Chapter 2: Achieving Strategic Fit in a Supply Chain

Competitive and Supply Chain Strategies

Competitive strategy of a company defines the set of customer needs that it seeks to
satisfy through its products and services. For example a company can have a huge variety
of products but at a longer delivery time or different price then a company with fewer
products but with shorter delivery time. So, the competitive strategy is defined based on
customer priorities (cost, delivery time, variety, and quality). It targets one or more
customer segments.

Value chain in a company (with after the dot each function’s strategy).
- New product development: creates specifications for the product.
- Marketing and Sales: generate demand by publicizing that products and services
satisfies and brings customer input to new product development.
- Operations: transforms inputs to outputs according to specifications and create new
product.
- Distribution: Either takes product to customer or brings customer to product.
- Service: Responds to customer requests during or after the sale.
These are the core processes or functions that must be performed for a successful sale.
Finance, accounting, IT, and HR support and facilitate the functioning of the value chain.

Each function must develop its own strategy for example new product development
specifies portfolio of new products it tries to develop. Also, it dictates to outsource or
not. And Marketing and Sales specifies how market will be segmented and product
position, price, and promotion.

A supply chain strategy determines the nature of procurement of raw materials,

transportation of 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 any follow-up service and specification of in-house or outsourcing.

Strategic fit requires that both the competitive and SC strategies of a company have
aligned goals. Refers to consistency between customer priorities that the competitive
strategy hopes to satisfy and the capabilities that the SC strategy aims to build. To
achieve strategic fit a company must accomplish the following:
1. Competitive strategy and all functional strategies must fit together. Each
functional strategy must support other ones and help firm reach competitive
strategy goal.
2. Different functions in company must structure processes and resources to be able
to execute the strategies successfully.
3. Design of overall SC and role of each stage must be aligned to support SC strategy.

How is Strategic Fit Achieved?

Three basic steps to achieve strategic fit
 1. Understanding the customer and SC uncertainty: a company must first understand
the customer needs for each targeted segment and the uncertainty these needs
impose on the SC. These needs helps to define the desired cost and service
requirements. The uncertainty of the CN helps to identify the extent of
unpredictability of demand and supply to prepare.
2. Understanding the SC capabilities: Each of the many types of SC is designed to
perform different tasks well, a company must understand what its supply chain is
designed to do well.
3. Achieving strategic fit: if a mismatch occurs between the SC does particularly
well and the desired customer needs, then the company need to restructure the
SC to support the competitive strategy or alter its competitive strategy.

1.Understanding the Customer and SC uncertainty

Understand the needs of the customer segment that the company wants to serve. Different
segments have different needs. The following general customer attributes are relevant
demands:
- Quantity of the product needed in each lot
- Response time that customers are willing to tolerate
- Variety of products needed
- Service level required
- Price of the product
- Desired rate of innovation in the product
Goal is to identify one key measure for combining all these attributes. This single measure
helps defining what the SC should do particularly well.

Implied demand uncertainty is demand uncertainty imposed on the SC because of the

customer needs it seeks to satisfy. Distinction between demand uncertainty and implied
demand uncertainty.
- Demand uncertainty: reflects the uncertainty of customer demand for a product.
- Implied demand uncertainty: is resulting uncertainty for only the portion of the
demand that the SC plans to satisfy based on the attributes the customer desires.

Impact of customer need on implied demand uncertainty

Customer need: Causes implied demand uncertainty to:
Range of quantity required Increase because a wider range of the
increases quantity required
implies greater variance in demand
Lead time decreases Increase because there is less time in which
to react to
orders
Variety of products required Increase because demand per product
increases becomes less
predictable
Required service level Increase because the firm now has to handle
increases unusual
surges in demand
Rate of innovation increases Increase because new products tend to have
more
uncertain demand
 Number of channels through Increase because customer demand per
which channel
product may be acquired becomes less predictable
increases
The implied demand uncertainty is often correlated with other characteristics of demand.

2.Understanding the SC capabilities

Supply chain responsiveness includes a SC’s ability to do the following: 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 lever, and handle supply uncertainty.
To increase responsiveness there are additional costs that lower efficiency. Companies
must look at the cost-responsiveness efficient frontier (try looking for lowest cost possible
for a given level of responsiveness).

Responsive spectrum:

Highly efficient Somewhat Somewhat Highly

efficient responsive responsive
Integrated steel Hanes apparel: a Most automotive Seven-Eleven
mills: Japan:
production traditional make- production: changing
scheduled to- delivering merchandise
for weeks or stock a large variety of mix by location
months in manufacturer and
advance with with production products in a few time of day.
little lead
variety or time of several weeks.
flexibility. weeks.

3.Achieving strategic fit

Final step is to ensure that the degree of SC responsiveness is consistent with the implied
uncertainty. Goal is to target high responsiveness for a SC facing high implied uncertainty,
and efficiency for a SC facing low implied uncertainty.

Zone of Strategic Fit:

In a SC with different stages from supplier, to manufacturer, to retailer, each stage can
achieve a level of responsiveness by adjusting the role of each of its stages. Making one
stage more responsive allows other stages to focus on becoming more efficient. Best
combination depends on efficiency and flexibility available at each stage.
Tailoring the Supply Chain for Strategic Fit

Figure 2-6. Different Roles and Allocations of Implied Uncertainty for a Given Level of
Supply Chain Responsiveness

Supply Chain Levers to Deal with Uncertainty

There are five basic levers that can be used to deal with uncertainty in a SC:
1. Capacity (both excess and flexible capacity)
2. Inventory (one of most used levers to deal with uncertainty, but also consider the
cost)
3. Time (combination of speedy supply and willingness of customers to wait)
4. Information (uncertainty is absence of right information)
5. Price (vary the price over time can help a SC uncertainty)
A SC must find the right balance of these levers to deal with uncertainty. When capacity is
cheap, it might be wise to overinvest here to save on other levers.

Expanding Strategic Scope

The scope of strategic fit refers to the functions within the firm and stages across the SC
that devise an integrated strategy with an aligned objective. At one extreme, every
operation in one function/stage devises its own independent strategy, at other extreme all
functional areas across all stages of SC devise aligned strategies that maximize the SC
surplus.

Intraoperation Scope: Minimizing Local Cost

Each stage of the SC devises its strategy independently. The resulting collection of
strategies typically does not align and results in conflict and loss of SC surplus.

Intrafunctional Scope: Minimizing Functional Cost

Align all operations within a function. All SC functions, including sourcing,
manufacturing, warehousing, and transportation, has to align their strategies to minimize
total functional cost. This results that products may be sourced from a higher-cost local
supplier if the resulting decrease in inventory and transportation costs more than
compensated for the higher unit cost. Weakness with intrafunctional is that different
functions within a firm may have conflicting objectives (e.g. sales want more revenue and
manufacturing lower cost).

Interfunctional Scope: Maximizing Company Profit

Align strategies across all functions within the firm. Goal here is to maximize company
profit. This is achieved by developing alignment in strategies between all functions.
Weakness may be that this can lead to conflict between stages of the SC (e.g. supplier
and manufacturer both want other party to hold inventory for own profit).

Intercompany Scope: Maximizing Supply Chain Surplus

Work together with different companies to create the best SC surplus. Perhaps flexibility
on both ends works best, a good collaboration is key.

Agile Intercompany Scope

This refers to a firm’s ability to achieve strategic fit when partnering with SC stages that
change over time. A company may select both a responsive as well as an efficient
supplier for a product. This way the firm may use the efficient supplier at a low cost to
supply the predictable portion of demand and as a backup use the responsive supplier
when demand exceeds. Agility to shift demand between efficient and responsive supplier
increases the overall SC surplus in an unpredictable environment.

Summaries
Strategic fit is crucial to a company’s overall success
Strategic fit requires that all functions within a firm and stages in the SC target the same
goal-one that is consistent with customer needs. A lack of strategic fit between the
competitive and SC strategies can result in the SC taking actions that are not consistent
with customer needs, leading to a reduction in SC surplus and a decrease in SC
profitability.

Achievement of strategic fit between SC and competitive strategy

To achieve strategic fit, a company must first understand the needs of the customers
being served and the capabilities of all supply sources. Both the needs and the
capabilities should be used to identify the implied uncertainty that the SC must absorb.
The second step is to understand the SC’s capabilities in terms of efficiency and
responsiveness. The key to strategic fit is ensuring that SC responsiveness is consistent
with customer needs, supply capabilities, and the resulting implied uncertainty. Tailoring
the SC is essential to achieving strategic fit when supplying a wide variety of customers
with many products through different channels.
The main levers to deal with uncertainty in a SC
The implied uncertainty that a SC needs to absorb depends on the needs of the customer
segment(s) targeted. Capacity, inventory, time, information, and price are the five levers
that a SC can use to deal with this uncertainty. Investing more in one lever generally
allows the SC to invest less in one or more of the other levers. To achieve strategic fit, a
SC must find the right balance between investments in the five levers to effectively serve
the target customer segment(s).

Importance of expanding the scope of strategic fit across the SC

The scope of strategic fit refers to the functions and stages within a SC 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 SC surplus. As the scope of strategic fit is enlarged to
include the entire SC, actions are evaluated based on their impact on overall SC
performance, which helps increase SC surplus.