Chapter 2

Supply Chain
Performance:
Achieving Strategic
Fit and Scope

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Outline
Competitive and supply chain strategies
Achieving strategic fit

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 Competitive and Supply
Chain 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 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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The Value Chain: Linking Supply

Chain and Business Strategy

Finance, Accounting, Information Technology, Human Resources

New Marketing
Product and Operations Distribution Service
Development Sales

For a firm to succeed, all functional strategies must support one another and the
competitive strategy.

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 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 aligned goals
A company may fail because of a lack of strategic fit
or because its supply chain design, processes and
resources do not provide the capabilities to execute
the desired strategy

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How is Strategic Fit Achieved?

Step 1: Understanding the customer and supply chain
uncertainty
Step 2: Understanding the supply chain Capabilities
Step 3: Achieving strategic fit

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 Step 1: Understanding the Customer
and Supply Chain Uncertainty
Identify the needs of the customer segment being
served
Customer demand from different segments varies
along several attributes, as follows:
– 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

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Step 1: Understanding the Customer

and Supply Chain Uncertainty
Demand uncertainty: uncertainty of customer demand
for a product
Implied demand uncertainty: resulting uncertainty for
the portion of the demand that the supply chain plans
to satisfy based on the attributes the customer desires.
First step to strategic fit is to understand customers by
mapping their demand on the implied uncertainty
spectrum

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 Achieving Strategic Fit
Understanding the Customer
– Lot size
– Response time
– Service level Implied
– Product variety Demand
– Price Uncertainty
– Innovation

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Levels of Implied Demand

Uncertainty
Predictable Predictable supply and uncertain Highly uncertain
supply and demand or uncertain supply and supply and demand
demand predictable demand or somewhat
uncertain supply and demand

Salt at a An existing A new

supermarket automobile communication
model device

Figure 2.2: The Implied Uncertainty (Demand and Supply)

Spectrum
Salt has a low margin, accurate demand forecasts, low stockout rates, and
virtually no markdowns.

On the other end of the spectrum, a new cell phone has high implied demand
uncertainty. It will likely have a high margin, inaccurate demand forecasts, high
stockout rates (if it is successful), and large markdowns (if it is a failure).
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 Step 2: Understanding the
Supply Chain Capabilities
How does the firm best meet demand in an uncertain
environment?
Creating strategic fit is all about designing a supply
chain whose responsiveness aligns with the implied
uncertainty it faces
Supply chain responsiveness -- 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
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Step 2: Understanding the

Supply Chain
There is a cost to achieving responsiveness
Supply chain efficiency: inverse of the cost of making
and delivering the product to the customer
Increasing responsiveness results in higher costs that
lower efficiency
Second step to achieving strategic fit is to map the
supply chain on the responsiveness spectrum

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Understanding the Supply Chain: Cost-
Responsiveness Efficient Frontier
Responsiveness

High

Low
Cost
High Low
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Responsiveness Spectrum

Highly Somewhat Somewhat Highly

efficient efficient responsive responsive

Integrated steel Hanes apparel: A Most automotive Seven-Eleven

mills: Production traditional make-to production: Japan: Changing
scheduled weeks stock Delivering a large merchandise mix
or months in manufacturer variety of products by location and
advance with with production in a few weeks time of day
little variety or lead time of
flexibility several weeks

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 Step 3: Achieving Strategic Fit
Step is to ensure that what the supply chain does well
is consistent with target customer’s needs.
The goal is to target high responsiveness for a supply
chain facing high implied uncertainty, and efficiency
for a supply chain facing low implied uncertainty.
Ex: Pasta - Barilla. Pasta is a product with relatively
stable customer demand, giving it a low implied
demand uncertainty. Supply is also quite predictable.
Much better position if it designs a more efficient
supply chain with a focus on cost reduction.

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Comparison of Efficient and

Responsive Supply Chains
Efficient
Primary goal Lowest cost
Product design strategy Min product cost
Pricing strategy Lower margins
Mfg strategy High utilization
Inventory strategy Minimize inventory
Lead time strategy Reduce but not at expense
of greater cost
Supplier selection strategy Cost and low quality
Transportation strategy Greater reliance on low cost
modes
Responsive
Quick response
Modularity to allow
postponement
Higher margins
Capacity flexibility
Buffer inventory
Aggressively reduce even if
costs are significant
Speed, flexibility, quality
Greater reliance on
responsive (fast) modes

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 Tailoring the Supply Chain for
Strategic Fit
Many firms are required to achieve strategic fit while
serving many customer segments with a variety of products
across multiple channels.
 In such a scenario, a “one size fits all” supply chain cannot
provide strategic fit, and a tailored supply chain strategy is
required.
 Ex: Zara sells trendy items with unpredictable demand along with
basics, such as white T-shirts, with a more predictable demand.
 Zara uses a responsive supply chain with production in Europe for
trendy items, and a more efficient supply chain with production in
Asia for the basics.

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