SC Performance and achieving strategic fit

Companys Competitive strategy and its supply chain strategy affects the performance based on its strategic fit. Companys competitive strategy defines, relative to its competitor the set of customer needs that it seeks to satisfy through its products and services.

e.g.: wall mart strategy is to make available variety of products and at low cost. Whereas McMaster sells MRO (aintanence,repiar,operations) products. It offers about 4 lakh items through catalogue/website. Its strategy is built around customer convenience ,availability and responsiveness. (not on cost) . These are the contradictory views.

 Similarly Dell has build to order strategy through web as against Gateway selling through retailers. Customer walking into Gateway can walk away with e-machine but variety and customization is limited where as from Dell you can get the machine of your choice in a weeks time. Both scatters to different kind of needs of customers.

 Thus a firms competitive strategy is defined based on customers priorities. Competitive strategy targets one or more customer segments and aims to provide products and services that satisfy these customers needs.

Value chain
Finance , Accounting , Information technology, New product development> Marketing & sales> operations Human Resource Distribution > service

 New product development = creates specifications for the product Marketing & Sales : Generate demand & bring input back to new product development. Operations transforms inputs into outputs to create the product Distribution = either takes the product to customer or brings the customer towards product. Service customer requests after the sale or during the sale Other support functions facilitate core functions.

 Now to execute Cos competitive strategy , all these functions play a role and each must develop its own strategy. Product development strategy :specifies the portfolio of new products the company will develop. Marketing & sales specifies how market will be segmented , how the product will be positioned , priced and promoted.

 Supply chain strategy determines the nature of procurement of raw materials , transportation of materials to & fro the company , manufacture of the product or operation to provide the service and distribution of the product to the customer along with any follow up service and a specification whether these processes will be performed or outsourced.

 The value chain emphasizes the close relationship between functional strategies within a company. Each function is crucial and functional strategies can not be formulated in isolation. They are closely intertwined and must fit and support each other if a company is to succeed.

Fitment of SC strategy and Competitive strategy

Strategic fit means both SC strategies and Competitive strategies have aligned goals consistency between customer priorities that competitive strategy hopes to satisfy and SC capabilities that SC strategy aims to build. Achieving strategic fit is the main consideration when SC strategy /design is formulated

 All processes and functions that are part of Cos value chain contribute to success or failure they do not operate in isolation no one function or process can ensure chains success. Failure at any one process or function can lead to failure of over all value chain. Thus Cos success / failure is closely linked to the following keys;

1)Competitive strategy and all functional strategies must fit together to form a coordinated overall strategy. Each functional strategy must support other functional strategies and help a firm reach its competitive strategy goal 2)The different functions in a Co must appropriately structure their processes and resources to be able to execute these strategies successfully. 3)Design and overall SC and role of each stage must be aligned to support the SC Strategy.

 A company can fail because of lack of strategic fit or because of its design , processes and resources do not provide the capabilities to support the desired strategic fit. If this alignment is not achieved conflicts arise between functional goals within firm or between goals of different SC stages. E.g.; marketing publicizes variety of products in quick time whereas distribution targeting grouping of product to get economies there by delaying.

Ways to achieve strategic fit

A competitive strategy specifies one or customer segments it hopes to satisfy. To get strategic fit Co should ensure its SC capabilities support its ability satisfy the targeted customer segments.

Step 1: Understanding The customer and SC uncertainty

Understand the needs of customer segment being served. A customer may look for low cost while other may seek convenience . In general following attributes are demanded by customers; 1.The quantity of the product needed in each lot. 2.Response time that customer are willing to tolerate.

 There are three steps; 1)Understanding the customer and SC uncertainty 2)Understanding SC Capabilities 3)Achieving strategic fit. If there is a mismatch exists between what SC is capable of and what Customer needs are , then either SC need to be restructured to suit competitive strategy or alter competitive strategy.

SC Responsiveness means
1.Respond to wide ranges of quantities demanded. 2. Meet short lead times 3. Handle Variety of products needed 4. Meet high Service level required 5. Price of product during emergencies 6. Desired rate of innovation in the product.

Each customer in a particular segment will tend to have similar needs.

Identifying a single measure

Although we noticed a number of attributes along which customer demand varies , we need to identify one key measure for combining all of these attributes. Once this single measure is identified SC can be defined well

 It may appear that each of the customer need categories should be viewed differently but in a very fundamental sense , each customer need can be translated into the metric of Implied demand uncertainty. IMPLIED DEMAND UNCERTAINTY is demand uncertainty due to the portion of demand that the SC is

 We make a distinction between demand uncertainty and implied demand uncertainty . DEMAND UNCERTAINTY reflects the uncertainty of customer demand for a product. IMPLIED DEMAND Uncertainty on the other hand is the resulting uncertainty for only the portion of the demand that SC plans to satisfy and attributes the

e.g.; (1) a firm supplying only emergency orders for a product will face a higher implied demand uncertainty than a firm that supplies the same product with a long lead time as the second firm has an opportunity to fulfill the orders evenly over the long lead time. (2) Another example is on impact of service level. As a supply chain raises its level of service , it must be able to meet higher and higher percentage of actual demand forcing it to prepare for rare surges in demand

 Thus raising service level increases the implied demand uncertainty even though the products demand uncertainty does not change. Both the product demand uncertainty and various customer needs that the SC tries to fill affect implied demand uncertainty.

Impact of customer needs on implied demand uncertainty

Customer need Causes implied demand uncertainty to a wider range Range of quantity required increase because increases deceases of the quantity required implies Lead time increase because there is less greater variance in demand time in which to react to orders. Variety of products required Increase because demand per increasesof channels through product becomes the total Number Increase because more which a innovation increases customerbecause new products Rate of product may be acquired disaggregate Increase demand is now increases service level increases disaggregated overuncertain tend to have morethe firm now Required Increase because more channels demand has to handle unusual surges in demand.

 Since each individual customer need contributes to the implied demand uncertainty , we can use IMPLIED DEMAND UNCERTAINTY as a common metric with which to distinguish different types of demand. Fisher pointed out that implied demand uncertainty is often correlated with other

Other attributes Low implied demand uncertainty Product margin Low Average forecast 10% error Average stock out 1% to 2 % rate Average forced 0% season-end markdown

Correlation between implied demand uncertainty and other attributes

High implied uncertainty High 40% to 100% 10% to 40% 10% to 25%

1.Products with uncertain demand are often less mature and have less direct competition as a result , margins tend to be high. 2.Forecasting is more accurate when demand has less uncertainty. 3.Increased implied demand uncertainty leads to increased difficulty in matching supply 4.Markdowns are high for products with high implied demand uncertainty because oversupply often results.

e.g. ; if we take salt and palmtop computer Salt has low implied demand uncertainty low margins- low stock out rates accurate demand forecast possible- virtually no markdownsPalm top computer: high implied uncertainty- high margins- high stock out costs (if successful) large markdowns (if it is failure).

e.g. : circuit board supplier to TWO different types of PC manufacturer. One PC manufacturer like DELL who is build to order whose lead time is same day. In this case the supplier has to have flexible manufacturing or ability to build high inventory to meet DELL deadlines. Forecast and supplier inventories would be high and margins also may be high.

 The other customer builds a small variety of PCs and give the supplier long lead time and reducing forecast errors and inventories. Thus his margins may be low.

from the above two examples we can see the same product but to different customer segment can have different implied demand uncertainty given separate service requirements.

Uncertainty resulting from capability of supply chain

When a new component is introduced in a PC industry the quality yields of the production process tends to be low and breakdowns are frequent. Delivery becomes difficult and PC manufacturers suffer. But once the production technology becomes mature and yields improve Cos are able to follow a fixed delivery schedule resulting in low supply

Supply source capability Frequent break downs Unpredictable and low yields Poor quality Limited supply capacity Inflexible supply capacity Evolving production process

Impact of supply source capability on supply uncertainty

Cause supply uncertainty to increase Increase Increase Increase Increase increase

 Supply uncertainty is also strongly affected by the life cycle position of the product. New products being introduced have higher supply uncertainty because designs and production processes are still evolving . In contrast mature products have less supply uncertainty. Using this a spectrum can be created by combining the demand uncertainty and supply uncertainty.

Implied uncertainty (demand & supply ) spectrum.

Predictable uncertain supply & demand demand

predictable supply & uncertain demand

Highly supply &

or uncertain supply & predictable demand or somewhat uncertain supply & demand --------------------------------------|-------------------------------------- Salt at an existing a new Super market automobile model communication

Step 2. Understanding SC Capabilities

Like we placed demand on a one dimensional spectrum (the implied demand uncertainty) , the supply also needs to be placed on a spectrum SCs have many different characteristics that influence their responsiveness and efficiency. SCs can do the following;

 Respond to wide ranges of quantities demanded Meet short lead times Handle a large variety of products Build highly innovative products Meet a high service level Handle supply uncertainty

 The more these abilities the more responsive SC is. Responsiveness comes at a cost SC efficiency is the inverse of cost of making and delivering a product to a customer Increases in cost lower efficiency.

Cost responsiveness efficient frontier

SC range from those that focus solely on responsive to those that focus on low cost. Dell SC is highly responsive as it focuses on it. Sams club is low cost and hence efficient (eliminates responsiveness)

Step 3: Achieving strategic fit

The final step is Having understood implied uncertainty and SC position on responsiveness spectrum the next step is to ensure that the degree of SC responsiveness is consistent with the implied uncertainty. The goal is to target high responsiveness for a SC facing high implied uncertainty and efficiency for a SC facing low implied uncertainty.

e.g. Dell: high response hence high demand uncertainty. It has two options (1) to go for efficient SC OR 2) To go for responsive SC If it opts for efficient cost will come down but delivery will be delayed not acceptable to Dell Hence Dell has to opt for highly responsive SC only.

 E.g. : Barilla pasta manufacturer: it has stable customer demand low implied demand uncertainty-supply is quite predictable Barilla if it opts for highly responsive SC it will increase the cost and will loose customers. Hence it has to opt for efficient SC which will lower cost . This relations ship is represented by zone of strategic fit.

Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map (Fig. 2.5) Responsive
supply chain

Responsiven ess spectrum

of ic e g on ate Z r t t Fi S

Efficient supply chain Certain demand Implied uncertainty spectrum Uncertain demand
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Comparison of Efficient and Responsive Supply Chains (Table 2.4)Responsive Efficient

Primary goal Product design strategy Pricing strategy Mfg strategy Inventory strategy Lead time strategy Supplier selection strategy Transportation strategy Lowest cost Min product cost Lower margins High utilization Minimize inventory Quick response Modularity to allow postponement Higher margins Capacity flexibility Buffer inventory

Reduce but not at expense of Aggressively reduce even if greater cost costs are significant Cost and low quality Speed, flexibility, quality Greater reliance on low cost modes Greater reliance on responsive (fast) modes

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Other Issues Affecting Strategic Fit

Multiple products and customer segments Product life cycle Competitive changes over time

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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 products demand
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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

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Product Life Cycle

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

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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

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Expanding Strategic Scope

Scope of strategic fit
The functions and stages within a supply chain that devise an integrated strategy with a shared objective One extreme: each function at each stage develops its own strategy Other extreme: all functions in all stages devise a strategy jointly

Five categories:

1.Intra-company intra-operation scope 2.Intra-company intra-functional scope 3.Intra-company inter-functional scope 4.Inter-company inter-functional scope 5.Agile inter-company- inter-functional scope
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Different Scopes of Strategic Fit Across a Supply Chain

Suppliers Competitive Strategy Product Development Strategy Supply Chain Strategy Marketing Strategy
Intercompany Interfunctional Intracompany Intrafunctional at Distributor Intracompany Intraoperation at Distributor

Manufacturer

Distributor

Retailer

Customer

Intracompany Interfunctional at Distributor

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1.Intra-company intra-operation scope

It is about One operation within a functional area within a company. Here , each operation within each stage of supply chain devises strategy independently. The resulting collection of strategies will not result in maximizing SC profitability, because different functions and operations have conflicting local objectives.

 E.g.: a distribution company a transportation operation evaluation based on shipping cost per unit. Shipping the product individually costs $5 per item whereas shipping by truck load costs only $1 per item. To minimize cost transportation group, ships by truck load basis as it is economical. This decision while minimizing the transportation cost per unit increases the response time and may underline a competitive strategy based on responsiveness. The key point is that transportation decision was made independent of other functions within the firm and the rest of supply chain. Therefore the strategic fit is restricted only to a portion (transportation)of the distribution stage within the supply chain (smallest eclipse)

2.Intra-company intra-functional scope

We have just seen that many operations together form each function within a firm weakness of intra-company intra-operations. SC operations include manufacturing , warehousing and transportation among others. With the intra company intrafunctional scope, the strategic fit is expanded to include all operations within a function.

 In this case warehouse manager no longer minimizes warehousing costs while transport manager independently minimizes transportation costs. By working together and developing a joint strategy, the two minimize the total functional cost. Managers now not only look at transportation cost but also look at warehousing and other SC related cost. Although truckload transportation saves the company $4 per item , it costs company additional $8 per item because of increased inventory and warehousing costs. Therefore it costs less for the company to ship each item individually because the extra $4 transportation charge saves the company $8 which otherwise we have to spend for inventory/warehouse related cost. Strategic fit now expands to entire function within a stage of supply chain (see distributor) in chart.

3.Intra-company inter-functional scope

But different functions may have conflicting views which is not solved in the earlier example. E.g.: marketing and sales working on revenue generation while manufacturing & distribution focusing on cost reduction. Conflicting objectives.! Overall firms performance is hurt .

 Now we have to expand the scope of strategic fit across all functions within the firm. For this, all functional strategies are developed to support each other and also the competitive strategy.

 To realize this, the company will now not only look at SC cost but also look at revenues as well. Although the company had already decided to ship individual units to bring down inventory costs, marketing wanted to increase inventory so that the company could take advantage of increased sales as a result of higher service levels. If revenues and margins gained from holding more inventory outweigh the additional costs , the company should go ahead and increase inventory. Key point : both operational and marketing decisions have revenue and cost impact. They must be coordinated.(see chart distributer.

4.Inter-company inter-functional scope

The earlier option still does not solve two issues. 1.It leads to each stage of SC trying to maximize its own profits, which does not necessarily result in maximization of SC surplus. The SC surplus is maximized only when all SC stages coordinate strategy together. This occurs with inter company inter functional scope in which all stages of SC coordinate strategy across all functions, ensuring that together they

2. When speed became a great driver of SC success . Today more and more companies are succeeding not because they have the lowest priced product, and not because they have the highest quality or best performing product, but because they are able to respond quickly to market needs and get the right product to the right customer at the right time.(Zara).

 But responding speedily lies to a large extent outside companies own boundaries for most of the companies. Most delays are created at the interface between the boundaries of different stages of SC. Thus managing these interfaces become the key focus to provide quick response. the inter company scope forces every stage of SC to look across the SC to raise SC surplus and increase the size of the pie that all stages have to share among themselves.(see chart ) Key point: strategic fit is essential because competitive playing field has shifted from Company Vs Company to Supply Chain Vs Supply Chain. A companys partner in SC may well determine companys success as company is intimately tied to supply chain.

 Discuss about treating stages in supply chain that does not belong to company. Companys reducing the inventory but asking supplier to hold it does not solve the problem. Only the ownership changes but costs lie within the supply chain!

5.Agile intercompany inter functional scope

Strategy and operations at firms must be agile enough to maintain strategic fit in a changing environment. Agile scope refers to firms ability to achieve strategic fit when partnering with SC stages that change over time. Some times firm may become part of new SC but still should ensure strategic fit. The

Summary of Learning Objectives

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?
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