Supply Chain Management

(3rd Edition)

Chapter 2
Supply Chain Performance:
Achieving Strategic Fit and Scope

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 What is Supply Chain Management?

 Managing supply chain flows and assets, to maximize

supply chain surplus

 What is supply chain surplus? Difference between

revenue generated from the customer and the overall
cost across the supply chain

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 Internal Value Chain: Local Focus
Executive
R&D
Management

Information
Operations
Technology

Supply
Logistics
Management

Finance Marketing

Human
Accounting Resource
Management 3
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 Internal Value Chain: Company
Focus
Executive
R&D
Management

Information
Operations
Technology

Upstream Downstream
Supply
Suppliers Logistics Customers
Management

Finance Marketing

Human
Accounting Resource
Management 4
© 2007 Pearson Education
 Internal Value Chain: Company
Focus
Executive
R&D
Management

Information
Operations
Technology

Upstream Downstream
Supply
Suppliers Logistics Customers
Management

Finance Marketing

Human
Accounting Resource
Management 5
© 2007 Pearson Education
 SCM: Linked Value Chains
Executive
R&D
Management

Information
Operations
Technology
Executive Executive Executive Executive
R&D R&D R&D R&D
Management Management Management Management

Information Information Information Information

Operations Operations Operations Operations
Technology Technology Technology Technology

Supply Supply Supply Supply Supply

Management Management
Logistics Logistics
Management Logistics
Management
Logistics Logistics
Management

Finance Finance Marketing Marketing Finance Finance

Marketing Marketing

Human Human Human Human

Accounting Resource Accounting Resource Accounting Resource Accounting Resource
Management Management Management Management

Finance Marketing

Supplier’s Supplier Focal Human Customer Customer’s

Accounting Resource
Supplier Firm Management
Customer 6
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 The Value Chain: Linking Supply
Chain and Business Strategy

Finance, Accounting, Information Technology, Human Resources

New Marketing
Product and Operations Distribution Service
Development Sales

Creates Generate Creates the Takes the Responds to

specifications demand product products to customer
for the customers requests
product during or after
the sale

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 Creating Value
 Companies seek to develop a distinctive advantage
and differentiate themselves in the mind of consumer.
 Customers seek value in terms of:
– Quality
– Cost
– Flexibility
– Delivery
– Innovation

8
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 Competitive and Supply
Chain Strategies
 Competitive strategy: defines the set of customer needs a firm
seeks to satisfy through its products and services
 Product development strategy: specifies the portfolio of new
products that the company will try to develop
 Marketing and sales strategy: specifies how the market will
be segmented and product 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
– 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
 Example of strategic fit – Dell

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 How is Strategic Fit Achieved?
 Step 1: Understanding the customer and supply chain
uncertainty
 Step 2: Understanding the supply chain
 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
– 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

© 2007 Pearson Education 2-13

 Levels of Implied Demand
Uncertainty

Predictable Predictable supply and uncertain Highly uncertain

supply and demand or uncertain supply and supply and demand
demand predictable demand or somewhat
uncertain supply and demand

Salt at a An existing A new

supermarket automobile communication
model device
Low margin, High margin, very
accurate demand inaccurate demand
forecast, low forecast, high
stockout rates, stockout rates (if
virtually no successful),
markdown virtually no
markdown (if a
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failure)
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 Step 2: Understanding the
Supply Chain Capabilities
 How does the firm best meet demand?
 Dimension describing the supply chain is supply chain
responsiveness
 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

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 Step 2: Understanding the
Supply Chain Capabilities
 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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 Step 3: Achieving Strategic Fit
 Step is to ensure that what the supply chain does well
is consistent with target customer’s needs
 Goal:
– Target high responsiveness for supply chain facing high
implied uncertainty, or
– Target efficiency for a supply chain facing low implied
uncertainty
 Examples: Dell, Barilla

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 Examples: Achieving Strategic Fit
 Barilla: Practices an efficient SC with focus on cost
reduction
– Pasta
» Stable customer demand
» Low implied demand uncertainty
» Supply is quite predictable

 Dell: Practices a responsive SC

– PCs
» Stable customer demand
» High demand uncertainty
» Some supply uncertainty, esp. for newly introduced components

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 Responsiveness Spectrum
Highly Somewhat Somewhat Highly
efficient efficient responsive responsive

Integrated Hanes Most 7-11 Japan:

steel mill: apparel: A automotive Changing
production traditional production: merchandise
scheduled make-to- Delivering a mix by
weeks or stock large variety location and
months in manufacturer of products time of day
advance with in a couple
with little production of weeks
variety or lead time of
flexibility several weeks

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 Other Issues Affecting Strategic Fit
 Multiple products and customer segments
 Product life cycle
 Competitive changes over time

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 1. Multiple Products and
Customer Segments
 Firms sell different products to different customer
segments (with different implied demand
uncertainty)
 The supply chain has to be able to balance efficiency
and responsiveness given its portfolio of products
and customer segments
 Two approaches:
a. Different supply chains (for each product or
customer segment
b. Tailor supply chain to best meet the needs of each
product’s demand
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 2. Product Life Cycle
 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, cost
is secondary
 Late: predictable demand, lower margins, price is
important
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 3. Competitive Changes Over Time
 Competitive pressures can change over time
 More competitors may result in an increased emphasis
on variety at a reasonable price
 Impact of globalization
 The Internet makes it easier to offer a wide variety of
products
 The supply chain must change to meet these changing
competitive conditions

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