers order a number
of weeks in advance, allowing the case company to produce and deliver to a specified
date and time. These orders are normally in the form of full truckloads dispatched
directly from the factory to a retailer. This supply chain solution is also used by Beta but
the orders are normally in the form of full containers dispatched directly from an
external manufacturer to a retailer.
In a final supply chain solution, Alpha combines the supply method DTO with the
“home delivery” delivery method. This solution implies that the case company, at the
retailer’s request, bypasses the retailer’s distribution network and delivers directly to
the customer’s home. This delivery method is normally combined with other services,
such as installation and the removal of old products. This supply chain solution is not
used by Beta. All deliveries to the customers go through the retailers.
Each supply chain solution has different cost implications for the case companies and
their retailers. One solution might be cheaper for the retailer, but more expensive for the
case company, and vice versa. It is very important to appreciate the cost-to-serve for a
particular retailer, when judging its profitability.
In both case companies the SCD process is directed based on a segmentation model. In
these segmentation models the customers are grouped into different market segments
based on the similarity of needs and benefits sought by the customer (Best, 2005). When
the SCD process is initiated the target is always one or more of the included segments.
The model is not developed each time the process is initiated but continuously evaluated.
When the three stages have been conducted the implementation starts. Consequently, it
may be argued that their SCD processes consists of five stages, very similar to the
proposed framework. Still, it is important to note that some of the important
considerations explained in the framework are not considered in the case companies. For
example, the collaboration between supply chain and marketing is limited.

5. Discussion
This research suggests that differentiation focused SCD can be organized into a
five-stage process. In the first stage (development of segmentation model), the goal is to
develop a segmentation model based on the parameters that are required to identify an
appropriate supply chain solution. In the second stage (collection of market information),
the goal is to identify how different market segments want to acquire the particular
product (identify the wanted supply chain solutions). In the third stage (specification of
supply chain solutions), the goal is to specify the supply chain solutions that can be
implemented cost-efficiently (identify the capabilities to serve the market). In the fourth
stage (selection of supply chain solutions), the goal is to select the supply chain solutions
necessary to satisfy most customers within each market segment. In the fifth and final
stage (implementation of supply chain solutions), the goal is to implement and prepare
the selected supply chain solutions.
IMDS This differentiation focused SCD process should be initiated when a new product
112,9 (or product category) is in the process of being developed. It is critical that the SCD process
is aligned with the NPD process in order for them to be directed based on the same
segmentation model and to allow information to be exchanged between them. One way to
improve the information exchange is the involvement of supply chain representatives in the
NPD process. This is in line with previous research that emphasis that companies need to
1288 stop thinking around the edges and begin to coordinate and address these issues in parallel,
in order to reduce the TTM and enhance profitability (Hilletofth and Eriksson, 2011;
Pero et al., 2010). Supply chain management (SCM) should no longer clean up after NPD, but
be involved from the beginning with the same authority (Van Hoek and Chapman, 2007).
An important benefit of a differentiated supply chain is improved competitiveness by
also using SCM as a value generating function. Current theories concerning supply chain
strategy selection seem to ignore the prospect of competing through logistics in a more
comprehensive way. Following tradition, marketing sets the business strategy and
SCM must only execute it. In other words, SCM builds up appropriate supply chain
capabilities and advantages, according to the marketing strategy. However, as
customers want more customized products, they could likewise prefer more customized
supply chain solutions, and perhaps be willing to pay more for this. Additionally, there is
a trend towards commoditization in many industries, resulting in customers perceiving
little difference between products. This results in a dwindling brand loyalty and causes
competition through customer service to become a major determinant of success. The
additional value added from customer service is achieved by extending the core product
with auxiliary services (provide desirable supply chain solutions). Another advantage of
a differentiated supply chain is that it allows companies to reach the goal of meeting
highly varying needs of local and differing markets while at the same time achieving
cost-efficiency (Hilletofth, 2009). On a global level, overcapacity tends to be the rule
rather than the exception, and when supply exceeds demand there is a downward
pressure on price. Operating in a differentiated manner helps to overcome this problem
by allowing the same company to serve more customers in different ways.
There are several requirements that need to be considered to achieve a differentiated
supply chain. These requirements concern design, planning, and execution level. First, the
requirements on supply chain collaboration are in this case higher than normal since a
differentiated supply chain may involve more supply chain partners. The involved case
companies have stated supply chain collaboration as a major issue when differentiating
the supply chain. Second, collaboration with marketing in general and NPD in particular
are two important requirements, for succeeding with supply chain differentiation.
Collaboration with marketing is important, since it has the knowledge and skills to identify
customer needs and to create customer value (e.g. market intelligence). Coordination is
essential, and SCD should occur in parallel with NPD, due to the interdependence of the two
processes. Logisticians should also be involved in the NPD process to provide feedback
from a logistics point of view; addressing NPD conflicts with production as well as with
SCD. Finally, integrated information systems and advanced decision support tools are
needed to efficiently manage differentiated supply chains, as well as to make feasible
logistics decisions in the context of multiple supply chains. For example, the involved case
companies have stated demand and inventory visibility along the supply chain as
significantly important to succeed with a differentiated supply chain. This requires some
type of integration between the supply chain members’ information systems.
6. Conclusion Differentiation
This research aimed to develop a framework for differentiation focused SCD. It can be focused SCD
concluded that differentiation focused SCD can be organized into a five-stage process.
The five stages include development of segmentation model, collection of market
information, as well as specification, selection, and implementation of supply chain
solutions. It is vital that this differentiation focused SCD process is aligned with the NPD
process, so they exchange information, and operate on the basis of the same 1289
segmentation model. At best these two major business processes are addressed in
parallel. This implies that the SCD process should be initiated when a new product
category is being developed. The main benefits of a differentiated supply chain are
enhanced competitiveness, as SCM changes from being a cost center to being a value
generating function, and increased profitability, by allowing differentiated customer
needs to be satisfied cost-efficiently. To succeed with developing a differentiated supply
chain, logisticians must be extensively involved with both the NPD process and the
strategic marketing process.
This research provides knowledge and insights on how a differentiated supply chain
may be developed. It is clear that firms and supply chain managers may benefit in
several respects from supply chain differentiation. The main practical implication of this
research is that SCD is a process in need of attention. It should not be done as an
afterthought, but should be as rigorous as NPD, which is a multi-stage process where
each stage has a specific purpose. Companies may also gain competitive advantage by
using a more complex SCD model, with several supply and delivery methods focused at
a targeted customer segment. The notion that one supply method may be matched with
several delivery methods, and vice versa, can help managers to construct innovative and
value-adding supply chain solutions. The main theoretical implication is that research
has not been leading the development of SCD, as it has followed industry practice and
from that presented overly simple models. Based on the findings in this research, it
appears that current theories do not reflect practice. Hence, theories need to be adjusted
in order to be at the forefront of knowledge creation. Utilizing different supply chain
solutions, companies are able to move value-adding services closer to the consumption
market. Hence, one social implication is that jobs may be created in countries where
labor costs are normally considered too high.
A limitation of the research is that the framework only has been evaluated in two
research settings (i.e. case companies). Both of the case companies operate in a single
industry and originate from Sweden. Therefore, empirical data from similar and other
research settings should be gathered to reinforce the validity of the reported findings.
Another limitation of the research concerns the lack of collaboration between marketing
and supply chain in the case companies, which did not allow the investigation of
these aspects of the framework. These limitations should be considered when
researchers later attempt to replicate or further evaluate the reported findings, and each
of these limitations could be addressed by further research. Other interesting aspects
for further research include the continuing examination of how a differentiated supply
chain can be developed, implemented, and managed. A differentiation focused SCD
process has been proposed in this research. However, this matter needs to be
investigated further and the scope of the research should be extended to include
implementation and managerial aspects as well.
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About the author
Per Hilletofth (PhD) is an Assistant Professor of Logistics at Jönköping University. He holds an
MSc in Industrial Management from University of Skövde and a PhD in Logistics and
Transportation from Chalmers University of Technology. His research interests include supply
chain management, customer orientation, demand and supply alignment, outsourcing, and
information technology. He is currently a member of the editorial board of Industrial
Management & Data Systems. Per Hilletofth can be contacted at: per.hilletofth@jth.hj.se

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