Chapter 2: Achieving Strategic Fit in a Supply Chain
Zone of Strategic Fit
- Responsive Supply Chain = Uncertain Demand - Responsiveness Spectrum = Implied Uncertainty Spectrum -Efficient Supply Chain = Certain Demand
Agile Intracompany Scope
-A firm's ability to achieve strategic fit when partnering with supply chain stages that change over time.
Competitive and Supply Chain Strategies
-All functional strategies must support one another and the competitive strategy.
Strategic Fit
-Competitive and supply chain strategies have aligned goals. -A company may fail because of a lack of strategic fit or because its overall supply chain design, processes, and resources do not provide the capabilities to support the desired strategy.
Responsive Supply Chain: Product design strategy
-Create modularity to allow postponement of product differentiation.
Cost-Responsiveness Efficient Frontier
-Curve shows the lowest possible cost for a given level of responsiveness.
Competitive Strategy
-Defines the set of customer needs a firm seeks to satisfy through its products and services.
Intraoperation Scope: Minimize Local Cost
-Each stage of the supply chain devises strategy independently.
Intrafunctional Scope: Minimizing Functional Cost
-Firms align all operations within a function.
Impact of Supply Source Capability on Supply Uncertainty
-Frequent breakdowns: Increase -Unpredictable and low yields: Increase -Poor quality: Increase -Limited supply capacity: Increase -Inflexible supply capacity: Increase -Evolving production processes: Increase
Intrafunctional Scope: Maximizing Company Profit
-Functional strategies are developed to align with one another and with the competitive strategy.
Responsive Supply Chain: Pricing Strategy
-Higher margins because price is not a prime customer driver.
Supply Chain Efficiency
-Is the inverse to the cost of making and delivering the product to the customer.
Efficient Supply Chains: Manufacturing strategy
-Lower costs through high utilization
Efficient Supply Chains: Pricing Strategy
-Lower margins because price is a prime customer driver.
Responsive Supply Chain: Manufacturing strategy
-Maintain capacity flexibility to buffer against demand/supply uncertainty.
Efficient Supply Chains: Product design strategy
-Maximize performance at a minimum product cost
Efficient Supply Chains: Inventory strategy
-Minimize inventory to a lower cost
The Value Chain
-New Product Development -Marketing and sales -Operations -Distribution -Service
Correlation Between High Implied Demand Uncertainty and Other Attributes
-Product Margin: High -Average Forecast Error: 40% - 100% -Average Stockout Rate: 10% - 40% -Average forced season-end markdown: 10% - 25%
Correlation Between Low Implied Demand Uncertainty and Other Attributes
-Product Margin: Low -Average Forecast Error: 10% -Average Stockout Rate: 1% to 2% -Average forced season-end markdown: 0%
Understanding the Customer and Supply Chain Uncertainty
-Quantity of product needed in each lot -Response time customers are willing to wait -Variety of products needed -Service level required -Price of the product -Desired rate of innovation in the product
Responsive Supply Chain: Lead-time strategy
-Reduce aggressively, even if the costs are significant.
Efficient Supply Chains: Lead-time strategy
-Reduce, but not at the expense of costs
Tailoring the Supply Chain
-Requires sharing operations for some links in the supply chain, while having separate operations for other links.
Responsive Supply Chain: Primary Goal
-Respond quickly to demand
Understanding Supply Chain Capabilities
-Responsiveness comes at a cost.
Implied Demand Uncertainty
-Resulting uncertainty for only the portion of the demand that the supply chain plans to satisfy based on the attributes the customer desires.
Efficient Supply Chains: Supplier Strategy
-Select based on cost and quality
Responsive Supply Chain: Supplier Strategy
-Select based on speed, flexibility, reliability, and quality
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 processes will be in-house or outsourced.
Marketing and Sales
-Strategy specifies how the market will be segmented and product positioned, priced, and promoted.
Product Development
-Strategy specifies the portfolio of new products that the company will try to develop.
Intracompany Scope: Maximizing Supply Chain Surplus
-Supplier and customer work together and share information to reduce total cost and increase supply chain surplus.
Efficient Supply Chains: Primary Goal
-Supply demand at the lowest cost.
Scope of strategic fit
-The functions within the firm and stages across the supply chain that devise an integrated strategy with an aligned objective.
Demand Uncertainty
-Uncertainty of customer demand for a product.
Supply Chain Levers
1. Capacity: combination of excess capacity and flexible capacity. 2. Inventory: one of the most common levers used in practice to deal with uncertainty. 3. Time: combination of speedy supply and the willingness of customers to wait. 4. Information: appropriate information can help a supply chain reduce uncertainty. 5. Price: prices of products and services that vary over time.
Product Life Cycle: Later Stages
1. Demand has become more certain, and supply is predictable. 2. Margins are lower as a result of an increase in competitive pressure. 3. Price becomes a significant factor in customer service.
Product Life Cycle: Beginning Stages
1. Demand is very uncertain, and supply may be unpredictable. 2. Margins are often high, and time is crucial to gaining sales. 3. Product availability is crucial to capturing the market. 4. Cost is often a secondary consideration.
Achieving Strategic Fit
1. Ensure that the degree of supply chain responsiveness is consistent with the implied uncertainty. 2. Assign roles to different stages of the supply chain that ensure the appropriate level of responsiveness. 3. Ensure that all functions maintain consistent strategies that support the competitive strategy.
Implied Uncertainty and Other Attributes
1. Products with uncertain demand are often less mature and have less direct competition. As a result, margins tend to be high. 2. Forecasting is more accurate when demand has less uncertainty. 3. Increased implied demand uncertainty leads to increased difficulty in matching supply with demand. For a given product, this dynamic can lead to either a stockout or an oversupply situation. 4. Markdowns are high for products with greater implied demand uncertainty because over supply often results.
Achieving Strategic Fit
1. The competitive strategy and all functional strategies must fit together to form a coordinated overall strategy. Each functional strategy must support other functional strategies and help a firm reach its competitive strategy goal. 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.
How is a Strategic Fit Achieved
1. Understanding the customer and supply chain uncertainty. 2. Understanding the supply chain capabilities. 3. Achieving strategic fit
Causes implied demand uncertainty to INCREASE because the total customer demand per channel becomes less predictable.
Customer need number of channels through which product may be acquired INCREASES
Causes implied demand uncertainty to INCREASE because a wider range of the quantity required implies greater variance in demand.
Customer need range of quantity required INCREASES
Causes implied demand uncertainty to INCREASE because new products tend to have more uncertain demand.
Customer need rate of innovation INCREASES
Causes implied demand uncertainty to INCREASE because the firm now has to handle unusual surges in demand.
Customer need required service level INCREASES
Causes implied demand to INCREASE because there is less time in which to react to orders.
Customers need lead time DECREASES
Causes implied demand uncertainty to INCREASE because demand per product becomes less predictable.
Customers need variety of products required INCREASES