Supply Chain Management

INDE 6641
Achieving Strategic Fit in a Supply Chain

Dr. Narjes Sadeghiamirshahidi

Department of Mechanical and Industrial Engineering

1 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved
Learning Objectives
1. Explain why achieving Strategic Fit is critical to a company’s overall success.

2. Describe how a company achieves Strategic Fit between its Supply Chain
Strategy and its Competitive Strategy.

3. Identify the main Levers to deal with Uncertainty in a Supply Chain.

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Supply Chain Strategies

• Competitive Strategy

• Product Development Strategy

• Marketing and Sales Strategy Functional Strategies

• Supply Chain Strategy

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Supply Chain Strategies – Cont’d
• Competitive Strategy: defines a set of Customer Needs that a Company aims
to satisfy through its Products and Services.
Examples:
• Walmart: sells everything from Home Appliances to Clothing.
Competitive Strategy: providing high availability of Products at reasonable Quality at low Prices.
• Most products sold at Walmart can be purchased elsewhere.
• But, what Walmart provides is a low Price & high Product availability.
(it is more convenient for Customers to buy all items they need in one-stop shopping)

• McMaster-Carr: sells Maintenance, Repair, and Operations products (MRO).

It offers more than 500,000 Products via Catalogs and Website.
Competitive Strategy: providing Customers with convenient, variety, and
responsiveness not low Price.

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Supply Chain Strategies – Cont’d
• Product Development Strategy: specifies the portfolio of New Products that the
Company will try to develop.
• It dictates whether the development Activities will be Internally or Outsourced.
• Marketing and Sales Strategy specifies:
• How the Market will be segmented
• How Product will be 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
• Follow-up Service
• Whether these Processes will be In-house or Outsourced
Note:
• All the above-mentioned Strategies are called Functional Strategies.
• All Functional Strategies must support one another & Competitive Strategy
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Value Chain
Value Chain: includes core Processes such as:
1- New Product Development: creates specifications for Product.
2- Marketing & Sales: generate Demand by publicizing Customer priorities that the Products &
Services will satisfy.
• Marketing also brings Customers’ input back to New Product Development Process (#1).
3- Operations: transforms inputs to outputs based on specifications (#1) to create Products.
4- Distribution: either takes Products to Customers or brings Customer to Products.
5- Service: responds to Customers’ requests during or after Sale.

Supportive Processes: support and facilitate the Functioning of Value Chain by:
Finance, Accounting, Information Technology, Human Resources

The Value Chain in a Company

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Achieving Strategic Fit
Strategic Fits: requires both Competitive & Functional Strategies of a Company have aligned
Goals
 Strategic Fits: refers to consistency between:
• The Customer priorities that Competitive Strategy hopes to satisfy
&
• The capability that Functional Strategies aim to build

 To achieve a Strategic Fit, a Company must ensure that:

• Its Competitive Strategy & all Functional Strategies fit together
• Different Functions in Company appropriately structure the Process & Resources
• The Design of Supply Chain & the Role of each Stage are aligned.
Note: A Company may fail either:
• Because of a lack of Strategic Fit
or
• Because its overall Supply Chain Design, Processes, & Resources do not support the
desired Strategy
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Summary of Learning Objective 1
Strategic Fit requires that all Functions within a Firm and Stages in the Supply Chain
target the same Goal—one that is consistent with Customer Needs.

A lack of Strategic Fit between Competitive and Functional Strategies can result in:
• The Supply Chain taking actions that are not consistent with Customer Needs
o leading to a reduction in Supply Chain Surplus (Profitability).

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How is Strategic Fit Achieved?
To achieve Strategic Fit:
A company must ensure that its Supply Chain capabilities support its ability to satisfy
targeted Customers Needs.

There are three basic Steps to achieve Strategic Fit:

Step 1: Understanding Customers and Supply Chain Uncertainties
Step 2: Understanding Supply Chain Capabilities
Step 3: Achieving Strategic Fit

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How is Strategic Fit Achieved? – Cont’d
Step 1: Understanding Customers and Supply Chain Uncertainties
To understand Customer, a Company must identify needs of Customer being served such as:
1- Quantity of Product needed in each Lot

2- Response Time Customers are willing to tolerate:

• The tolerable Response Time for emergency Order is short
• The allowable Response Time for construction Order is long

3- Variety of Products Needed: A customer may place high premium on availability of all parts
of an emergency Repair Order
4- Service Level Required: if Customer place an emergency Order, they expect a high level of
Products availability.
• Otherwise, Customers may go elsewhere if all parts of the Order are not immediately available.

4- Product Price

5- Desired rate of innovation in Product

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How is Strategic Fit Achieved? – Cont’d
Step 1: Understanding Customers and Supply Chain Uncertainties – Cont’d
Supply Chain Uncertainty happens for two reasons:
• Demand Uncertainty – Uncertainty of Customer Demand for a Product
• Implied Demand Uncertainty – Uncertainty for only portion of Demand that Supply Chain
plans to satisfy based on attributes Customer desires.
o Implied Demand Uncertainty is Demand uncertainty due to portion of Demand that
Supply Chain is targeting, not entire Demand

Example:
A Firm that supplies ONLY emergency Orders for a Product will face a higher Implied
Demand Uncertainty than a Firm that supplies same Products with a long Lead-Time.
• Because the second Firm can fulfill Orders evenly over long Lead-Time.

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How is Strategic Fit Achieved? – Cont’d
Step 1: Understanding Customers and Supply Chain Uncertainties – Cont’d
Impact of Customer Needs on Implied Demand Uncertainty

Customer Need Causes Implied Demand Uncertainty to …

Increase because a wider range of Quantity leads to greater Variance in
Range of Quantity required increases Demand

Lead Time decreases Increase because there is less time to react to Customer Orders

Variety of Products required increases Increase because Demand per Product becomes less predictable

Required Service Level increases Increase because the Firm must handle unusual emergency in Demand

Rate of Innovation increases Increase because new Products tend to have more uncertain Demand

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 How is Strategic Fit Achieved? – Cont’d
Step 2: Understanding Supply Chain Capabilities
After understanding Supply Chain uncertainties, question is:
Q: How does a Firm satisfy Demand in uncertain Environment?
A: Creating Strategic Fit to design a Responsive Supply Chain.
Responsive Supply Chain: meets Customer Demand the best
Supply Chain Responsiveness is ability to:
• 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
Note: Responsiveness comes at a Cost
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How is Strategic Fit Achieved? – Cont’d
Step 2: Understanding Supply Chain Capabilities – Cont’d

Efficiency & Responsiveness Spectrum

Integrated Steel Mills: Hanse Apparel: Most Automotive Production: Seven-Eleven Japan:
Production scheduled A traditional Make-to-Stock Delivering a large variety of Changing Merchandise
Weeks or Months in manufacture with production products in a couple of weeks mix by Location and
advance with lead-Time of several Weeks Time
little Variety or Flexibility

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How is Strategic Fit Achieved? – Cont’d
Step 3: Achieving Strategic Fit
To achieve Strategic Fit we need to:
• Ensure that the degree of Supply Chain Responsiveness is consistent with
Implied Uncertainty

• Assign Roles to different Supply Chain Stages that ensure appropriate

Responsiveness level

• Ensure that all SC Functions maintain consistent Strategies that support

Competitive Strategy

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Efficient and Responsive Supply Chains
Comparison of Efficient and Responsive Supply Chains
Blank Efficient Supply Chains Responsive Supply Chains
Primary goal Supply Demand at the lowest Cost Respond quickly to Demand
Maximize Performance at a minimum Create modularity to allow postponement of
Product Design Strategy Cost Product Differentiation*
Lower Margins because Price is a prime Higher Margins because price is not a prime
Pricing Strategy Customer driver Customer driver

Manufacturing Strategy Lower Costs through high Utilization Maintain Capacity flexibility to buffer against
Demand/Supply Uncertainty
Maintain buffer Inventory to deal with
Inventory Strategy Minimize Inventory to lower Cost Demand/Supply Uncertainty

Lead-Time Strategy Reduce, but not at the expense of Costs Reduce aggressively, even if Costs are significant

Select based on Speed, Flexibility, Reliability, and

Supplier Strategy Select based on Cost and Quality Quality

*Postponement of Product Differentiation: A concept in Supply Chain Management where Manufacturing Process starts
by making a Generic Product or Family Product that is later differentiated into a specific End-Product.

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Changes over Product Life Cycle

Product at the Beginning Stages Product at the Later Stages

1. Demand is very uncertain, and 1. Demand has become more certain,
Supply may be unpredictable and Supply is predictable
2. Margins are often high, and Time 2. Margins are lower as a result of
is crucial to increase Sales increase in Competitive Pressure
3. Product availability is crucial to 3. Price becomes a significant Factor in
capturing Market Customer Choice
4. Cost is often a secondary
consideration

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Summary of Learning Objective 2
• To achieve Strategic Fit, first, a Company must understand Needs of Customers being
served and the Capabilities of all Supply Sources.

• Step 1: Both Needs and Capabilities should be used to identify Implied Uncertainty in
Supply Chain.

• Step 2: is to understand Supply Chain’s Capabilities in terms of Efficiency and

Responsiveness.

• Key to Strategic Fit: is ensuring that Supply Chain Responsiveness is consistent with:
o Customer Needs
o Supply Capabilities
o Resulting Implied Uncertainty

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Supply Chain Levers to Deal with Uncertainty
There are five basic Levers to deal with Uncertainty in a SC:
• Capacity: combination of excess Capacity and flexible Capacity
• Inventory: one of the most common Levers used in practice to deal with
Uncertainty
• Time: combination of speedy Supply and willingness of Customers to wait
• Information: appropriate Information can help a SC to reduce Uncertainty
• Price: Products and Services Prices that vary over Time

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Supply Chain Levers to Deal with Uncertainty – Cont’d
Example: Consider a Fashion Retailer preparing for Fall Season.
 First, Retailer starts by looking at historical Sales and any other Information available relating to
Consumer Preferences.
• Having more Information, results in less Uncertainty in anticipating Consumer Demand
 Then, Retailer must decide on level of Inventory at the beginning of Season based on Demand
Uncertainty & Level of Service planned for Customers
• level of Inventory Decision depends on available Supply Capacity & Supplier Lead-Time
(i.e., Time taken by Supplier to fulfill Replenishment Order)

• The more the availability of Supply Capacity & the quicker Replenishment Order arrives,
the less the initial Inventory required by Retailer.
 Finally, as Season progress, Retailer may decrease Prices to increase Demand if available
Inventory is too high.

Note: Retailer’s success: depends on finding right combination of Actions in each of five Levers
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Summary of Learning Objective 3
 Implied Uncertainty that a SC needs to absorb depends on Customers’ Needs.

 Supply Chain’s five Levers to deal with Uncertainties are:

• Capacity
• Inventory
• Time
• Information
• Price

 Investing more in one Lever allows Supply Chain to invest less in one or more other
Levers.

 To achieve Strategic Fit, a SC must find right balance between investments in five
Levers to effectively serve Customers.

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