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SUPPLY CHAIN MANAGEMENT Chapter 2 – SC Performance: Achieving Strategic Fit Session 3
Competitive Strategy • Set of customer needs a firm seeks to satisfy through its products and services – Wal-Mart (variety and cost) vs. McMaster-Carr (variety and response time) – Blue Nile (variety and cost) vs. Zales (response time and sales service)
• Defined based on customer preferences
Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Achieving Strategic Fit
Comparing SCs
Other Issues
Expanding Strategic Scope 2
The Value Chain F i n a n c e , I n f o r m a t i o n Te c h n o l o g y, A d m i n i s t r a t i o n , H u m a n R e s o u r c e
New Product Development
Marketing and Sales
Operations
Distribution
Service
• Product development strategy – specifies the portfolio of new products that the company will try to develop
• Marketing and sales strategy – specifies how the market will be segmented and product positioned, priced & promoted
• Supply chain strategy: – determines the nature of material procurement, transportation of materials, manufacture of product or creation of service, distribution of product • DELL – Direct Sales (initially) and PCs through resellers (2007) • Amazon – Warehouses to stock and partial distribution through third party • Toyota – Production facility in major markets
Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Achieving Strategic Fit
Comparing SCs
Other Issues
Expanding Strategic Scope 3
Strategic Fit • Strategic Fit – Competitive Strategy (customer priorities) and SC strategy (capabilities) must have aligned goals
• A company’s failure – conflict – Lack of strategic fit, or – Processes/resources do not provide execution capabilities to support the fit
• Dell (1993 to 2006 and then 2007 onwards) Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Achieving Strategic Fit
Comparing SCs
Other Issues
Expanding Strategic Scope 4
Achieving Strategic Fit • Identify customer segment’s needs • Quantity & variety of product • Response time • Service level required • Price of the product • Desired rate of innovation
Understanding the Customer and SC Uncertainty
Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Implied Demand Uncertainty
Understanding the SC • SC Responsiveness to customer requirements vs. • SC Efficiency on cost • Efficiency vs. Responsiveness (frontier)
• The degree of SC responsiveness must match the implied uncertainty from demand and supply
Achieving Strategic Fit
Achieving Strategic Fit
Comparing SCs
Other Issues
Expanding Strategic Scope 5
Implied Demand/ Supply Uncertainty • Implied Demand Uncertainty may increase if: – Quantity or variety increases – Lead time decreases – Channels for distribution increase – Rate of innovation increases • When there is high Implied Demand Uncertainty, product margins, forecasting error, stock-outs and forced markdowns are also higher
• Implied Supply Uncertainty may increase due to: – – – –
Frequent breakdowns Unpredictable and low yields Limited or inflexible capacity Evolution of the production process
Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Achieving Strategic Fit
Comparing SCs
Other Issues
Expanding Strategic Scope 6
Efficient vs. Responsive SC Efficient
Responsive
Primary goal
Lowest cost
Quick response
Product design strategy
Minimum product cost
Modularity to allow postponement
Pricing strategy
Lower margins – price sensitive customer
Higher margins
Manufacturing strategy
Low cost through high utilization
Capacity flexibility - uncertainty cushion
Inventory strategy
Minimize inventory to lower cost
Buffer inventory – uncertainty cushion
Lead time strategy
Reduce but not at the expense of greater cost
Aggressively reduce even if costs are significant
Supplier selection strategy Based on cost and quality Transportation strategy Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Greater reliance on low cost modes Achieving Strategic Fit
Based on speed, flexibility, reliability and quality Greater reliance on responsive (fast) modes
Comparing SCs
Other Issues
Expanding Strategic Scope 7
Zone of Strategic Fit Responsive SC
Responsiveness Spectrum
Efficient SC Certain Demand Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Achieving Strategic Fit
Implied Uncertainty Spectrum Comparing SCs
Uncertain Demand Other Issues
Expanding Strategic Scope 8
Roles Across the SC Supplier absorbs the least implied uncertainty and must be very efficient
Manufacturer absorbs less implied uncertainty and must be somewhat efficient
Retailer absorbs most of the implied uncertainty and must be very responsive
Supplier
Manufacturer
Retailer
SC 1
Extent of Implied Uncertainty for the SC Supplier
Manufacturer
Retailer
Supplier absorbs less implied uncertainty and must be somewhat efficient
Manufacturer absorbs most of the implied uncertainty and must be very responsive
Retailer absorbs the least implied uncertainty and must be very efficient
Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Achieving Strategic Fit
Comparing SCs
Other Issues
SC 2
Expanding Strategic Scope 9
Other Issues Affecting Strategic Fit • Multiple products and customer segments – Different products to different customer segments – Different Implied Uncertainty – SC’s ability to balance efficiency and responsiveness given a diverse portfolio – Two approaches: • Different SCs • Tailor SC to best meet the needs of each product’s demand
• Product life cycle – SC strategy must evolve throughout the life cycle • Early: uncertain demand, high margins, product availability is critical, low emphasis on cost • Late: predictable demand, lower margins, cost becomes important • SC must change from emphasizing responsiveness to emphasizing efficiency
• Globalization and Competitive changes over time Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Achieving Strategic Fit
Comparing SCs
Other Issues
Expanding Strategic Scope 10
Expanding Strategic Scope • IKEA: – Competitive Strategy: Offer reasonable variety at low prices – Transfers final assembly and last-mile delivery to customer (product and stores) – All functions focus on efficiency and growing SC surplus • Supplier – large volumes, few modules, low cost • Transportation – ship large quantities of unassembled modules to large stores and low cost
• Scope of Strategic Fit – all functions within the firm and stages across the SC that devise an integrated strategy with an aligned objective – – – –
Intra-company Intra-operation Scope: Minimize Local Cost Intra-company Intra-functional Scope: Minimize Functional Cost Intra-company Inter-functional Scope: Maximize Company Profit Inter-company Inter-functional Scope: Maximize SC Surplus
Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Achieving Strategic Fit
Comparing SCs
Other Issues
Expanding Strategic Scope 11
Next Session • Go through chapter 3 • Prepare Case Study on 7-eleven Japan Co. (Page 69 – 75 of the course textbook)
PLEASE BE WELL PREPARED!!
Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Achieving Strategic Fit
Comparing SCs
Other Issues
Expanding Strategic Scope 12
Competitive Strategy • Set of customer needs a firm seeks to satisfy through its products and services – Wal-Mart (variety and cost) vs. McMaster-Carr (variety and response time) – Blue Nile (variety and cost) vs. Zales (response time and sales service)
• Defined based on customer preferences
Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Achieving Strategic Fit
Comparing SCs
Other Issues
Expanding Strategic Scope 2
The Value Chain F i n a n c e , I n f o r m a t i o n Te c h n o l o g y, A d m i n i s t r a t i o n , H u m a n R e s o u r c e
New Product Development
Marketing and Sales
Operations
Distribution
Service
• Product development strategy – specifies the portfolio of new products that the company will try to develop
• Marketing and sales strategy – specifies how the market will be segmented and product positioned, priced & promoted
• Supply chain strategy: – determines the nature of material procurement, transportation of materials, manufacture of product or creation of service, distribution of product • DELL – Direct Sales (initially) and PCs through resellers (2007) • Amazon – Warehouses to stock and partial distribution through third party • Toyota – Production facility in major markets
Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Achieving Strategic Fit
Comparing SCs
Other Issues
Expanding Strategic Scope 3
Strategic Fit • Strategic Fit – Competitive Strategy (customer priorities) and SC strategy (capabilities) must have aligned goals
• A company’s failure – conflict – Lack of strategic fit, or – Processes/resources do not provide execution capabilities to support the fit
• Dell (1993 to 2006 and then 2007 onwards) Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Achieving Strategic Fit
Comparing SCs
Other Issues
Expanding Strategic Scope 4
Achieving Strategic Fit • Identify customer segment’s needs • Quantity & variety of product • Response time • Service level required • Price of the product • Desired rate of innovation
Understanding the Customer and SC Uncertainty
Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Implied Demand Uncertainty
Understanding the SC • SC Responsiveness to customer requirements vs. • SC Efficiency on cost • Efficiency vs. Responsiveness (frontier)
• The degree of SC responsiveness must match the implied uncertainty from demand and supply
Achieving Strategic Fit
Achieving Strategic Fit
Comparing SCs
Other Issues
Expanding Strategic Scope 5
Implied Demand/ Supply Uncertainty • Implied Demand Uncertainty may increase if: – Quantity or variety increases – Lead time decreases – Channels for distribution increase – Rate of innovation increases • When there is high Implied Demand Uncertainty, product margins, forecasting error, stock-outs and forced markdowns are also higher
• Implied Supply Uncertainty may increase due to: – – – –
Frequent breakdowns Unpredictable and low yields Limited or inflexible capacity Evolution of the production process
Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Achieving Strategic Fit
Comparing SCs
Other Issues
Expanding Strategic Scope 6
Efficient vs. Responsive SC Efficient
Responsive
Primary goal
Lowest cost
Quick response
Product design strategy
Minimum product cost
Modularity to allow postponement
Pricing strategy
Lower margins – price sensitive customer
Higher margins
Manufacturing strategy
Low cost through high utilization
Capacity flexibility - uncertainty cushion
Inventory strategy
Minimize inventory to lower cost
Buffer inventory – uncertainty cushion
Lead time strategy
Reduce but not at the expense of greater cost
Aggressively reduce even if costs are significant
Supplier selection strategy Based on cost and quality Transportation strategy Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Greater reliance on low cost modes Achieving Strategic Fit
Based on speed, flexibility, reliability and quality Greater reliance on responsive (fast) modes
Comparing SCs
Other Issues
Expanding Strategic Scope 7
Zone of Strategic Fit Responsive SC
Responsiveness Spectrum
Efficient SC Certain Demand Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Achieving Strategic Fit
Implied Uncertainty Spectrum Comparing SCs
Uncertain Demand Other Issues
Expanding Strategic Scope 8
Roles Across the SC Supplier absorbs the least implied uncertainty and must be very efficient
Manufacturer absorbs less implied uncertainty and must be somewhat efficient
Retailer absorbs most of the implied uncertainty and must be very responsive
Supplier
Manufacturer
Retailer
SC 1
Extent of Implied Uncertainty for the SC Supplier
Manufacturer
Retailer
Supplier absorbs less implied uncertainty and must be somewhat efficient
Manufacturer absorbs most of the implied uncertainty and must be very responsive
Retailer absorbs the least implied uncertainty and must be very efficient
Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Achieving Strategic Fit
Comparing SCs
Other Issues
SC 2
Expanding Strategic Scope 9
Other Issues Affecting Strategic Fit • Multiple products and customer segments – Different products to different customer segments – Different Implied Uncertainty – SC’s ability to balance efficiency and responsiveness given a diverse portfolio – Two approaches: • Different SCs • Tailor SC to best meet the needs of each product’s demand
• Product life cycle – SC strategy must evolve throughout the life cycle • Early: uncertain demand, high margins, product availability is critical, low emphasis on cost • Late: predictable demand, lower margins, cost becomes important • SC must change from emphasizing responsiveness to emphasizing efficiency
• Globalization and Competitive changes over time Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Achieving Strategic Fit
Comparing SCs
Other Issues
Expanding Strategic Scope 10
Expanding Strategic Scope • IKEA: – Competitive Strategy: Offer reasonable variety at low prices – Transfers final assembly and last-mile delivery to customer (product and stores) – All functions focus on efficiency and growing SC surplus • Supplier – large volumes, few modules, low cost • Transportation – ship large quantities of unassembled modules to large stores and low cost
• Scope of Strategic Fit – all functions within the firm and stages across the SC that devise an integrated strategy with an aligned objective – – – –
Intra-company Intra-operation Scope: Minimize Local Cost Intra-company Intra-functional Scope: Minimize Functional Cost Intra-company Inter-functional Scope: Maximize Company Profit Inter-company Inter-functional Scope: Maximize SC Surplus
Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Achieving Strategic Fit
Comparing SCs
Other Issues
Expanding Strategic Scope 11
Next Session • Go through chapter 3 • Prepare Case Study on 7-eleven Japan Co. (Page 69 – 75 of the course textbook)
PLEASE BE WELL PREPARED!!
Competitive and Functional 3/28/2019 Strategies
Strategic Fit
Achieving Strategic Fit
Comparing SCs
Other Issues
Expanding Strategic Scope 12
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