Achieving Strategic fit
Competitive and Supply Chain Strategies
Competitive strategy defines the set of customer needs a firm
seeks to satisfy through its products and services
Walmart – high availability, value for money (low price)
XYZ Co selling MRO products offering more than 500,000
products , catlog and website – convenience, availability and
responsiveness.
Blue Nile – online diamond retail, 90,000 stones – variety,
wait, cannot touch and feel
Zales – retail stores – limited, personal touch, fast response
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
All functional strategies must support one another and the
competitive strategy
The Value Chain
• Dell – initial decision to sell direct, 2007 decision to sell PCS
through resellers
• CISCO – contract manufacturers - sc strategy
• SC strategy – include design decision regd inventory,
transportation, operation facilities and information flows.
• Amazon – build own warehouses and use distributors of other
products .
• Toyota – decision to have production facilities in each of its
major markets
• Seven Eleven success because of excellent fir of functional
strategies
Achieving Strategic Fit
What is a Strategic fit ?
Customer
Competitive Strategies priorities
Aligned Goals
Supply Chain Strategies Supply Chain
Capabilities
Achieving Strategic Fit
1. The competitive strategy and all functional strategies
must fit together to form a coordinated overall
strategy.
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.
Achieving Strategic Fit
Co. 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
Ex: Marketing – large variety of products quickly
Distribution – targeting lowest cost means of
transportation
Ex: Retailer high level of variety – low level
inventory but select suppliers/carriers (low price)
Achieving Strategic Fit - DELL
1993 – 2006 Starting 2007
Large variety, customized Change in competitive strategy
products, reasonable price Selling PCs thru Walmart
Focus on customization so SC Limited variety
designed to be responsive Inventory of peripherals need
Assembly facilities owned to be available
designed for flexible factor Production changed to MTS
Low inventory hence supplier/ model
carriers highly responsive Contract manufacturers –
Sony monitor merged by Foxconn (low cost focus)
carriers with PCs manufactured for DELL
Focus on Responsiveness Greater focus on low cost
How is Strategic Fit Achieved?
1. Understanding the customer and supply
chain uncertainty
The supply chain uncertainty helps co define the extent of
unpredictability of demand and supply that the supply chain must be
prepared for.
2. Understanding the supply chain capabilities
Many types of supply chain designed for certain tasks. Co
needs to understand what is supply chain can do best
3. Achieving strategic fit
Customer need MISMATCH with What SC does best, then
◦ Alter competitive strategy (can we????) OR
◦ Restructure the Supply Chain to support the
Competitive strategy
Step 1: Understanding the Customer and
Supply Chain Uncertainty
HURRY &
CONVENIENCE
Vs
WAIT & LOW PRICE
Step 1: Understanding the Customer and
Supply Chain Uncertainty
Emergency Regular
Quantity of product needed in each lot Small Large
Response time customers will tolerate Short Long
High premium Low price
Variety of products needed
for availability
Immediate Long lead
Service level required
time
Price of the product Less sensitive Highly
sensitive
Desired rate of innovation in the High end (new Regular
product designs Ex: Brand
Step 1: Understanding the Customer and
Supply Chain Uncertainty
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
Ex: Firm catering to emergency orders face higher implied
demand uncertainty than firm supplying regular (opportunity
to fulfil due to long lead time)
EX: Raise in level of service should meet higher percentage
of actual demand, forcing it to prepare for rare surges of
demand
Customer Needs and
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
Number of channels through Increase because the total customer demand
which product may be per channel becomes less predictable
acquired increases
Rate of innovation increases Increase because new products tend to have
more uncertain demand
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 oversupply often results.
Implied Uncertainty and Other
Attributes
Low Implied High Implied
Uncertainty Uncertainty
Product margin Low High
Average forecast error 10% 40% to 100%
Average stockout rate 1% to 2% 10% to 40%
Average forced season-end
0% 10% to 25%
markdown
Adapted from Marshall L Fisher. “What is the Right supply Chain for your
product?” Harvard Business Review (March – April 1997
Impact of Supply Source Capability
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
Adapted from Hau L Lee. “Aligning supply Chain Strategies with Product
Uncertainties” California Management Review (Spring 2002)
Implied Uncertainty
(Demand and Supply) Spectrum
Impacted by life cycle position of product. New products have
higher supply uncertainty than mature products
Step 1 - Key Point
The first step in achieving strategic fit between
competitive and supply chain strategies is to
understand customers and supply chain
uncertainty.
Uncertainty from the customer and the supply
chain can be combined and mapped on the
implied uncertainty spectrum.
Step 2: Understanding Supply Chain
Capabilities
How does the firm best meet demand?
Supply chain responsiveness 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 high service level
◦ Handle supply uncertainty
Step 2: Understanding Supply Chain
Capabilities
Responsiveness comes at a cost
Supply chain efficiency is the inverse to the cost of
making and delivering the product to the customer
EX: To respond to wider demand, we need to expand
capacity, increases cost
The cost-responsiveness efficient frontier curve shows
the lowest possible cost for a given level of
responsiveness
Increases in cost lower efficiency.
For every strategic choice to increase responsiveness, there are
additional costs that lower efficiency
Cost-Responsiveness Efficient Frontier
• Lowest cost defined based
on existing technology
• Not every firm operate on
efficient frontier
• Can improve responsiveness
and become less efficient
(increase cost)
• Trade off between efficiency
and responsiveness
• Firms on efficient frontier –
continuously improving
processes, technology to
shift efficient frontier
Responsiveness Spectrum
Seven Eleven responds quickly to orders, store managers place orders for
replenishment orders less than 12 hours before they are supplied
Step 2- Key Point
The second step in achieving strategic fit
between competitive and supply chain
strategies is to understand the supply chain
and map it on the responsiveness spectrum.
Step 3: Achieving Strategic Fit
Ensurethat the degree of supply chain
responsiveness is consistent with the
implied uncertainty
Goal – To target high responbsiveness for a supply chain facing high
implied uncertainty and efficiency for a supply chain facing low
implied uncertainty
Zone of Strategic Fit
For a high level
performance,
companies should
move their
competitive strategy
(and resulting implied
uncertainty)
and
supply chain
strategy (and resulting
responsiveness)
towards the zone of
strategic fit.
Step 3: Achieving Strategic Fit
Assign roles to different stages of the supply chain
that ensure the appropriate level of responsiveness
EX: IKEA – 40 countries- stylish furniture at reasonable cost – limits variety – modular –
large scale stores – decrease implied uncertainty – stock inventory (absorb uncertainty) –
supply from stock – allows replenishment orders more stable and predictable. SC passes litlle
uncertainty to manufacturer (low cost country and efficiency focus). IKEA provides
responsiveness in SC by stores absorbing most of uncertainty and being responsive,
suppliers absorbing little and being efficient.
EX: XYZ Co manufacturer of furniture. Manufacture 1000s of furniture every week to
supply across country within 3 weeks. Retailers allow customer to choose from a wide variety
of styles and promise relatively quick delivery. High level of implied uncertainty on SC.
Retailer carries no inventory and pass most of the uncertainty to manufacturer. Retailer can
be efficient. XYZ Co. choice of uncertainty to pass to suppliers – more raw material
inventories, supplier become efficient, if it hold less inventory then supplier must become
more responsive.
Roles and Allocations
Step 3: Achieving Strategic Fit
To achieve complete strategic fit, firms must
ensure that all functions maintain consistent
strategies that support the competitive strategy
Efficient and Responsive Supply Chains
Efficient Supply Chains Responsive Supply Chains
Primary goal Supply demand at the lowest cost Respond quickly to demand
Create modularity to allow
Product design Maximize performance at a
postponement of product
strategy minimum product cost
differentiation
Lower margins because price is a Higher margins because price is not
Pricing strategy
prime customer driver a prime customer driver
Maintain capacity flexibility to
Manufacturing
Lower costs through high utilization buffer against demand/supply
strategy
uncertainty
Inventory Maintain buffer inventory to deal
Minimize inventory to lower cost
strategy with demand/supply uncertainty
Lead-time Reduce, but not at the expense of Reduce aggressively, even if the
strategy costs costs are significant
Select based on speed, flexibility,
Supplier strategy Select based on cost and quality
reliability, and quality
Step 3- Key Point
The final step in achieving strategic fit is to
match supply chain responsiveness with the
implied uncertainty from demand and supply.
The supply chain design and all functional
strategies within the firm must also support the
supply chain’s level of responsiveness.
Tailoring the Supply Chain
Achieve strategic fit while serving many customer segments
with a variety of products across multiple channels
Ex: Zara sells trendy items with unpredictable demand
(responsive SC) along with basics (white T shirts) (efficient SC)
Requires sharing some links in the supply chain with some
products, while having separate operations for other links
Responsiveness –
• use same lines, different modes for distribution
• Use regional warehouses
Tailoring – hi tech, pharma
Changes Over 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
Introductory phase corresponds to high implied
uncertainty, given high demand uncertainty and hence
high need of product availability
Changes Over 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
choice
Supply Chain must change
Key Point
When supplying multiple customer
segments with a wide variety of
products through several channels,
a firm must tailor its supply chain
to achieve strategic fit.
Expanding Strategic Scope
Scope of strategic fit – the functions within the firm and stages
across the supply chain that devise an integrated strategy with
an aligned objective
Functional area devises independent strategy to excel local
performance at the other end of the spectrum, all functional
areas devise aligned strategies for maximizing supply chain
surplus
• Intraoperation Scope: Minimize Local Cost View
◦ Each stage of the supply chain devises strategy independently
Expanding Strategic Scope
Intrafunctional Scope: Minimizing 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
Expanding Strategic Scope
Intercompany Scope: Maximize Supply Chain
Surplus
◦ Supplier and customer work together and share information
to reduce total cost and increase supply chain surplus
Agile intercompany scope – a firm’s ability to
achieve strategic fit when partnering with supply
chain stages that change over time
Key Point
The intercompany scope of strategic fit requires firms to
evaluate every action in the context of the entire supply
chain. This broad scope increases the size of the surplus
to be shared among all stages of the sup- ply chain. The
intercompany scope of strategic fit is essential today
because the competitive playing field has shifted from
company versus company to supply chain versus supply
chain. A company’s partners in the supply chain may
well determine the company’s success, as the company
is intimately tied to its supply chain.
Challenges
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 fluctuations in exchange rates, global demand,
and the price of crude oil affecting supply chain
performance
Challenges
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
Challenges
Changing technology and business
environment
◦ Changes in customer needs and technology may
force a firm to rethink their supply chain strategy to
maintain strategic fit
The environment and sustainability
◦ Growing in relevance and must be accounted for
when designing supply chain strategy
◦ Opportunities may require coordination across
different members of the supply chain
Key Point
Many challenges, such as rising product
variety and shorter product life cycles,
have made it increasingly difficult for
supply chains to achieve strategic fit.
Overcoming these challenges offers a
tremendous opportunity for firms to use
supply chain management to gain
competitive advantage.
INDIAN RETAIL SECTOR
What different models of supply chains do
you visualize emerging in the transforming
Indian retail sector?
What trends do you see in in the emerging
Indian supply chain models that suggest
conscious attempts at achieving proper
strategic fit between business strategies
and supply chain strategies?
How do you see the Indian retail supply
chains becoming role models for supply
chains in other sectors?
End of topic
