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Supply Chain Strategic fit

Supply Chain Performance:

Achieving Strategic Fit and Scope

Prof Laoucine Kerbache

LSCM 611:
Session 5

© Professor L. Kerbache 14/09/2023

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Supply Chain Strategic fit

Outline
• Competitive and supply chain strategies
• Achieving strategic fit: Demand and Supply
Uncertainties
• Other issues affecting strategic fit
• Mini-cases

© Professor L.Kerbache 14/09/2023

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Supply Chain Strategic fit
Linking Supply Chain to Business Strategy
• The competitive strategy is defined based on how the customer
values product cost, delivery time, variety, and quality.
• The relationship between competitive and supply chain strategies
can be illustrated by the following value chain:
Business Strategy

New Product Marketing Supply Chain Strategy

Strategy Strategy

New
Product Marketing
Operations Distribution Service
Development and Sales

Finance, Accounting, Information Technology, Human Resources

© Professor Laoucine Kerbache 14/09/2023

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Supply Chain Strategic fit

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 must have the same
goals
• To achieve a strategic fit, the requirements are:
– The competitive strategy and all functional strategies must fit
together to form a coordinated overall strategy.
– The different functions must appropriately structure their
processes and resources to be able to execute these strategies
successfully.
– The design of the overall supply chain and the role of each stage
must be aligned to support the supply chain strategy.

© Professor Laoucine Kerbache 14/09/2023

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Supply Chain Strategic fit

How is Strategic Fit Achieved?

• Three basic steps to achieve a strategic fit
– Step 1: Understand the customer needs for each
targeted segment and the uncertainty these needs
impose on the supply chain.
– Step 2: Understand the supply chain capabilities – what
is the supply chain is designed to do well.
– Step 3: Achieving strategic fit. If mismatch, the firm
must either restructure the supply chain or alter its
competitive strategy.

© Professor Laoucine Kerbache 14/09/2023

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Supply Chain Strategic fit
Step 1: Understanding the Customer needs
and resulting uncertainties impacting the supply
chain
• Identify the needs of the customer segment being
served (Wal-Mart vs Seven Eleven)
• Customer demand from different segments tend to
vary along several attributes:
– Quantity of product needed per order
– Variety of products needed
– Service level required
– Price of the product

• Demand Uncertainty and Implied Demand

Uncertainty:
– Demand Uncertainty: the uncertainty of customer demand for a
product
– Implied Demand Uncertainty: The resulting uncertainty faced by the
supply chain to serve customers with specific above attributes
© Professor Laoucine Kerbache 14/09/2023
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Supply Chain Strategic fit
Demand Uncertainty Framework (Hau Lee, 2004)

Functional Product Innovative Product

Low Demand Uncertainties High Demand Uncertainties

More Predictable Demand Difficult to Forecast

Stable Demand Variable Demand

Long Product Life Short Selling Season

Low Inventory Cost High Inventory Cost

Low Product Variety High Product Variety

Higher Volume per SKU Low Volume per SKU

Low Stockout Cost High Stockout Cost

Low Obsolescence High Obsolescence

© Professor Laoucine Kerbache 14/09/2023
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Supply Chain Strategic fit
Correlation between demand and implied
demand uncertainties (see Fisher, 1997)
• Products with uncertain demand are often less mature
and have less direct competition and thus, having
higher margins. Commonly known as innovative
products,
• Forecasting is more accurate when demand has less
uncertainty. Commonly known as functional products
• Increased implied demand uncertainty lead to
increased difficulty in matching supply with demand.
Thus, overstocking or shortages are higher. Further,
markdowns are high for products with greater implied
demand uncertainty.

© Professor Laoucine Kerbache 14/09/2023

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Supply Chain Strategic fit
Step 2: Understanding the
Supply Chain capabilities
• How does the firm best meet demand in this uncertain
environment?
• The answer is : Responsiveness and Efficiency
• Definitions:
– Responsiveness is the ability to deal effectively with high
implied demand uncertainty
» 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
– Efficiency is the ability to making and delivering a product to the
customer at least cost.
• Increasing responsiveness results in higher costs that
lower efficiency

© Professor Laoucine Kerbache 14/09/2023

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Supply Chain Strategic fit
Comparison of Efficient and
Responsive Supply Chains (Chopra 2013)
Efficient SC Responsive SC

Primary goal Lowest cost Quick response

Product design strategy Min product cost Modularity 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 Aggressively reduce even
of greater cost if costs are significant
Supplier selection strategy Cost and low quality Speed, flexibility, quality

Transportation strategy Greater reliance on low Greater reliance on

cost modes responsive (fast) modes

© Professor Laoucine Kerbache 14/09/2023

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Supply Chain Strategic fit
Understanding the Supply Chain:
Tradeoffs: Efficiency-Responsiveness (C-R)
Responsiveness of SC The C-R efficient frontier is the curve showing
The lowest possible cost for a given level of
Responsiveness.

High
BIC
x Notation:

BIC: Best In Class

AIC: Average in Class
WIC: Worst In Class

x BIC
AIC x

WIC
Low AIC
x
BIC
x
WIC WIC
x Efficiency of SC
High Low
© Professor Laoucine Kerbache 14/09/2023
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Supply Chain Strategic fit
Step 3: Achieving Strategic Fit
Responsive
supply chain
Zara
Zone of
Mismatch

Responsiveness
spectrum

Zone of
Mismatch
Barilla
Efficient
supply chain

Certain demand Implied Uncertain

(Functional Products) uncertainty demand
spectrum (Innovative Products)
© Professor Laoucine Kerbache 14/09/2023
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Supply Chain Strategic fit
Strategic fit: A simple representation (2x2 Matrix)
(Use this to do the four minicases)

Product characteristics Predictable/Mature/ Unpredictable/Introductory/

Functional Innovative
Supply chain type

Make-to- Ex: Mineral water If product is here

stock/Efficient

Make-to- If product is here Ex: Personal computer

order/Responsive models

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
© Professor Laoucine Kerbache 14/09/2023
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Supply Chain Strategic fit
Other classification for selecting global supply chain
strategies (Christopher et al., 2006)

Predictable Demand Unpredictable demand

Long Lead Time Lean Supply Chain Leagile supply chain

Plan and Execute Postponement

Short Lead Time Lean Supply Chain Agile supply chain

Continuous Quick Response
Replenishment

© Professor Laoucine Kerbache 14/09/2023

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Supply Chain Strategic fit
Other Issues Affecting Strategic Fit

• Multiple products and customer segments

• Product life cycle
• Competitive changes over time

© Professor Laoucine Kerbache 14/09/2023

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Supply Chain Strategic fit
Multiple Products and
Customer Segments
• Firms sell different products to different
customer segments (with different implied
demand uncertainty)
• The supply chain has to be able to balance
efficiency and responsiveness given its
portfolio of products and customer segments
• Two approaches:
– Different supply chains
– Tailor supply chain to best meet the needs of each
product’s demand

© Professor Laoucine Kerbache 14/09/2023

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Supply Chain Strategic fit

Product Life Cycle

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

© Professor Laoucine Kerbache 14/09/2023

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Supply Chain Strategic fit

Supply chain Strategy & Product Life Cycle

© Professor Laoucine Kerbache 14/09/2023

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Supply Chain Strategic fit

Product Life Cycle

• Examples: pharmaceutical firms, etc
• As the product goes through the life cycle,
the supply chain changes from one
emphasizing responsiveness to one
emphasizing efficiency

© Professor Laoucine Kerbache 14/09/2023

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Supply Chain Strategic fit

Competitive Changes Over Time

• Competitive pressures can change over time
• More competitors may result in an increased
emphasis on variety at a reasonable price
• The Internet makes it easier to offer a wide
variety of products
• The supply chain must change to meet these
changing competitive conditions

© Professor Laoucine Kerbache 14/09/2023

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Supply Chain Strategic fit

The Seven Principles of Supply Chain Management

• Segment customers based on the service needs of distinct groups
and adapt the supply chain to serve these segments profitably.
• Customize the logistics network to the service requirements and
profitability of customer segments.
• Listen to market signals and align demand planning accordingly
across the supply chain, ensuring consistent forecasts and optimal
resource allocation.
• Differentiate product closer to the customer and speed conversion
across the supply chain.
• Manage sources of supply strategically to reduce the total cost of
owning materials and services.
• Develop a supply chain-wide technology strategy that supports
multiple levels of decision making and gives a clear view of the flow
of products, services and information.
• Adopt channel-spanning performance measures to gauge collective
success in reaching the end-user effectively and efficiently.

© Professor Laoucine Kerbache 14/09/2023