Supply Chain Management Chapter 2: Supply Chain Performance - Achieving Strategic Fit and Scope

A company's competitive strategy defines, relative to its competitors,

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the set of customer needs that it seeks to satisfy through its products and services.

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product development strategy

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specifies the portfolio of new products that a company will try to develop. It also dictates whether the development effort will be made internally or outsourced.

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A marketing and sales strategy specifies

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how the market will be segmented and how the product will be positioned, priced, and promoted.

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A supply chain strategy determines

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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 a specification of whether these processes will be performed in-house or outsourced.

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Strategic fit requires that both the competitive and supply chain strategies of a company have aligned goals. It refers to consistency between the customer priorities that the competitive strategy hopes to satisfy and the supply chain capabilities that the supply chain strategy aims to build. For a company to achieve strategic fit, it must accomplish the following:

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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.

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There are three basic steps to achieving this strategic fit,

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1. Understanding the customer and supply chain uncertainty:

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First, a company must understand the customer needs for each targeted segment and the uncertainty these needs impose on the supply chain. These needs help the company define the desired cost and service requirements. The supply chain uncertainty helps the company identify the extent of the unpredictability of demand and supply that the supply chain must be prepared for.

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2. Understanding the supply chain capabilities:

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Each of the many types of supply chains is designed to perform different tasks well. A company must understand what its supply chain is designed to do well.

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3. Achieving strategic fit:

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If a mismatch exists between what the supply chain does particularly well and the desired customer needs, the company will either need to restructure the supply chain to support the competitive strategy or alter its competitive strategy.

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1. Understanding the customer and supply chain uncertainty:

Demand uncertainty

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reflects the uncertainty of customer demand for a product.

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Implied demand uncertainty,

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is the resulting uncertainty for only the portion of the demand that the supply chain plans to satisfy based on the attributes the customer desires.

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1. Products with uncertain demand are often less mature and have less direct competition. As a result, margins tend to be high.

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2. Forecasting is more accurate when demand has less uncertainty.

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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. Increased implied demand uncertainty thus leads to both higher oversupply and a higher stockout rate.

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4. Markdowns are high for products with greater implied demand uncertainty because oversupply often results.

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2. Understanding the supply chain capabilities:

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.

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Supply chain responsiveness includes a supply chain's ability to do the following:

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• 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

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Supply chain efficiency

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the inverse of the cost of making and delivering a product to the customer. Increases in cost lower efficiency. For every strategic choice to increase responsiveness, there are additional costs that lower efficiency.

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The cost-responsiveness efficient frontier

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The higher the cost, the higher the responsiveness

3. Achieving strategic fit:

The goal is to target high responsiveness for a supply chain facing high implied uncertainty, and efficiency for a supply chain facing low implied uncertainty.

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the "zone of strategic fit"

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For a high level of performance, companies should move their competitive strategy (and resulting implied uncertainty) and supply chain strategy (and resulting responsiveness) toward the zone of strategic fit.

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The next step in achieving strategic fit is to assign roles to different stages of the supply chain that ensure the appropriate level of responsiveness.

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In contrast, another approach for responsiveness may involve the retailer holding little inventory. In this case, the retailer does not contribute significantly to supply chain responsiveness, and most of the implied demand uncertainty is passed on to the manufacturer.

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The figure shows two supply chains that face the same implied uncertainty but achieve the desired level of responsiveness with different allocations of uncertainty and responsiveness across the supply chain. Supply Chain I has a very responsive retailer that absorbs most of the uncertainty, allowing (actually requiring) the manufacturer and supplier to be efficient. Supply Chain II, in contrast, has a very responsive manufacturer that absorbs most of the uncertainty, thus allowing the other stages to focus on efficiency.

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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.

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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.

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Toward the beginning stages of a product's life cycle:

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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.

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As the product becomes a commodity product later in its life cycle, the demand and supply characteristics change. At this stage, it is typically the case that:

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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.

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The intraoperation scope

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has each stage of the supply chain devising its strategy independently.

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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 supply 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.

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Agile intercompany scope

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refers to a firm's ability to achieve strategic fit when partnering with supply chain stages that change over time. Firms must think in terms of supply chains consisting of many players at each stage.

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Challenges to Achieving and maintaining Strategic Fit

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Increasing product variety and shrinking life cycles

Globalization and increasing uncertainty

Fragmentation of supply chain ownership

Changing technology and business environment

The environment and sustainability