scm 2 f chap 2.pdf
TRANSCRIPT
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Supply Chain Management:
Strategic Fit and Scope
(Source: Supply Chain Management, Strategy, Planningand Operation, By Sunil Chopra, Peter Meindl, D. V.
Kalra‐Pearson)
For academic purpose and private circulation only
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Competitive strategy
Competitive strategy defines, relative to itscompetitors, the set of customer needs a firm seeks tosatisfy through its products and services.
Competitive strategy is defined based on how the customer
prioritizes product cost, delivery time, variety and quality.
WalMart & Seven Eleven Japan
WalMart: Low price , product availability, variety
Seven Eleven: Convenience, availability and responsiveness
Blue Nile (online diamond retailing model), Zales (Diamond retail stores)
Blue Nile – low cost, variety
Zales – responsiveness, help in product selection
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Competitive strategy of a firm will be defined bycustomers priorities.
Competitive strategy targets one or more customersegments and aims to provide products and servicesthat satisfy customer needs.
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Competitive strategy
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The Value Chain for a typical organisation
To execute a company’s competitive strategy, various functions
in a firm play a role and each develops its own strategy.
Supply chain strategy defines broad structure of supply chain
and includes long term decisions regarding facilities,
transportation, outsourcing etc.
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All functional strategies as well as supply chainstrategy must support one another and thecompetitive strategy.
E.g. Seven Eleven Japan success can be attributed to excellentfit among functional strategies including supply chain strategy.
Marketing strategy- convenience, product availability, variety.
Product development strategy: exploits frequent customer visits to stores, make use of existing infrastructure
Operations and distribution strategy: focuses on high densityof stores, very responsive, excellent information networks
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Competitive strategy
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Achieving Strategic Fit
Strategic fit
• It requires that both competitive and supply chain strategies have
aligned goals.
• It refers to the consistency between the customer priorities
that the competitive strategy hopes to satisfy and thesupply chain capabilities that the supply chain strategy
aims to build.
• A company may fail because of a lack of strategic fit i.e supply
chain do not provide the capabilities to support the desired
strategy fit.
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Dell and its Supply Chain1993-2006:
Competitive strategy was to provide large variety of customisedproducts at reasonable price.
With focus on customisation, Dells supply chain focus wasdesigned to be very responsive.
Assembly facilities were designed to be flexible rather thanfocussing on low cost and producing large volumes.
Dell PCs were designed to use common components and allowrapid assembly.
Dell was able to produce customised products with lowinventory.
Because of low inventory, suppliers and carriers were highly
responsive. 4-7
Achieving Strategic Fit
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2007 onwards:
Changed its competitive strategy and supply chain
While it continued to offer customisation, it also started
selling PCs through retail stores like Wal-Mart. In retail sales, focus is on low cost as against customisation
in Direct Sales Channel
Changes were made in earlier flexible and responsive
supply chain that satisfied customisation Dell increased contract manufacturing in low cost
countries. Also increased inventory levels.
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Achieving Strategic Fit
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Steps in Achieving Strategic Fit
•
To achieve strategic fit, a company must ensure that itssupply chain capabilities support its ability to satisfy the
needs of targeted customer segments.
• Three basic steps in achieving strategic fit are:
1. Understanding the customer needs and uncertainty
faced by supply chain 2. Understanding the supply chain
3. Achieving strategic fit
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Understanding the customer and supply chain uncertainty
To understand the customer, a company must identify theneeds of the customer segment being served.
Each customer in a particular segment will tend to havesimilar needs, whereas customer in different segments canhave different needs.
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d di h d l h i i
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Company must also understand uncertainity these needsimpose on the supply chain.
E.g. For the same product, demand varies along certainattributes for customer making a purchase at:
Seven Eleven- Customer need of convenience
Wall-Mart- Customer need of low cost
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Understanding the customer and supply chain uncertainty
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Step 1: Understanding the Customer and Supply Chain
Uncertainty
Customer Demand from different segments variesalong several attributes:
• Quantity of product needed in each lot
• Response time customers will tolerate
• Variety of products needed
• Service level required (e.g. high product availability)
•
Price of the product• Desired rate of innovation in the product
Above are the attributes of demand along which demand
may vary giving rise to demand uncertainty.
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Step 1: Understanding the Customer and Supply Chain
Uncertainty
• One key measure which combines different attributes of
the demand is “Implied demand uncertainty”
•
It is the resulting uncertainty for only the portion of thedemand that the supply chain plans to satisfy and handle
based on the attributes the customer desires.
• It is the demand uncertainty imposed on the supply chainbecause of the customer needs it seeks to satisfy.
• e.g. a firm supplying emergency orders for a product will face a higher
implied demand uncertainty than a firm supplying the same product
with long lead time
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Customer Needs and Implied Demand Uncertainty
Customer Need Causes Implied Demand Uncertainty to …
Range of quantity required increases Increase because a wider range of the quantity requiredimplies greater variance in demand
Lead time decreases Increase because there is less time in which to react to orders
Variety of products required increases Increase because demand per product becomes moredisaggregate
Number of channels through whichproduct may be acquired increases
Increase because the total customer demand is nowdisaggregated over more channels
Rate of innovation increases Increase because new products tend to have more uncertaindemand
Required service level increases Increase because the firm now has to handle unusual surgesin demand (but the underlying demand uncertainty may notchange)
Table 2-1
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Supply Uncertainty
Supply Source Capability Causes Supply Uncertainty to...
Frequent breakdowns Increase
Unpredictable and low yields IncreasePoor quality Increase
Limited supply capacity Increase
Inflexible supply capacity Increase
Evolving production process Increase
Table 2-3
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Thus uncertainty from customer (implied demanduncertainty) and supply chain (supply uncertainty) can be
combined on an implied uncertainty spectrum.
Implied uncertainty is the uncertainty which a company faces in achieving a strategic fit between competitive
strategy and supply chain strategy.
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Implied Uncertainty
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Levels of Implied Uncertainty (Demand and Supply)
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Step 2: Understanding Supply Chain Capabilities
•
Creating a strategic fit requires creating a supply chain strategy that best meets the demand a company has targeted given the
uncertainty.
• This requires understanding and building capabilities /
characteristics in the supply chain
• Supply chain responsiveness : It is the 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
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Step 2: Understanding Supply Chain Capabilities
• Responsiveness comes at a cost e,g, to wide ranges of
quantities demanded shall require high capacity.
• Supply chain efficiency is the inverse of the cost of making and delivering the product to the customer.
• Increases in cost lowers the efficiency.
• For every strategic choice to increase responsiveness, there
are additional costs that lower efficiency.
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Cost-Responsiveness Efficient Frontier
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The cost-responsiveness efficient frontier curve shows thelowest possible cost for a given level of responsiveness.
It represents the cost-responsiveness performance for thebest supply chains.
It shows trade-off between responsiveness and costs.
Supply chains range from those that focus solely on beingresponsive to those that focus on producing and supplying
at low cost.
Thus a key strategic decision for a company is to mapit on responsiveness spectrum i.e. choose the level of responsiveness it seeks to provide.
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Step 2: Understanding Supply Chain Capabilities
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Responsiveness Spectrum
Supply chain strategy is the find the correct balance between
“responsiveness” and “efficiency” that fits the competitive
strategy.
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Step 3: Achieving Strategic Fit
• Ensure that the degree of supply chain responsiveness isconsistent with the implied uncertainty.
• Goal is to target high responsiveness for a supply
chain facing high implied uncertainty and efficiency
for a supply chain facing low implied uncertainty.
•
Increased implied demand uncertainty from customersand supply chain is best served by increasing
responsiveness.
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Zone of Strategic Fit
Companies should move their competitive strategy (andresulting implied uncertainty) and supply chain strategy (and
resulting responsiveness) towards zone of strategic fit
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• For achieving strategic fit, assign roles to different
stages of the supply chain that ensure the
appropriate level of responsiveness.
•
Ensure that all functions maintain consistentstrategies that support the competitive strategy.
• E.g IKEA
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Step 3: Achieving Strategic Fit
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IKEA : a Swedish furniture retailer, Stores in 20 countries
Competitive strategy: Target customers who want stylish furniture withreasonable variety at low prices.
• Supply Chain Strategy:
Limits variety of furniture style through modular design, products easy to assemble. Modular design of products allow moving final assembleto customer.
Have large stores with large inventory, stocks all styles in stores andserves customer through stock.
Manufacturers produces large volumes of few modules and focus on
efficiency.
Transportation focuses on shipping large quantities of unassembled
modules at low cost o large stores.
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Step 3: Achieving Strategic Fit
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Large stores allow replenishment orders to its manufacturers to bemore stable and predictable. Hence large stores inventory and modular design decreases the implied demand uncertainty faced bysupply chain.
Stores inventory absorb most of the implied uncertainty and passeslittle uncertainty to manufacturers.
Manufacturers are located in low-cost countries and focus onefficiency.
Thus IKEA provides responsiveness in supply chain with the storesabsorbing most of the uncertainty and being responsive.
Manufacturers and suppliers absorb little uncertainty and are efficient.
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Step 3: Achieving Strategic Fit
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England Inc : a furniture manufacturer
Manufactures sofas, chairs etc to order and deliver them furniturestores across the country within 3 weeks.
Large variety and promise of quick delivery imposes high implieddemand uncertainty on supply chain.
Retailers do not carry much inventory and hence pass on implied
uncertainty to manufacturer.
Thus retailer can be efficient because of less implied uncertainty facedby them.
Manufacturers have flexible manufacturing process to absorb implieddemand uncertainty and be responsive.
Manufacturer hold more raw material inventory and supplier focus onefficiency.
If manufacturer decreases its raw material inventory, then suppliermust become more responsive.
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Step 3: Achieving Strategic Fit
R l d All ti
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Roles and Allocations
Supply chain can achieve a given level of responsiveness andefficiency by adjusting roles of each stage. Making one stagemore responsive allow other stage to become more efficient.
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Efficient and Responsive Supply Chains
Efficient Supply Chains Responsive Supply Chains
Primary goal Supply demand at the lowest cost Respond quickly to demand
Product designstrategy
Maximize performance at a minimumproduct cost
Create modularity to allowpostponement of product differentiation
Pricing strategy Lower margins because price is a prime
customer driverHigher margins because price is not aprime customer driver
Manufacturingstrategy
Lower costs through high utilization Maintain capacity flexibility to buffer
against demand/supply uncertainty
Inventory strategy Minimize inventory to lower cost Maintain buffer inventory to deal with
demand/supply uncertainty
Lead-time strategy Reduce, but not at the expense of costs Reduce aggressively, even if the costs are
significant
Supplier strategy Select based on cost and quality Select based on speed, flexibility,
reliability, and quality
Table 2-4
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Tailoring the Supply Chain
• When supplying multiple customer segments with a wide
variety of products through several channels, a firm musttailor its supply chain to achieve strategic fit.
• E.g. Dell: Built responsive supply chain for customised PCs.
• For low cost channel (e.g for Wall Mart) designed a low cost
supply chain.
• Requires sharing some links in the supply chain with some
products, while having separate operations for other links. (e.g.Various products may be manufactured at the same plant but those products
requiring responsiveness may be shipped by faster mode of transportation like
courier.
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Tailoring the Supply Chain:
Changes Over Product Life Cycle
Beginning stages:
Demand is very uncertain, and supply may be
unpredictable.
Margins are often high, and time is crucial to gainingsales.
Product availability is crucial to capturing the market.
Cost is often a secondary consideration.
In this case responsiveness is the most important
characteristic of supply chain.
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Changes Over Product Life Cycle
• Later stages:
Demand has become more certain, and supply is
predictable.
Margins are lower as a result of an increase in competitivepressure.
Price becomes a significant factor in customer choice.
In this case efficiency is the most important
characteristic of supply chain.
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A Framework for Structuring Drivers
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Expanding Strategic Scope
•
Scope of strategic fit –
the functions within the firmand stages across the supply chain that devise an
integrated strategy with an aligned objective.
• It refers to the supply chain stages across which
strategic fit applies.
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Expanding Strategic Scope
• Intraoperation scope – minimize local cost view
Each stage of the supply chain devises strategy independently
• Intrafunctional scope – minimize total functional cost
Firms align all operations within a function
•
Interfunctional scope – maximize company profit Functional strategies are developed to align with one another
and the competitive strategy
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Expanding Strategic Scope
•
Intercompany scope– maximize supply chain surplus
Supplier and customer work together and share
information to reduce total cost and grow supply chain
surplus.
Competitive playing field has shifted from company
versus company to supply chain versus supply chain
• Agile intercompany scope – a firm’s ability to achieve
strategic fit when partnering with supply chain stages that
change over time.
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Different Scopes of Strategic Fit Across a Supply Chain
Figure 2-7
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Challenges to Achieving and Maintaining Strategic Fit
• Increasing product variety and shrinking life cycles
Greater product variety and shorter life cycles increase uncertainty
while reducing the window of opportunity within which the supply
chain can achieve fit.
• Globalization and increasing uncertainty
Significant f luctuations in exchange rates, global demand, and the
price of crude oil.
Contd…
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Challenges to Achieving and Maintaining Strategic Fit
Fragmentation of supply chain ownership
Firms are less vertically integrated
Take advantage of supplier and customer competencies they did
not have
New ownership structure makes aligning and managing the supply
chain more difficult
Aligning all members of a supply chain has become critical to
achieving supply chain fit
Contd…
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Challenges to Achieving and Maintaining Strategic Fit
• Changing technology and business environment
Customer needs and technology change may force a firm to rethink
their supply chain strategy
• The environment and sustainability Issues of environment and sustainability are growing in relevance
and must be accounted for when designing supply chain strategy
Opportunities may require coordination across different members
of the supply chain