BUILDING

STRATEGIC
FRAMEWORK TO
ANALYZE SUPPLY
CHAINS
1.2: Supply Chain Performance: Achieving Strategic
Fit and Scope
 Explain why achieving strategic fit is critical to a
Explain company’s overall success.

Describe how a company achieves strategic fit between

Describe its supply chain strategy and its competitive strategy.
Learning
Objectives Discuss Discuss the importance of expanding the scope of
strategic fit across the supply chain.

Describe the major challenges that must be overcome to

Describe manage a supply chain successfully.
Competitive and Supply
Chain Strategies
◦ Competitive strategy: defines the set of customer needs a firm seeks to satisfy
through its products and services
◦ competitive strategy is defined based on how the customer prioritizes product cost,
delivery time, variety, and quality.
◦ Supply chain strategy:
◦ determines the nature of material procurement, transportation of materials, manufacture of
product or creation of service, distribution of product. along with any follow-up service and a
specification of whether these processes will be performed in-house or outsourced.
◦ Consistency and support between supply chain strategy, competitive strategy, and other
functional strategies is important

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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
◦ 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.
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.

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Achieving Strategic Fit
◦ Example of strategic fit – Dell
◦ Between 1993 and 2006, Dell’s competitive strategy was to provide a large variety of
customizable products at a reasonable price. - focus on responsiveness.
◦ Starting in 2007, however, Dell altered its competitive strategy and had to change its
supply chain accordingly. With a reduced customer focus on hardware customization,
Dell branched out into selling PCs through retail stores – Focus on low cost.

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 Understanding the customer and
Step 1 supply chain uncertainty

How is
Strategic Fit Step 2 Understanding the supply chain

Achieved?

Step 3 Achieving strategic fit

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Step 1: Understanding the Customer and
Supply Chain Uncertainty
◦ Identify the needs of the customer segment being served
◦ Customer demand from different segments varies along several attributes,
as follows:
◦ 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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Step 1: Understanding the Customer and
Supply Chain Uncertainty
◦ Overall attribute of customer demand
◦ Demand uncertainty: uncertainty of customer demand for a product
◦ Implied demand uncertainty: resulting uncertainty for the supply chain
given the portion of the demand the supply chain must handle and
attributes the customer desires

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Achieving Strategic Fit
◦ Understanding the Customer
◦ Lot size
◦ Response time
◦ Service level
Implied
◦ Product variety Demand
◦ Price
◦ Innovation Uncertainty

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LEVELS OF IMPLIED DEMAND UNCERTAINTY

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 IMPACT OF
CUSTOMER
NEEDS ON
IMPLIED
DEMAND
UNCERTAINTY

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Attribute Low Implied Uncertainty High Implied Uncertainty
Product margin Low High
Avg. forecast error 10% 40%-100%
Avg. stockout rate 1%-2% 10%-40%
Avg. forced season-end 0% 10%-25%
markdown

CORRELATION BETWEEN IMPLIED DEMAND

UNCERTAINTY AND OTHER ATTRIBUTES

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Step 2: Understanding the
Supply Chain
◦ How does the firm best meet demand?
◦ Creating strategic fit is all about designing a supply chain whose responsiveness aligns
with the implied uncertainty it faces.
◦ categorize supply chains based on different characteristics that influence their
responsiveness and efficiency.
◦ Supply chain responsiveness -- 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 very high service level 2-15
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
◦ 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
RESPONSIVENESS SPECTRUM

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 Step is to ensure that what the
supply chain does well is consistent
with target customer’s needs

Step 3: Uncertainty/Responsiveness map

Achieving
Strategic Fit
Zone of strategic fit

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ACHIEVING STRATEGIC FIT SHOWN ON THE
UNCERTAINTY/RESPONSIVENESS MAP

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 All functions in the value chain must support
the competitive strategy to achieve strategic
fit.

Two extremes: Efficient supply chains

Step 3: (Mcdonalds) and responsive supply chains
(Marriot)
Achieving
Strategic Fit 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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 Efficient Responsive
Primary goal Lowest cost Quick response
Product design Min product cost Modularity to allow
strategy postponement
Pricing strategy Lower margins Higher margins
COMPARISON
Mfg strategy High utilization Capacity flexibility
OF EFFICIENT
Inventory strategy Minimize inventory Buffer inventory AND
Lead time strategy Reduce but not at Aggressively reduce RESPONSIVE
expense of greater even if costs are SUPPLY CHAINS
cost significant
Supplier selection Cost and low quality Speed, flexibility,
strategy quality
Transportation Greater reliance on Greater reliance on
strategy low cost modes responsive (fast)
modes

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 Multiple products and
customer segments

Other Issues
Affecting Product life cycle

Strategic Fit
Competitive changes over time

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 ◦ Firms sell different products to different customer
segments (with different implied demand

Multiple uncertainty)
◦ The supply chain has to be able to balance efficiency
Products and and responsiveness given its portfolio of products
and customer segments
Customer ◦ Two approaches:

Segments ◦ Different supply chains

◦ Tailor supply chain to best meet the needs of each
product’s demand

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 ◦ The demand characteristics of a product and the
needs of a customer segment change as a product
goes through its life cycle
◦ Supply chain strategy must evolve throughout the life
cycle
◦ Early: uncertain demand, high margins (time is
important), product availability is most important,
Product Life cost is secondary

Cycle ◦ Late: predictable demand, lower margins, price is

important
◦ Examples: pharmaceutical firms, Intel
◦ As the product goes through the life cycle, the supply
chain changes from one emphasizing responsiveness
to one emphasizing efficiency

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 ◦ Competitive pressures can change over time

Competitive ◦ More competitors may result in an increased

emphasis on variety at a reasonable price

Changes Over ◦ The Internet makes it easier to offer a wide variety of

products
Time ◦ The supply chain must change to meet these
changing competitive conditions

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 Scope of strategic fit

• The functions and stages within a supply chain that

devise an integrated stategy with a shared objective
• One extreme: each function at each stage develops
its own strategy
Expanding • Other extreme: all functions in all stages devise a
strategy jointly

Strategic Five categories:

Scope • Intraoperation scope – Minimizing local cost

• Intrafunctional scope – Minimizing functional cost
• Interfunctional scope – Maximizing company
profit
• Intercompany scope – Maximizing supply chain
surplus
• Agile interfunctional scope

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Strategic Scope
Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Product Dev.
Strategy

Supply Chain
Strategy

Marketing
Strategy

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 ◦ One operation within a functional area in a
Intraoperation company
◦ Each operation within each stage of the
scope – supply chain devises a strategy independently
and attempts to optimize its own
Minimizing performance independently

local cost ◦ Usually results in different operations having

conflicting objectives – does not maximize
total supply chain profits

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Strategic Scope:
Intracompany Intraoperation Scope
Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Product Dev.
Strategy

Supply Chain
Strategy

Marketing
Strategy

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Intrafunctional
◦ Strategic fit is expanded to include all
scope – operations within a function

Minimizing ◦ Attempt to maximize performance for the

entire function
functional cost

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Strategic Scope:
Intracompany Intrafunctional Scope
Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Product Dev.
Strategy

Supply Chain
Strategy

Marketing
Strategy

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Interfunctional ◦ All functional strategies within a company are
scope – developed to support each other and the
company’s competitive strategy
Maximizing ◦ Strategic fit is expanded to include all
company functions in a firm
◦ Goal is to maximize company profit
profit
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Strategic Scope:
Intracompany Interfunctional Scope
Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Product Dev.
Strategy

Supply Chain
Strategy

Marketing
Strategy

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 ◦ Increasing supply chain surplus increases the
Intercompany amount to be shared
◦ All stages coordinate strategy across all
scope – functions to ensure that they best meet the
customer’s needs and maximize supply chain
Maximizing surplus

supply chain ◦ Also provides more speed by managing the

interfaces between supply chain stages
surplus ◦ Each company must evaluate its actions in
the context of the entire supply chain

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Strategic Scope:
Intercompany Interfunctional Scope
Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Product Dev.
Strategy

Supply Chain
Strategy

Marketing
Strategy

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 Agile ◦ Ability to achieve strategic fit when partnering with
stages that change over time in the supply chain
Intercompany ◦ Customer needs and members of the supply chain
change over time
Interfunctional ◦ A firm may have to partner with many different

Scope firms over time

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CHALLENGES TO ACHIEVING AND
MAINTAINING STRATEGIC FIT
◦ Increasing Product Variety and Shrinking Life Cycles – eg. Samsung.
◦ Globalization and Increasing Uncertainty. Eg. Fluctuating demand for automobiles globally, fluctuation in
currency rates, fluctuation in crude oil prices, etc.
◦ Fragmentation of Supply Chain Ownership. – Outsourcing for cost effectiveness and building
competency.
◦ Changing Technology and Business Environment – eg. Blockbuster vs. redbox vs. Netflix
◦ The Environment and Sustainability – eg. Waste Electrical and Electronic Equipment (WEEE) and
Restriction of Hazardous Substances (RoHS) directives from the European Union forced cell phone
manufacturers to rethink their design and sourcing strategies. Packaging related issues.
CHALLENGES TO ACHIEVING AND
MAINTAINING STRATEGIC FIT
 Summary of Learning Objectives

1. Why is achieving strategic fit critical to a company’s overall success?

A lack of strategic fit between the competitive and supply chain strategies can result in the supply
chain taking actions that are not consistent with customer needs, leading to a reduction in supply
chain surplus and decreasing supply chain profitability. 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.

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 Summary of Learning Objectives

2. How does a company achieve strategic fit between its supply chain strategy and its
competitive strategy?
To achieve strategic fit, a company must first understand the needs of the customers being served,
understand the uncertainty of the supply chain, and identify the implied uncertainty. The second step is
to understand the supply chain’s capabilities in terms of efficiency and responsiveness. The key to
strategic fit is ensuring that supply chain responsiveness is consistent with customer needs, supply
capabilities, and the resulting implied uncertainty. Tailoring the supply chain is essential to achieving
strategic fit when supplying a wide variety of customers with many products through different channels.

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 Summary of Learning Objectives

3. What is the importance of expanding the scope of strategic fit across the supply chain?
The scope of strategic fit refers to the functions and stages within a supply chain that
coordinate strategy and target a common goal. When the scope is narrow, individual functions
try to optimize their performance based on their own goals. This practice often results in
conflicting actions that reduce the supply chain surplus. As the scope of strategic fit is enlarged
to include the entire supply chain, actions are evaluated based on their impact on overall
supply chain performance, which helps increase supply chain surplus.

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 Summary of Learning Objectives

4. Describe the major challenges that must be overcome to manage a supply chain
successfully.
Globalization, increasing product variety, decreasing product life cycles, fragmentation of
supply chains, changing technologies, and an increased focus on sustainability represent
significant challenges to achieving strategic fit. They also represent great opportunities for firms
that can successfully address these challenges with their supply chain strategies.

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DISCUSSION QUESTIONS
1. How would you characterize the competitive strategy of a high-end department store chain such as Q
Mart? What are the key customer needs that Q Mart aims to fill?
2. Where would you place the demand faced by Q Mart on the implied demand uncertainty spectrum?
Why?
3. What level of responsiveness would be most appropriate for Q Mart’s supply chain? What should the
supply chain be able to do particularly well?
4. How can Q Mart expand the scope of strategic fit across its supply chain?
5. Reconsider the previous four questions for other companies such as Amazon, a supermarket chain, an
auto manufacturer, and a discount retailer such as Walmart.
DISCUSSION QUESTIONS
6. Give arguments to support the statement that Walmart has achieved good strategic fit between its
competitive and supply chain strategies. What challenges does it face as it works to open smaller format
stores in urban environments?
7. What are some factors that influence implied uncertainty? How does the implied uncertainty differ
between an integrated steel mill that measures lead times in months and requires large orders and a steel
service center that promises 24-hour lead times and sells orders of any size?
8. What is the difference in implied uncertainty faced by a convenience store chain such as Heritage, a
supermarket chain, and a discount retailer such as D mart?
9. What are some problems that can arise when each stage of a supply chain focuses solely on its own
profits when making decisions? Identify some actions that can help a retailer and a manufacturer work
together to expand the scope of strategic fit.