Ch-2

Supply Chain Performance

Achieving Strategic Fit and Scope

By: Prof C. P. Thakor

2.1 Competitive and Supply Chain Strategies

A Company’s Competitive Strategies defines, relative

Retail Units
to its competitors, the set of customer needs that it Worldwide 7,390
seeks to satisfy through its products and services. US Retail Units
4,219
Example : Wal-Mart aims to provide high availability Wal-Mart Stores
of a variety of products at reasonable quality of low 920
prices. Supercenters
2,565
A Product Development strategy specifies the Sam’s Clubs 593
Neighborhood
portfolio of new products that a company will try to
Market 141
develop. International
Retail Units 3,171
A marketing and sales strategy specifies how the
market will be segmented and how the product will
be positioned, priced and promoted.
A Supply chain strategy determines the nature of
procurement of raw materials, transportation of raw
materials to and from the company, manufacture of the
product or operation to provide the service, and
distribution of the product to the customer, along with the
follow up service and a specification of whether these
processes will be performed in house or outsourced.

Example : Cisco, Dell, Toyota, 7-Eleven Japan

New Marketing
Product and Operations Distribution Service
Development Sales
Finance, Accounting, IT, Human resources
The
The Value chain in a Company
2.2 Achieving Strategic Fit

Strategic Fit means that both the competitive and supply

chain strategies have aligned goals
It refers to consistency between the customer priorities
that the competitive strategy hopes to satisfy and the
supply chain capabilities that the supply chain strategies
aims to build.

A company’s success or failure is thus closely linked to the

following keys,

1. The competitive strategy and all functional strategies must fit

together to form coordinated overall strategy. Each functional
strategy must support other functional strategies
2. The different functions in a company must appropriately structure
their processes and resources to be able to execute these strategies
successfully.
How is Strategic Fit Achieved ??
1. Understanding the Customer and Supply chain Uncertainty

2. Understanding the Supply Chain Capabilities

3. Achieving Strategic Fit

1. Understanding the Customer and Supply chain
Uncertainty

• The Quality of the Product Needed in Each lot

• The response time that customers are willing to
Tolerate
• The variety of products needed
• The service level required
• The price of the product
• The desired innovation in the product

Demand Uncertainty reflects the uncertainty of customer demand.

Implied Demand Uncertainty is the resulting uncertainty for only
the portion of the demand that the supply chain plans to satisfy
based on the attributes the customer desires.

Ex: A firm supplying only emergency orders for a product will face a
Correlation Between Implied Demand Uncertainty and other
Low Implied High Implied
Attributes Uncertainty Uncertainty
Product Margin Low High
Average Forecast error 10 % 40% to 100%
Average stock out rate 1% to 2% 10% to 40%
Average forced season- 0% 10% to 25%
end markdown

Source: Fisher, Harward Business Review

Impact of Supply Source Capability on Supply Uncertainty

Supply Source Capability Causes Supply Uncertainty to…
Frequent Breakdowns Increase
Unpredictable and Low Yields Increase
Poor quality Increase
Limited Supply Capacity Increase
Inflexible Supply Capacity Increase
Evolving Production Process Increase
Source: Hau L. lee, California Management Rev
 Predictable Predictable Supply and Uncertain Highly uncertain
Supply or uncertain Supply and predictable Supply
And Demand Demand or somewhat uncertain And Demand
Supply and demand

Salt at a An Existing A new

Supermarket Automobile Communication
Model Device

The implied Uncertainty (demand and supply)

2. Understanding the Supply chain capabilities
Supply chain Responsiveness includes,
• 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
Responsiveness Cost
-Responsiven
High
ess The cost-responsiveness
Efficient Efficient frontier is the curve
Frontier Showing the lowest possible
Cost for a given level of
Responsiveness. Lowest cost
Based on existing technology.
The
Efficient frontier represents
Low
the cost-responsiveness
High Cost Low performance of the best
3. Achieving Strategic Fit
Responsive Finding the Zone of Strategic Fit
Supply Chain

The Goal is to
high
Responsiveness Zone responsiveness
Spectrum Of Strategic Is consistent with
Fit the implied
Uncertainty, and
efficiency for
Supply chain or
facing low
Efficient implied
Supply Chain uncertainty.
Certain Implied Uncertain
Demand Uncertainty Demand
Spectrum
Highly Somewhat Somewhat Highly
efficient Efficient Responsive Responsive

Integrated Hanes apparel Most Automotive 7-Eleven Japan

Steel Mills A traditional Production Changing
Production Make-to-stock Delivering a large Merchandising
Scheduled weeks Manufacturer Variety of products Mix by
Or months With production In a couple of Location and
In advance with Lead time of several weeks Time of day
Little variety or weeks
flexibility

The Responsiveness Spectrum

 Manufacturer absorbs Retailer absorbs
Supplier absorbs Less implied Most of the implied
The least implied Uncertainty and Uncertainty and
Uncertainty and Must be somewhat Must be very
Must be very efficient responsive
Supply Chain I
efficient Supplier Manufacturer Retailer

Extent of implied Uncertainty for the supply chain

Supplier Manufacturer Retailer

Supply Chain II
Supplier absorbs Manufacturer absorbs Retailer absorbs
Less implied Most of the implied the least implied
Uncertainty and Uncertainty and Uncertainty and
Must be somewhat Must be very responsive Must be very
efficient efficient
Different roles and allocation of implied uncertainty for a given level of SC Responsiveness
 Competitive Strategy

Supply chain strategy

1. Manufacturing
Product Marketing and
2. Inventory
Development sales
3. Lead time
Strategy Strategy
4. Purchasing
5. transportation

Information Technology Strategy

Finance Strategy

Human Resource Strategy

Fit Between Competitive and Functional

 Efficient supply chains Responsive supply chains
Supply demand at the Respond quickly to demand
lowest cost Create modularity to allow
Strategy Maximize performance postponement of product
Primary Goals differentiation
at a minimum product
Higher margins because
Product Design cost price is not a prime customer
Strategy Lower margin because driver
price is a prime Maintain capacity flexibility
Pricing strategy
customer driver to buffer against
Manufacturing Lower cost through high demands/supply uncertainty
strategy utilization Maintain buffer inventory to
deal with demand/supply
Inventory Strategy Minimize inventory to
uncertainty
Lead time strategy lower cost Reduce aggressively, even if
Reduce, but not at the the costs are significant
Supplier Strategy
expense cost Select based on speed,
Selected based on cost flexibility, reliability and
and quality quality
Other issues affecting Strategic Fit

1. Multiple Products and Customer Segments

2. Product Life Cycle
3. Globalization and competitive changes over time
4. Growing supply chain uncertainty
5. The environment and sustainability
 ing and Maintaining Strategic Fit in Emerging Retail Markets:
The Indian Scenario
booming Indian Retail Industry, estimated at around $ 300 billion
unorganized sector, controlling over 95% of the retail business in the country
Indian middle class, of about 350 million, which the organized retail sector
ying to target
is scenario, the Walmart-Bharti combine presents the Walmart everyday low
e (EDLP) model for an efficient supply chain
ance Retail, seems more focused on developing an indigenous sourcing base
concentrating on economies arising out of disintermediation of supply and
ibution channels and variety of stores reaching put about 800 cities and
ns throughout the country .
ppers Stop, an early entrant into Indian retail sector, seems to prefer targeting
-end customers in a limited number of cities
7. Pantaloon Retail (India) Ltd which had charted out a mega expansion
plan powered by its retail discount chain
8. Big Bazaar, and was planning to cover 3 million Sq. feet of retail space
in the country within 2007 and low price leader.
9. Subhiksha, the no frills deep discount branded product seller
including mobile phones, 1655 stores in 2 years, is now facing cash
crunch.
10. Available reports suggest that a number of malls experiencing rough
weather due to low percentage of footfalls getting converted into
actual sales, high rentals, inadequate parking spaces, and overarching
Indian attitudes.
11. Pantaloon’s projected expansion is slowing down for these reasons. As
per Mayur Toshniwal, VP and Business Head North, “ Expansions into
newer cities is going through a problem phase”
12. The Indian Retail Industry, failed to gain a thorough understanding
2.3 Expanding Strategic Scope

Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy
Intra company
Intra functional
At distributor Product
Intercompany Development
Inter functionalExpanding Strategic Scope Strategy

Supply chain
Strategy
Intra company Intra company
Inter functional Inter operation
At distributor At distributor
Marketing
Strategy

The different Scope of Strategic Fit Across a Supply Chain

Intra Company Intra operation Scope: The Minimize Local cost View
Intra company intra functional Scope: The Minimize Functional Cost View
Intra company Inter functional Scope: The maximize Company profit View
Inter company Inter functional Scope: The Maximize Supply Chain Surplus V
Agile Inter company Inter Functional Scope
2.4 Obstacles to Achieving Strategic Fit

1. Increasing variety of Products

2. Decreasing product Life Cycles
3. Increasingly Demanding Customers
4. Fragmentation of Supply Chain Ownership
5. Globalization
6. Changing Business Environment
7. Difficulty Executing New Strategies