IE 428 Introduction to Supply

Chain Management

Assist.Prof.Dr. Nuşin UNCU

Supply Chain Performance:Achieving strategic
fit and scope
• A company's competitive strategy defines, relative to its competitors, the set of
customer needs that it seeks to satisfy through its products and services.
✓For example,
• Wal-Mart aims to provide high availability of a variety of products of reasonable
quality at low prices. Most products sold at Wal-Mart are commonplace
(everything from home appliances to clothing) and can be purchased elsewhere.
What Wal-Mart provides is a low price and product availability.
• McMaster-Carr sells maintenance, repair, and operations (MRO) products. It
offers more than 400,000 different products through both a catalog and a Web
site. Its competitive strategy is built around providing the customer with
convenience, availability, and responsiveness. With this focus on responsiveness,
McMaster does not compete based on low price. Clearly, the competitive strategy
at Wal-Mart is different from that at McMaster.
Supply Chain Performance:Achieving strategic
fit and scope
➢ To see the relationship between competitive and supply chain strategies, start with the value
chain for a typical organization.
The value chain begins with new product development, which creates specifications for the
product. Marketing and sales generate demand by publicizing the customer priorities that the
products and services will satisfy. Marketing also brings customer input back to new product
development. Using new product specifications, operations transforms inputs to outputs to create
the product. Distribution either takes the product to the customer or brings the customer to the
product. Service responds to customer requests during or after the sale. These are core processes
or functions that must be performed for a successful sale. Finance, accounting, information
technology, and human resources support and facilitate the functioning of the value chain.
Supply Chain Performance:Achieving strategic
fit and scope
➢ To execute a company's competitive strategy, all these functions play a role, and each must
develop its own strategy. Here, strategy refers to what each process or function will try to do
particularly well.
• A product development strategy specifies the portfolio of new products that a company will try to
develop. It also dictates whether the development effort will be made internally or outsourced.
• A marketing and sales strategy specifies how the market will be segmented and how the product
will be positioned, priced, and promoted.
Supply Chain Performance:Achieving strategic
fit and scope
• A supply chain strategy determines the nature of procurement of raw materials, transportation
of materials to and from 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 of whether these processes will be performed in-house or outsourced.
• Supply chain strategy specifies what the operations, distribution, and service functions, whether
performed in-house or outsourced, should do particularly well.
✓ For example, Dell's decision to sell direct, Gateway's decision to start selling PCs through
resellers, and Cisco's decision to use contract manufacturers define the broad structure of their
supply chains and are all part of their supply chain strategies.
• Supply chain strategy also includes design decisions regarding inventory, transportation, operating
facilities, and information flows.
✓ For example, Amazon’s decisions to build warehouses to stock some products and to continue
using distributors as a source of other products are part of its supply chain strategy. Similarly,
Toyota's decision to have production facilities in each of its major markets is part of its supply
chain strategy.
Supply Chain Performance:Achieving strategic
fit and scope
• The value chain emphasizes the close relationship between the functional
strategies within a company. Each function is crucial if a company is to satisfy
customer needs profitably. Thus, the various functional strategies cannot be
formulated in isolation. They are closely intertwined and must fit and support
each other if a company is to succeed.
✓ For example, Seven-Eleven Japan's success can be related to the excellent fit among its functional
strategies. Marketing at Seven-Eleven has emphasized convenience in the form of easy access to
stores and availability of a wide range of products and services. New product development at
Seven-Eleven is constantly adding products and services, such as bill payment services that draw
customers in and exploit the excellent information infrastructure and the fact that customers
frequently visit Seven-Eleven. Operations and distribution at Seven-Eleven have focused on
having a high density of stores, being very responsive, and providing an excellent information
infrastructure. The result is a virtuous cycle in which supply chain infrastructure is exploited to
offer new products and service that increase demand, and the increased demand in turn makes it
easier for operations to improve the density of stores, responsiveness in replenishment, and the
information infrastructure.
Achieving strategic fit
• All processes and functions that are part of a company's value chain contribute to its success or
failure. These processes and functions do not operate in isolation; no one process or function can
ensure the chain's success. Failure at any one process or function, however, may lead to failure of
the overall chain. A company's success or failure is thus closely linked to the following keys:
1. The 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 company must appropriately structure their processes and resources
to be able to execute these strategies successfully.
3. The design of the overall supply chain and the role of each stage must be aligned to support the
supply chain strategy.
Achieving strategic fit
• There are three basic steps to achieving strategic fit;
1. Understanding the Customer and Supply Chain Uncertainty: First, a company must understand the
customer needs for each targeted segment and the uncertainty the supply chain faces in satisfying these
needs. These needs help the company define the desired cost and service requirements. The supply chain
uncertainty helps the company identify the extent of the unpredictability of demand, disruption, and delay
that the supply chain must be prepared for.
2. Understanding the Supply Chain Capabilities: There are many types of supply chains, each of which is
designed to perform different tasks well. A company must understand what its supply chain is designed to do
well.
3. Achieving Strategic Fit: If a mismatch exists between what the supply chain does particularly well and the
desired customer needs, the company will either need to restructure the supply chain to support the
competitive strategy or alter its competitive strategy.
Step 1:Understanding the Customer and
Supply Chain Uncertainty
• To understand the customer, a company must identify the needs of the customer segment being served.
✓ Let us compare Seven-Eleven Japan and a discounter such as Sam’s Club (a part ofWal-Mart). When
customers go to Seven-Eleven to purchase detergent, they go there for the convenience of a nearby store and
are not necessarily looking for the lowest price. In contrast, low price is very important to a Sam's Club
customer. This customer may be willing to tolerate less variety and even purchase very large package sizes as
long as the price is low. Even though customers purchase detergent at both places, the demand varies along
certain attributes. In the case of Seven-Eleven, customers are in a hurry and want convenience. In the case of
Sam's Club, they want a low price and are willing to spend time getting it. In general, customer demand from
different segments varies along several attributes as follows.
Step 1:Understanding the Customer and
Supply Chain Uncertainty
• In general, customer demand from different segments varies along several attributes as follows.
1. The Quantity of the Product Needed in Each Lot: An emergency order for material needed to
repair a production line is likely to be small. An order for material to construct a new production
line is likely to be large.
2. The Response Time that Customers are Willing to Tolerate: The tolerable response time for the
emergency order is likely to be short, whereas the allowable response time for the construction
order is apt to be long.
3. The Variety of Products Needed: A customer may place a high premium on the availability of all
parts of an emergency repair order from a single supplier. This may not be the case for the
construction order.
Step 1:Understanding the Customer and
Supply Chain Uncertainty
4. The Service Level Required: A customer placing an emergency order expects a
high level of product availability. This customer may go elsewhere if all parts of
the order are not immediately available. This is not apt to happen in the case of
the construction order, for which a long lead time is likely.
5. The Price of the Product: The customer placing the emergency order is apt to
be much less sensitive to price than the customer placing the construction order.
6. The Desired Rate of Innovation in the Product: Customers at a high-end
department store expect a lot of innovation and new designs in the store's
apparel.
Step 1:Understanding the Customer and
Supply Chain Uncertainty
• Demand Uncertainity: Demand uncertainty reflects the uncertainty of customer
demand for a product.
• Implied Demand Uncertainity: in contrast, is the resulting uncertainty for only
the portion of the demand that the supply chain plans to satisfy and the
attributes the customer desires.
✓For example, 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.
Step 1:Understanding the Customer and
Supply Chain Uncertainty
• We can use implied demand uncertainty as a common metric with which to
distinguish different types of demand.
Impact of customer needs on implied demand uncertainity
Customer Need Causes Implied Demand Uncertainty to ...
Range of quantity required increases Increase because a wider range of the quantity required
implies greater variance in demand
Lead time decreases Increase because there is less time in which to react to
orders
Variety of products required increases Increase because demand per product becomes more
disaggregate
Number of channels through which product may be Number of channels through which product may be
acquired increases acquired increases
Number of channels through which product may be Increase because new products tend to have more uncertain
acquired increases demand
Required service level increases Required service level increases
Step 1:Understanding the Customer and
Supply Chain Uncertainty
• Fisher (1997) pointed out that implied demand uncertainty is often correlated
with other characteristics of demand. An explanation follows.
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 with demand. For a given product, this dynamic can lead to either a
stockout or an oversupply situation. Increased implied demand uncertainty thus
leads to both higher oversupply and a higher stockout rate.
4. Markdowns are high for products with high implied demand uncertainty because
oversupply often results.
Step 1:Understanding the Customer and
Supply Chain Uncertainty
• First let us take an example of a product with low implied demand uncertainty
such as table salt. Salt has a very low margin, accurate demand forecasts, low
stockout rates, and virtually no markdowns. These characteristics match well with
Fisher's chart of characteristics for products with highly certain demand.
• On the other end of the spectrum, a new palmtop computer has high implied
demand uncertainty. It will likely have a high margin, very inaccurate demand
forecasts, high stockout rates (if it is successful), and large markdowns (if it is a
failure).
Step 1:Understanding the Customer and
Supply Chain Uncertainty
• Supply Uncertainty
• Lee (2002) pointed out that, along with demand uncertainty, it is important to
consider uncertainty resulting from the capability of the supply chain.
✓For example, when a new component is introduced in the PC industry, the quality
yields of the production process tend to be low and breakdowns are frequent. As
a result, companies have difficulty delivering according to a well-defined
schedule, resulting in high supply uncertainty for PC manufacturers. As the
production technology matures and yields improve, companies are able to follow
a fixed delivery schedule, resulting in low
Step 1:Understanding the Customer and
Supply Chain Uncertainty
Impact of supply source capability on supply uncertainty
Supply Source Capability Causes Supply Uncertainty to ...
Frequent breakdowns Increase
Unpredictable and low yields Increase
Poor quality Increase
Limited supply capacity Increase
Inflexible supply capacity Increase
Inflexible supply capacity 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.
Step 1:Understanding the Customer and
Supply Chain Uncertainty
• We can create a spectrum of uncertainty by combining the demand and supply
uncertainty.
Step 2: Understanding the Supply Chain
Capabilities
• Supply chain responsiveness includes a supply chain's ability to do
the following:
1. Respond to wide ranges of quantities demanded
2. Meet short lead times
3. Handle a large variety of products
4. Build highly innovative products
5. Meet a high service level
6. Handle supply uncertainty
Step 2: Understanding the Supply Chain
Capabilities
• Responsiveness, however, comes at a cost. For instance, to respond to a wider range of quantities
demanded, capacity must be increased, which increases costs. This increase in cost leads to the second
definition: Supply chain efficiency is the inverse of the cost of making and delivering a product to the
customer. Increases in cost lower efficiency. For every strategic choice to increase responsiveness, there are
additional costs that lower efficiency.
• Lowest cost is defined based on existing technology; not every firm is able to operate on the efficient
frontier. The efficient frontier represents the cost-responsiveness performance of the best supply chains.
Step 2: Understanding the Supply Chain
Capabilities
• A firm not on the efficient frontier can improve its responsiveness and cost performance by moving toward
the efficient frontier. In contrast, a firm on the efficient frontier can improve its responsiveness only by
increasing cost and becoming less efficient. Such a firm must then make a trade-off between efficiency and
responsiveness. Of course, firms on the efficient frontier are also continuously improving their processes and
changing technology to shift the efficient frontier itself. Given the tradeoff between cost and responsiveness,
a key strategic choice for any supply chain is the level of responsiveness it seeks to provide.
• Supply chains range from those that focus solely on being responsive to those that focus on a goal of
producing and supplying at the lowest possible cost.
Step 2: Understanding the Supply Chain
Capabilities
• Firm A- not on frontier curve
• Firm B- on frontier curve

• Black solid curve- current frontier

• Red arrows indicated possible
directions to move
• Green dotted curve- new frontier
with improved processes and better
technology over time.
Step 2: Understanding the Supply Chain
Capabilities
• Examples
• The more capabilities constituting responsiveness a supply chain has, the more responsive it is. Seven-
Eleven Japan replenishes its stores with breakfast items in the morning, lunch items in the afternoon, and
dinner items at night. As a result, the available product variety changes by time of day. Seven-Eleven
responds very quickly to orders, with store managers placing replenishment orders less than 12 hours
before they are supplied. This practice makes the Seven-Eleven supply chain very responsive.
• The Dell supply chain allows a customer to customize any of several thousand PC configurations. Dell then
delivers the appropriate PC to the customer within days. The Dell supply chain is also considered very
responsive.
• Another example of a responsive supply chain is W.W. Grainger. The company faces both demand and
supply uncertainty; therefore, the supply chain has been designed to deal effectively with both. An
efficient supply chain, in contrast, lowers cost by eliminating some of its responsive capabilities. For
example, Sam's Club sells a limited variety of products in large package sizes. The supply chain is capable
of low costs, and the focus of this supply chain is clearly on efficiency.
Step 3: Achieving Strategic Fit
• After mapping the level of implied uncertainty and understanding the supply chain position on
the responsiveness spectrum, the third and final step is to ensure that the degree of supply chain
responsiveness is consistent with the implied uncertainty. 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.
✓ Example
• The competitive strategy of Dell targets customers who value having customized PCs delivered
within days. Given the vast variety of PCs, the high level of innovation, and rapid delivery, demand
from Dell customers can be characterized as having high demand uncertainty. Some supply
uncertainty also exists, especially for newly introduced components. Dell has the option of
designing an efficient or responsive supply chain. An efficient supply chain may use slow,
inexpensive modes of transportation and economies of scale in production. If Dell made these
choices, it would have difficulty supporting the customer's desire for rapid delivery and a wide
variety of customizable products. Building a responsive supply chain, however, will allow Dell to
meet its customers' needs. Therefore, a responsive supply chain strategy is best suited to meet
the needs of Dell's targeted customers.
Step 3: Achieving Strategic Fit
• It is seen that increasing implied uncertainty from customers and supply sources
is best served by increasing responsiveness from the supply chain. This
relationship is represented by the "zone of strategic fit" illustrated in Figure. For a
high level of performance, companies should move their competitive strategy
(and resulting implied uncertainty) and supply chain strategy (and resulting
responsiveness) toward the zone of strategic fit.
• The first step in achieving strategic fit is to assign roles to different stages of the
supply chain that ensure the appropriate level of responsiveness. It is important
to understand that the desired level of responsiveness required across the supply
chain may be attained by assigning different levels of responsiveness and
efficiency to each stage of the supply chain as illustrated by the following
examples.
Step 3: Achieving Strategic Fit
• It is seen that increasing implied uncertainty from customers and supply sources
is best served by increasing responsiveness from the supply chain. This
relationship is represented by the "zone of strategic fit" illustrated in Figure. For a
high level of performance, companies should move their competitive strategy
(and resulting implied uncertainty) and supply chain strategy (and resulting
responsiveness) toward the zone of strategic fit.
Step 3: Achieving Strategic Fit
• The first step in achieving strategic fit is to
assign roles to different stages of the
supply chain that ensure the appropriate
level of responsiveness. It is important to
understand that the desired level of
responsiveness required across the supply
chain may be attained by assigning
different levels of responsiveness and
efficiency to each stage of the supply
chain as illustrated by the following
examples.
Step 3: Achieving Strategic Fit
• The supply chain can achieve a given level of
responsiveness by adjusting the roles of each stage of
the supply chain. Making one stage more responsive
allows other stages to focus on becoming more
efficient. The best combination of roles depends on the
efficiency and flexibility available at each stage. The
notion of achieving a given level of responsiveness by
assigning different roles and level of uncertainty to
different stages of the supply chain is illustrated in
Figure. The figure shows two supply chains that face the
same implied uncertainty but achieve the desired level
of responsiveness with different allocations of
uncertainty and responsiveness across the supply chain.
Supply Chain I has a very responsive retailer who
absorbs most of the uncertainty, allowing (actually
requiring) the manufacturer and supplier to be efficient.
Supply Chain II, in contrast, has a very responsive
manufacturer who absorbs most of the uncertainty,
thus allowing the other stages to focus on efficiency.
Step 3: Achieving Strategic Fit
1. There is no supply chain strategy that is always right.
2. There is a right supply chain strategy for a given competitive strategy.
OTHER ISSUES AFFECTING STRATEGIC FIT
• Multiple Products and Customer Segments
• The products sold and the customer segments served have different implied demand uncertainty. When
devising supply chain strategy in these cases, the key issue for a company is to design a supply chain that
balances efficiency and responsiveness given its portfolio of products, customer segments, and supply
sources.
OTHER ISSUES AFFECTING STRATEGIC FIT
• Product Life Cycle
• As products go through their life cycle, the demand characteristics and the needs of the customer segments
being served change. Supply characteristics also change as the product and production technologies mature.
High-tech products are particularly prone to these life-cycle swings over a very short time span. A product
goes through its life cycle from the introductory phase, when only the leading edge of customers is
interested and supply is uncertain, all the way to the point at which the product becomes a commodity, the
market is saturated, and supply is predictable. Thus, if a company is to maintain strategic fit, its supply chain
strategy must evolve as its products enter different phases.
OTHER ISSUES AFFECTING STRATEGIC FIT
• Example
• All PC manufacturers are subject to the cycle when a new model is introduced, margins are high, but
demand is highly uncertain. In such a situation, a responsive supply chain best serves the PC manufacturer.
As the model matures, demand stabilizes and margins shrink. At this stage, it is important that the
manufacturer have an efficient supply chain.
OTHER ISSUES AFFECTING STRATEGIC FIT
• Globalization and Competitive Changes over Time
• A final dimension to consider when matching supply chain and competitive strategy is the change in
competitor behavior resulting from changes in the marketplace or increased globalization. Like product life
cycles, competitors can change the landscape, thereby requiring a change in the firm's competitive strategy.
Summary for achieving strategic fit

• The first step in achieving strategic fit between competitive and supply chain strategies is to understand
customers and supply chain uncertainty. Uncertainty from the customer and the. supply chain can be
combined and mapped on the implied uncertainty spectrum.
• The second step in achieving strategic fit between competitive and supply chain strategies is to understand
the supply chain and map it on the responsiveness spectrum.
• A final dimension to consider when matching supply chain and competitive strategy is the change in
competitor behavior resulting from changes in the marketplace or increased globalization. Like product life
cycles, competitors can change the landscape, thereby requiring a change in the firm's competitive strategy.
• To achieve strategic fit, a firm must tailor its supply chain.to best meet the needs of different custorner
segments. To retain strategic. fit, supply.chain strategy must be adjusted over the life cycle ofa product and
as the competitive landscape changes.