strategic fit

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S.Chopra/Logistics Strategy with modifications by S. DeLurg 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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Page 1: Strategic Fit

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?

Page 2: Strategic Fit

1/22/08 S.Chopra/Logistics Strategy with modifications by S. DeLurgio 2

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.

Page 3: Strategic Fit

1/22/08 S.Chopra/Logistics Strategy with modifications by S. DeLurgio 3

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

Page 4: Strategic Fit

1/22/08 S.Chopra/Logistics Strategy with modifications by S. DeLurgio 4

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

Page 5: Strategic Fit

1/22/08 S.Chopra/Logistics Strategy with modifications by S. DeLurgio 5

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

Page 6: Strategic Fit

1/22/08 S.Chopra/Logistics Strategy with modifications by S. DeLurgio 6

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

Page 7: Strategic Fit

1/22/08 S.Chopra/Logistics Strategy with modifications by S. DeLurgio 7

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

Page 8: Strategic Fit

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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

Page 9: Strategic Fit

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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

Page 10: Strategic Fit

1/22/08 S.Chopra/Logistics Strategy with modifications by S. DeLurgio 10

Levels of Implied Demand Uncertainty

Low High

Price Responsiveness

Customer Need

Implied Demand Uncertainty

DetergentLong lead time steel

High FashionEmergency steel

Page 11: Strategic Fit

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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%

Page 12: Strategic Fit

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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

Page 13: Strategic Fit

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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

Page 14: Strategic Fit

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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

Page 15: Strategic Fit

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Responsiveness Spectrum (Figure 2.4)

Integratedsteel mill

Dell

Highlyefficient

Highlyresponsive

Somewhatefficient

Somewhatresponsive

Hanesapparel

Mostautomotiveproduction

Page 16: Strategic Fit

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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

Page 17: Strategic Fit

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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

Page 18: Strategic 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

Page 19: Strategic Fit

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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

Page 20: Strategic Fit

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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

Page 21: Strategic Fit

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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

Page 22: Strategic Fit

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Strategic ScopeGLOBALLY OPTIMAL STRATEGY

Suppliers Manufacturer Distributor Retailer Customer

Competitive Strategy

Product Dev. Strategy

Supply Chain Strategy

Marketing Strategy

Page 23: Strategic Fit

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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

Page 24: Strategic Fit

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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