Supply Chain Management

Third Edition
Nada R. Sanders

Chapter 2

Supply Chain Strategy

Learning Objectives
• Define supply chain strategy and explain how it supports the business
strategy.
• Explain how the right supply chain design can create a competitive
advantage.
• Identify and explain the building blocks of a supply chain strategy.
• Explain differences in supply chain design based on organizational
competitive priorities.
• Explain how productivity can be used to measure competitiveness.

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What Is Supply Chain Strategy?
• A company must have a long-range business strategy if it is going to
maintain a competitive position in the marketplace
• A business strategy is a plan for the company that clearly defines the
company’s long-term goals and how it plans to achieve these goals
• Supply chain strategy is a long-range plan for the design and ongoing
management of all supply chain decisions that support the business
strategy

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Strategic Alignment
• It is important to remember that there must be strategic alignment
between the business strategy and supply chain strategy
• A company’s supply chain strategy should be developed to drive and
support its business strategy
• The supply chain should not be designed to merely mimic its competitors
or solely focus on cost-cutting efforts
• In addition to SCM, all organizational functions should be designed to
support the business strategy

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Achieving a Competitive Advantage
• Seeking a sustainable competitive advantage has become a top business
concern
• At the most basic level, corporate success in the marketplace can result
from two aspects:
1. Cost-production advantage
2. Value advantage

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Cost–Productivity Advantage
• Every marketplace typically has one competitor who is the low-cost
producer and who has the greatest sales volume
• One factor contributing to this are economies of scale that enable the
company to spread its fixed costs over a greater volume
• Another factor contributing to this is the impact of the experience curve
• In addition to the experience curve, another way to reduce costs is through
an efficient supply chain network

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Value Advantage
• Customers do not buy products but rather the benefits or value provided
by those products
• An important competitive advantage for companies is to distinguish their
products or services in some way from their competitors
o Otherwise, it is a commodity
• One way to gain a value advantage is by segmenting the market and
identifying “value segments” in the marketplace
• Companies are increasingly focusing on service as a way to add value

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Competitive Advantage Matrix

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SCM as a Source of Value
• SCM provides a powerful way for companies to achieve a cost–value
advantage over their competitors
o Improvements in the supply chain can dramatically reduce inventory, distribution,
and coordination costs
• Another way that firms can move to a cost-leadership position is to develop
strategic differentiation based on service excellence
• Another option is through the introduction of new supply chain
technologies

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Building Blocks of Supply Chain Strategy
• Operations strategy
• Distribution strategy
• Sourcing strategy
• Customer service strategy

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Operations Strategy
• The operations strategy of a company involves decisions about how it will
produce goods and services
• One of the most important aspects of operations strategy is the degree of
product customization it offers
o Called the product positioning strategy

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Three Product Positioning Strategies
1. Make-to-stock is a strategy that produces finished products for
immediate sale or delivery, in anticipation of demand
o Typically seen in assembly line type operations
2. Assemble-to-order strategy is where the product is partially completed
and kept in a generic form, then finished when an order is received
o Also known as built-to-order
o Inventory is standard components that can be combined to customer specification
3. Make-to-order is a strategy for customized products or products with
infrequent demand
o The delivery system is longest with this strategy, and product volumes are low

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Product Positioning Strategies Visually

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Distribution Strategy
• A company’s distribution strategy is about how it plans to get its products
and services to customers
• Is the company is going to sell directly to customers or indirectly through
distributors or retailers
• The best distribution strategy varies depending on which market segment
the company is trying to reach

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Sourcing Strategy
• Sourcing strategy relates to which of a company’s business it is going to outsource
versus the ones it will retain internally
o This includes decisions regarding supplies and component parts
• The process of developing a sourcing strategy begins with a company analyzing its
existing supply chain skills and expertise
o Strategic differentiators must stay in house
o Anything else can be outsourced
• Outsourcing enables companies to quickly respond to changes in demand
• Outsourcing used to be considered by managers as a simple make or buy decision
• Today managers understand that sourcing is a strategic decision

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Outsourcing Advantages
• A third party may be able to offer products or services at a lower price due
to scale or other advantages
• It enables a company to expand its offering into new markets or geographic
areas through outsourcing partners that have reach in those areas
• Outsourcing may help companies achieve state-of-the art technological
capability quickly

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Outsourcing Disadvantages
• Loss of control
o As the scope of the task passed to the vendor increases, the ability to retain control
of the task or function decreases
• Dependency risk
o As a firm engages in more sophisticated sourcing engagements, it often tailors and
adapts its operations to match those of its vendor
o These arrangements create a risk that the firm will become overly dependent on the
vendor

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Customer Service Strategy
• The customer service strategy of a company should be based first on the
overall volume and profitability of market segments
• The company then must understand what the customers in each segment
want and make a decision on how the company is going to meet the
demands of its customers
• Typically, this requires dividing the market by volume and profitability

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Market Segmentation Based on Volume and Profitability

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Customer Service Strategies
• Do customers in all four quadrants need the same delivery speed
• Should all products be equally available to all four quadrants
• Do customers in all four quadrants need the same level of customer service
• The implications for supply chain management strategy is that there may
be different supply chains for different market segments

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Supply Chain Strategic Design
• The way a company competes in the marketplace is called a competitive
priority
• Supply chain strategy and supply chain design greatly depend on a
company’s competitive priorities
• There are five primary competitive priorities:
1. Cost
2. Time
3. Innovation
4. Quality
5. Service

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Competing on Cost
• Companies that compete on cost offer products at the lowest price possible
• These companies are either maintaining market share in a commodity market, or
they are offering low prices to attract cost-sensitive buyers
• Competing on cost requires highly efficient, integrated operations that have cut
costs out of the system
• It may require going to the least-expensive suppliers rather than focusing on
high-quality components
• This supply chain focuses on meeting efficiency-based metrics such as asset
utilization, inventory days of supply, product costs, and total supply chain costs
• The operation strategy is designed for product and process standardization

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Competing on Time
• Time is one of the most important ways companies compete today
• Making time a competitive priority means competing based on all
time-related dimensions, such as rapid delivery and on-time delivery
o Rapid delivery refers to how quickly an order is received
o On-time delivery refers to the number of times deliveries are made on time
• When time is a competitive priority, the job of the operations function is to
combine or eliminate processes to save time

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Competing on Innovation
• Companies whose primary strategy is innovation focus on developing products
that the customers perceive as “must-haves”
• The pull the product through the supply chain with significant demand
• Due to the “must-have” nature of these products, these companies can typically
command a premium price
• Companies that compete on innovation typically have a very short window of
opportunity before the imitators enter the market
• The supply chains of these companies typically focus on two features: speed and
product design
• Another challenge is the ability to quickly raise production volumes should
demand suddenly increase

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Competing on Quality
• Competing on quality means that a company’s products and services are
known for their premium nature
• Two important elements of this competitive priority are consistency and
reliability
• Many aspects of the supply chain are altered when companies compete on
quality
• This includes sourcing of components, as well as the implementation of
concepts such as total quality management (TQM) and Six Sigma
• As supply chain management is a boundary-spanning activity, an important
attribute of competing on quality is product traceability
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Competing on Service
• Competing on service means that a company understands the dimensions
that its target customers define as high service and has chosen to tailor
their products to meet those specific needs
• An important aspect of this strategy is that these companies typically build
customer loyalty
• Do not compete on cost
• These companies also have a strong ability to segment their customer
based on perceived value

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Why Not Compete on All Dimensions?
• Successful companies understand that they cannot effectively compete on
all dimensions
• The companies that succeed are those that understand which dimensions
to excel on and are able to focus their energies on those dimensions
• Order winners are those characteristics that win the company orders in the
marketplace
• Order qualifiers are those characteristics that will qualify the company to
be a participant in a particular market

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Strategic Considerations
• Small versus large firms
• Supply chain adaptability

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Small versus Large Firms
• For many supply chain companies, a large source of power comes from
their sheer size
• These companies are sometimes called supply chain masters
o Amazon, Walmart
• Large companies have the advantage of being able to buy larger quantities
of goods and command lower prices due to quantity discounts
• Large companies can also impose the supply chain structure they want
• Small companies can focus on particular regions, where they are not really
all that small

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Supply Chain Adaptability
• Successful companies understand that change is a natural part of the
business environment
• When new markets, changes in the environment, new products, and new
technologies, business strategies need to change
• A company’s supply chain strategy must quickly adapt
• Numerous factors can require significant adaptability on the part of a
company’s supply chain
o New technology
o Change in the scope of a company’s business
o Change in competitive position

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Measuring Productivity
•

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Interpreting Productivity
• The more efficiently a company uses its resources, the more productive it is
and the higher the productivity ratio
• Interpreting productivity is more complex than just the value of the ratio
• To interpret the meaning of a productivity measure, it must be compared
against a baseline
• Productivity should be measured over time to observe changes
• When computing productivity, it is important to consider the units used in
its computation
• Also important to consider how the company competes

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