strategic fit
TRANSCRIPT
1/22/08 S.Chopra/Logistics Strategy with modifications by S. DeLurgio 1
Summary of Learning Objectives
Why is achieving strategic fit critical to a company’s 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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CHAPTER 2SCM - STRATEGIC FIT
CUSTOMERS DEMAND PRODUCTS WITH DIFFERENT CHARACTERISTICS –
Cost Customization
Quantity Quality
Speed Service
Flexibility Features
(C, Q, S, F)2
These requirements can vary dramatically for customers and products. Consider some examples.
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Competitive & Supply Chain Strategies
Competitive strategy: defines the target market/customer needs. Product Development strategy: portfolio of new products to
achieve competitive strategy. Marketing and sales strategy: specifies how the market will be
segmented and product positioned, priced, and promoted Supply chain strategy:
– determines the nature of material procurement, transportation of materials, manufacture of product or creation of service, distribution of product
– Consistency and support between supply chain strategy, competitive strategy, and other functional strategies is important
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SCM - STRATEGIC FIT
ACHIEVING FIT - UNDERSTANDING:
1. THE CUSTOMER/PRODUCT REQUIREMENTS – CQSF2
ALSO - IMPLIED DEMAND UNCERTAINTY
2. THE SUPPLY CHAIN -
RESPONSIVE VS. EFFICIENT
3. STRATEGIC FIT -
THE ZONE OF STRATEGIC FIT
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Achieving Strategic Fit
Strategic fit: – Consistency between customer priorities of competitive
strategy and supply chain capabilities specified by the supply chain strategy
– Competitive and supply chain strategies have the same goals
A company may fail because of a lack of strategic fit or because its processes and resources do not provide the capabilities to execute the desired strategy
Example of strategic fit -- Dell
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The Value Chain: Linking Supply Chain and Business Strategy
NewProduct
Development
Marketingand
Sales Operations Distribution Service
Finance, Accounting, Information Technology, Human Resources
Business Strategy
New ProductStrategy
MarketingStrategy Supply Chain Strategy
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Step 1: Understanding the Customer and Supply Chain Uncertainty
Identify the needs of the customer segment being served
Quantity of product needed in each lot Response time customers will tolerate Variety of products needed Service level required Price of the product Desired rate of innovation in the product
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Achieving Strategic Fit Why is Implied Demand Uncertainty So Important? Understanding the Customer, CQSF2
– Lot size
– Response time
– Service level
– Product variety
– Price
– Innovation
ImpliedDemand
Uncertainty
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Impact of Customer Needs on Implied Demand Uncertainty (Table 2.1)
Customer Need Causes implied demand uncertainty to increase because …
Range of quantity increases Wider range of quantity implies greater variance in demand
Lead time decreases Less time to react to orders
Variety of products required increases
Demand per product becomes more disaggregated
Number of channels increases Total customer demand is now disaggregated over more channels
Rate of innovation increases New products tend to have more uncertain demand
Required service level increases Firm now has to handle unusual surges in demand
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Levels of Implied Demand Uncertainty
Low High
Price Responsiveness
Customer Need
Implied Demand Uncertainty
DetergentLong lead time steel
High FashionEmergency steel
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Correlation Between Implied Demand Uncertainty and Other Attributes (Table 2.2)
Attribute Low Implied Uncertainty
High Implied Uncertainty
Profit margin Low High
Avg. forecast error 10% 40%-100%
Avg. stockout rate 1%-2% 10%-40%
Avg. forced season-end markdown
0% 10%-25%
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SUPPLY CHAINS EFFICIENT VS. RESPONSIVE
GOAL: LOWEST COST PRODUCT:MAX. PERF. AT
MIN COST PRICING: LOWER PRICE
AND MARGIN MANU: HIGH EFFICIENCY INVENT: MIN. INVENTORY LEADTIME: REDUCE
LEADTIME SUPPLIERS: COST/QUALITY TRANSPORTATION: COST
QUICK RESPONSE ASSEMBE TO ORDER
HIGHER PRICE AND MARGINS
FLEX. CAPACITY MAINTAIN BUFFER REDUCE EVEN WITH
HIGHER PRICE SPEED, FLEX., QUALITY QUICK& RESPONSIVIE
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Step 2: Understanding the Supply Chain
There is a cost to achieving responsiveness Supply chain efficiency: cost of making and
delivering the product to the customer Increasing responsiveness results in higher costs that
lower efficiency Figure 2.3: cost-responsiveness efficient frontier Figure 2.4: supply chain responsiveness spectrum Second step to achieving strategic fit is to map the
supply chain on the responsiveness spectrum
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Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier (Fig. 2-3)
High Low
Low
High
Responsiveness
Cost
BOSE RADIO DELL
WAL-MART BARILLA
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Responsiveness Spectrum (Figure 2.4)
Integratedsteel mill
Dell
Highlyefficient
Highlyresponsive
Somewhatefficient
Somewhatresponsive
Hanesapparel
Mostautomotiveproduction
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Step 3: Achieving Strategic Fit
All functions in the value chain must support the competitive strategy to achieve strategic fit – Fig. 2.7
Two extremes: Efficient supply chains (Barilla) and responsive supply chains (Dell) – Table 2.3
Two key points– there is no right supply chain strategy independent of
competitive strategy
– there is a right supply chain strategy for a given competitive strategy
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Achieving Strategic Fit
Implied uncertainty spectrum
Responsive supply chain
Efficient supply chain
Certain demand
Uncertain demand
Responsiveness spectrum Zone o
f
Strateg
ic Fit
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Achieving Strategic Fit with Same Firm with Various Products
Implied uncertainty spectrum
Responsive supply chain
Efficient supply chain
Certain demand
Uncertain demand
Responsiveness spectrum Zone o
f
Strateg
ic Fit
PRODUCT LINE A CUSTOMER A
PRODUCT LINE A - CUSTOMER B
PRODUCT LINE B CUSTOMER B
PRODUCT LINE B CUSTOMER A
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Achieving Strategic Fit Product Life Cycle Progresses/Competition
Implied uncertainty spectrum
Responsive supply chain
Efficient supply chain
Certain demand
Uncertain demand
Responsiveness spectrum Zone o
f
Strateg
ic Fit
INTRODUCTION
MATURING COMMODITY
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Strategic Scope
Suppliers Manufacturer Distributor Retailer Customer
Competitive Strategy
Product Dev. Strategy
Supply Chain Strategy
Marketing Strategy
VERY LOCAL OPTIMAL BY OPERATION W/ILOCAL OPTIMAL BY
FUNCTION
FUNCTIONALLY OPTIMAL
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Intracompany Interfunctional Scope
All functional strategies within a company are developed to support each other and the company’s competitive strategy
Strategic fit is expanded to include all functions in a firm
Goal is to maximize company profit Figure 2.11
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Strategic ScopeGLOBALLY OPTIMAL STRATEGY
Suppliers Manufacturer Distributor Retailer Customer
Competitive Strategy
Product Dev. Strategy
Supply Chain Strategy
Marketing Strategy
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Intercompany Interfunctional Scope
The only positive cash flow for the supply chain occurs when the customer pays for the product – all other cash flows are resettling of accounts within the chain and add to total supply chain cost
Supply chain surplus– Difference between what the customer pays and total
supply chain cost– Total profit to be shared among all members of the
supply chain
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Intercompany Interfunctional Scope
Increasing supply chain surplus increases the amount to be shared
All stages coordinate strategy across all functions to ensure that they best meet the customer’s needs and maximize supply chain surplus
Also provides more speed by managing the interfaces between supply chain stages
Each company must evaluate its actions in the context of the entire supply chain
Figure 2.12