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Strategic Fit in Supply Chains

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46 views26 pages

Strategic Fit in Supply Chains

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SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

What is competitive strategy?


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. a firm’s
competitive strategy will be defined based on its
customers’ priorities. Competitive strategy targets one or
more customer segments and aims to provide products
and services that satisfy these customers’ needs.
For example, Walmart aims to provide high availability of
a variety of products of reasonable quality at low prices.
Most products sold at Walmart are commonplace
(everything from home appliances to clothing) and can be
purchased elsewhere. What Walmart provides is a low
price and product availability. McMasterCarr sells
maintenance, repair, and operations (MRO) products. It
offers more than 500,000 products through both a catalog
and a website. 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 Walmart is different from that
at McMaster.
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

To see the relationship between competitive and supply


chain strategies, we start with the value chain for a typical
organization, as shown in Figure 2-1.

Fig. 2.1: The Value Chain in a Company

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. Operations transform inputs to outputs to
create the product according to new product
specifications. 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. 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. 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. Supply
chain strategy also includes design decisions regarding
inventory, transportation, operating facilities, and
information flows. For a firm to succeed, all functional
strategies must support one another and the competitive
strategy.
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

Explain why achieving strategic fit is critical to a


company’s overall success.

Strategic fit requires that both the competitive and supply


chain strategies of a company have aligned goals. It refers
to consistency between the customer priorities that the
competitive strategy hopes to satisfy and the supply chain
capabilities that the supply chain strategy aims to build.
For a company to achieve strategic fit, it must accomplish
the following:
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.
A company may fail either because of a lack of strategic
fit or because it’s overall supply chain design, processes,
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

and resources do not provide the capabilities to support


the desired strategic fit.
Consider, for example, a situation in which marketing is
publicizing a company’s ability to provide a large variety
of products quickly; simultaneously, distribution is
targeting the lowest-cost means of transportation. In this
situation, it is likely that distribution will delay orders so
it can get better transportation economies by grouping
orders together or using inexpensive but slow modes of
transportation. This action conflicts with marketing’s
stated goal of providing variety quickly. Similarly,
consider a scenario in which a retailer has decided to
provide a high level of variety while carrying low levels
of inventory but has selected suppliers and carriers based
on their low price and not their responsiveness. In this
case, the retailer is likely to end up with unhappy
customers because of poor product availability.
Describe how a company achieves strategic fit between
its supply chain strategy and its competitive strategy.
A competitive strategy will specify, either explicitly or
implicitly, one or more customer segments that a
company hopes to satisfy. To achieve strategic fit, a
company must ensure that its supply chain capabilities
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

support its ability to satisfy the needs of the targeted


customer segments. There are three basic steps to
achieving this strategic fit, which we outline here and then
discuss in more detail:
1. Understanding the customer and supply chain
uncertainty: First, a company must understand the
customer needs for each targeted segment and the
uncertainty these needs impose on the supply chain.
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 and supply that the
supply chain must be prepared for.
2. Understanding the supply chain capabilities:
Each of the many types of supply chains 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
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

the competitive strategy or alter its competitive


strategy.
Step 1: understanding the Customer and Supply
Chain uncertainty:
In general, customer demand from different segments
varies along several attributes, as follows:
 Quantity of the product needed in each lot
 Response time that customers are willing to tolerate
 Variety of products needed
 Service level required
 Price of the product
 Desired rate of innovation in the product
Each customer in a particular segment will tend to have
similar needs, whereas customers in a different segment
can have very different needs. Although we have
described several attributes along which customer demand
varies, our goal is to identify one key measure for
combining all of these attributes. This single measure then
helps define what the supply chain should do particularly
well.
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

Implied Demand Uncertainty


At first glance, it may appear that each of the customer
need categories should be viewed differently, but in a
fundamental sense, each customer need can be translated
into the metric of implied demand uncertainty, which is
demand uncertainty imposed on the supply chain because
of the customer needs it seeks to satisfy.
Demand uncertainty reflects the uncertainty of customer
demand for a product. Implied demand uncertainty, in
contrast, is the resulting uncertainty for only the portion
of the demand that the supply chain plans to satisfy based
on 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.
Both the product demand uncertainty and various
customer needs that the supply chain tries to fill affect
implied demand uncertainty.
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

Table 2-1 illustrates how various customers’ needs affect


implied demand uncertainty.
Table 2-1: Impact of Customer Needs on Implied Demand
Uncertainty

Fisher (1997) pointed out that implied demand


uncertainty is often correlated with other characteristics of
demand, as shown in Table 2-2. An explanation follows:
Table 2.2: Correlation between Implied Demand
Uncertainty and Other Attributes
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

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
stock out or an oversupply situation. Increased
implied demand uncertainty thus leads to both higher
oversupply and a higher stock out rate.
4. Markdowns are high for products with greater
implied demand uncertainty because oversupply
often results.
First, let us take an example of a product with low implied
demand uncertainty—such as table salt. Salt has a low
margin, accurate demand forecasts, low stock out 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 stock out
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

rates (if it is successful), and large markdowns (if it is a


failure).
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
consumer electronics 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 electronics manufacturers. As the
production technology matures and yields improve,
companies are able to follow a fixed delivery schedule,
resulting in low supply uncertainty.
Table 2-3 illustrates how various characteristics of supply
sources affect the supply uncertainty
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

Table 2.3: Impact of Supply Source Capability on Supply


Uncertainty

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.
We can create a spectrum of uncertainty by combining the
demand and supply uncertainty. This implied uncertainty
spectrum is shown in Figure 2-2.
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

Fig. 2.2: The Implied Uncertainty (Demand and Supply) Spectrum


A company introducing a brand-new cell phone based on
entirely new components and technology faces high
implied demand uncertainty and high supply uncertainty.
As a result, the implied uncertainty faced by the supply
chain is extremely high. In contrast, a supermarket selling
salt faces low implied demand uncertainty and low levels
of supply uncertainty, resulting in a low implied
uncertainty. Many agricultural products, such as coffee,
are examples of supply chains facing low levels of
implied demand uncertainty but significant supply
uncertainty based on weather. The supply chain thus faces
an intermediate level of implied uncertainty.
Step 2: Understanding the Supply Chain Capabilities
After understanding the uncertainty that the company
faces, the next question is: How does the firm best meet
demand in that uncertain environment? Creating strategic
fit is all about designing a supply chain whose
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

responsiveness aligns with the implied uncertainty it


faces.
Supply chain responsiveness includes a supply chain’s
ability to 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 of these abilities a supply chain has, the more
responsive it is.
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. An increase in cost
lowers the efficiency. For every strategic choice to
increase responsiveness, there are additional costs that
lower efficiency.
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

The cost-responsiveness efficient frontier is the curve in


Figure 2-3 showing the lowest possible cost for a given
level of responsiveness. Given the trade-off between cost
and responsiveness, a key strategic choice for any supply
chain is the level of responsiveness it seeks to provide.

Fig.2.3: Cost-Responsiveness Efficient Frontier

Fig. 2.4: The Responsiveness Spectrum

Step 3: Achieving Strategic Fit


SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

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.

Fig. 2.5: Finding the Zone of Strategic Fit

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”. For a high level of performance,
companies should move their competitive strategy (and
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

resulting implied uncertainty) and supply chain strategy


(and resulting responsiveness) toward the zone of
strategic fit.
The next 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.
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.
When devising supply chain strategy, the key issue for a
company is to design a tailored supply chain that is able
to be efficient when implied uncertainty is low and
responsive when it is high. By tailoring its supply chain, a
company can provide responsiveness to fast-growing
products, customer segments, and channels while
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

maintaining low cost for mature, stable products and


customer segments.
Tailoring the supply chain requires sharing operations for
some links in the supply chain, while having separate
operations for other links. The links are shared to achieve
maximum possible efficiency while providing the
appropriate level of responsiveness to each segment.
Appropriate tailoring of the supply chain helps a firm
achieve varying levels of responsiveness for a low overall
cost. The level of responsiveness is tailored to each
product, channel, or customer segment.
For example, Zara sells trendy items with unpredictable
demand along with basics, such as white T-shirts, with a
more predictable demand. Whereas Zara uses a
responsive supply chain with production in Europe for
trendy items, it uses a more efficient supply chain with
production in Asia for the basics. This tailored supply
chain strategy provides a better strategic fit for Zara
compared with using a single supply chain.
Discuss the importance of expanding the scope of
strategic fit across the supply chain.
Expanding Strategic Scope
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

A key issue relating to strategic fit is the scope, in terms


of supply chain stages, across which the strategic fit
applies. Scope of strategic fit refers to the functions within
the firm and stages across the supply chain that devise an
integrated strategy with an aligned objective.
At one extreme, every operation within each functional
area devises its own independent strategy, with the
objective of optimizing its local performance. In this case,
the scope of strategic fit is restricted to an operation in a
functional area within a stage of the supply chain.
At the opposite extreme, all functional areas across all
stages of the supply chain devise aligned strategies that
maximize supply chain surplus. In this case, the scope of
strategic fit extends to the entire supply chain.
For example, IKEA has achieved great success by
expanding its scope of strategic fit to include all functions
and stages within the supply chain. Its competitive
strategy is to offer a reasonable variety of furniture and
home furnishings at low prices. Its stores are large and
carry all products in inventory. Its products are designed
to be modular and easy to assemble. The large stores and
modular design allow IKEA to move final assembly and
last-mile delivery (two high cost operations) to the
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

customer. As a result, all functions within the IKEA


supply chain focus on efficiency. Its suppliers concentrate
on producing large volumes of a few modules at low cost.
Its transportation function focuses on shipping large
quantities of high-density unassembled modules at low
cost to the large stores. The strategy at every stage and
function of the IKEA supply chain is aligned to increase
the supply chain surplus.
1. Intra-operation Scope: minimizing local Cost: The
intra-operation scope has each stage of the supply
chain devising its strategy independently. In such a
setting, the resulting collection of strategies typically
does not align, resulting in conflict. The resulting
lack of alignment diminished the supply chain
surplus.
2. Intra-functional Scope: minimizing Functional
Cost: Over time, managers recognized the weakness
of the intra-operation scope and attempted to align all
operations within a function. With the intra-
functional view, firms attempted to align all
operations within a function. All supply chain
functions, including sourcing, manufacturing,
warehousing, and transportation, had to align their
strategies to minimize total functional cost.
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

For example, the use of air freight could be justified


only if the resulting savings in inventories and
improved responsiveness justified the increased
transportation cost.
3. Inter-functional Scope: maximizing Company
profit: The key weakness of the intra-functional view
is that different functions within a firm may have
conflicting objectives. Companies realized the
importance of expanding the scope of strategic fit and
aligning strategy across all functions within the firm.
With the inter-functional scope, the goal is to
maximize company profit. To achieve this goal, all
functional strategies are developed to align with one
another and with the competitive strategy.
For example, marketing and sales focus on revenue
generation, and manufacturing and distribution
focusing on cost reduction. Actions the two functions
took were often in conflict, hurting the firm’s overall
performance.
4. Inter-company Scope: maximizing Supply Chain
Surplus: The goal of only maximizing company
profits can sometimes lead to conflict between stages
of a supply chain. For example, both the supplier and
the manufacturer in a supply chain may prefer to
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

have the other side hold most of the inventory, with


the goal of improving their own profits. If the two
parties cannot look beyond their own profits, the
more powerful party will simply force the other to
hold inventories without any regard for where
inventories are best held. The result is a decrease in
the supply chain surplus—the total pie that both
parties get to share.
The intercompany scope proposes a different
approach. Instead of just forcing the inventory onto
the weaker party, the two parties work together to
reduce the amount of inventory required. By working
together and sharing information, they can reduce
inventories and total cost, thus increasing the supply
chain surplus. The higher the supply chain surplus,
the more competitive the supply chain is.
5. Agile Intercompany Scope: Agile intercompany
scope refers to a firm’s ability to achieve strategic fit
when partnering with supply chain stages that change
over time. Firms must think in terms of supply chains
consisting of many players at each stage. For
example, a manufacturer may interface with a
different set of suppliers and distributors depending
on the product being produced and the customer
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

being served. Furthermore, as customers’ needs vary


over time, firms must have the ability to become part
of new supply chains while ensuring strategic fit.
This level of agility becomes more important as the
competitive environment becomes more dynamic.
Describe the major challenges that must be overcome
to manage a supply chain successfully.
1. Challenges to Achieving and Maintaining
Strategic Fit: The key to achieving strategic fit is a
company’s ability to find a balance between
responsiveness and efficiency that best matches the
needs of its target customers. In deciding where this
balance should be located on the responsiveness
spectrum, companies face many challenges which are
discussed below:
2. Increasing product variety and shrinking life
cycle: One of the biggest challenges to maintaining
strategic fit is the growth in product variety and the
decrease in the life cycle of many products. Greater
product variety and shorter life cycles increase
uncertainty while reducing the window of
opportunity within which the supply chain can
achieve fit. The challenge gets magnified when
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

companies continue to increase new products without


maintaining the discipline of eliminating older ones.
3. Globalization and increasing uncertainty:
Globalization has increased both the opportunities
and risks for supply chains. The twenty-first century
has started with significant fluctuations in exchange
rates, global demand, and the price of crude oil, all
factors that affect supply chain performance. Firms
must account for global risks and uncertainties if they
want to maintain strategic fit.
4. Fragmentation of Supply Chain ownership: With
the chain broken into many owners, each with its
own policies and interests, the chain is more difficult
to coordinate. This problem could potentially cause
each stage of a supply chain to work only toward its
local objectives rather than those of the whole chain,
resulting in the reduction of overall supply chain
profitability. Aligning all members of a supply chain
has become critical to achieving supply chain fit.
5. Changing technology and business environment:
With a changing environment in terms of customer
needs and technology, companies must constantly
evaluate their supply chain strategy to maintain
strategic fit. A strategy that may have been very
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

successful in one environment can easily become a


weakness in a changed setting.
6. The environment and Sustainability: Issues related
to the environment and sustainability has grown in
relevance and must be accounted for when designing
supply chain strategy. In some instances, regulation
has been driving changes; in others, change has been
driven by the perception of the lack of sustainability
as a risk factor. Environmental issues represent a
tremendous opportunity to firms that can often add
value to customers and lower their own costs along
this dimension. These issues also represent a major
challenge because some of the greatest opportunities
require coordination across different members of the
supply chain. To be successful, firms will need to
design a strategy that engages the entire supply chain
to identify and address opportunities for improved
sustainability.
Overcoming these challenges offers a tremendous
opportunity for firms to use supply chain management to
gain competitive advantage.
SUPPLY CHAIN PERFORMANCE: Achieving Strategic fit and scope

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