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Kumkum Sultana 26th Batch, Management, CU

Chapter Two
Supply Chain Performance: Achieving Strategic Fit and Scope
Competitive Advantage and SCM

A value chain is a collection of activities namely, primary activities and support activities that
are performed by a company to create value for its customers. Primary activities have an
immediate effect on the production, maintenance, sales and support of the products or services
to be supplied while secondary activities support the primary activities.

All the activities in the value chain

contribute to customer value, and the
cumulative costs in the chain determine
the difference between the customer
value and producer cost.

A firm gains competitive advantage by

performing these strategically important
activities more cheaply or better than its
competitor.
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Kumkum Sultana 26th Batch, Management, CU

The Two Vectors of Strategic Direction

To gain competitive advantage over its rivals, a firm must deliver value to its customers
through performing value chain activities more efficiently than its competitors or by
performing the activities in a unique way that create greater differentiation.

The most profitable competitor in any industry sector tends to be the lowest cost producer or
the supplier providing a product with the greatest perceived differentiated values

Competitive strategy and Supply Chain Strategy

• Competitive Strategy defines the set of customer needs a firm seeks to satisfy through its
products and services (relative to its competitors). A firm’s competitive strategy is defined
based on its customers’ priorities such as
- Product cost,
- Delivery time,
- Variety, and
- Quantity
• Supply Chain Strategy specifies
- What the operations, distribution, and service functions
- Whether performed in house or outsourced should do particularly well.
• Two Key Points

- There is no right supply chain strategy independent of competitive strategy

- There is a right supply chain strategy for a given competitive strategy.
• The value chain of a typical organization, integrates the competitive and supply chain
strategies
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Kumkum Sultana 26th Batch, Management, CU

Achieving Strategic Fit

Strategic fit:

Strategic fit refers to consistency between customer priorities that the competitive strategy
hopes to satisfy and the supply chain capabilities that the supply chain strategy aims to build.

A company may fail either because of a lack of strategic fit or because it’s overall supply
chain design, processes and resources do not provide the capabilities to support the desired
strategic fit.

For example, a situation in which marketing is publicizing a company’s ability to provide a

large variety of products quickly; simultaneously, distribution is targeting low cost means of
transportation. In this situation, it is likely that distribution will delay orders so it can get better
transportation economies by grouping orders together or using inexpensive but slow modes of
transportation.

How is Strategic Fit Achieved? ***

To achieve strategic fit, a firm must ensure that its supply chain capabilities support its ability
to satisfy the needs of the targeted customer segments. There are three basic steps to achieving
this strategic fit-

Step 1: Understanding the Customer and Supply Chain Uncertainty: First, a company must
understand the needs of the customer segment being served and the uncertainty these needs
impose on the supply chain.

• Understanding customer needs help the company to define the desired cost and service
requirements. Each customer in a particular segment tend to have similar needs, whereas
customers in a different segment can have very different needs. In general, customer needs
from different segments varies along several attributes, as follows:
a) Quantity of product needed in each lot: d) Service level required:
b) Response time that customers are e) Price of the product:
willing to tolerate: f) Desired rate of innovation in the
c) Variety of products needed: product

• On the other hand, the supply chain uncertainty helps the company to identify the extent
of the unpredictability of demand and supply that the supply chain must be prepared for.
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Each customer need can be translated into the metric of implied demand uncertainty, which
is demand uncertainty imposed on the supply chain because of the customer needs it seeks
to satisfy.

Thus first step to achieve strategic fit is to

understand customers by mapping their needs on
the implied uncertainty spectrum.

Figure: The Implied Uncertainty (Demand and Supply) Spectrum

Step 2: Understanding the Supply Chain Capabilities:

• A company must understand its supply chain capabilities (what the supply chain does well
is consistent with target customer’s needs) by mapping the supply chain on the
responsiveness spectrum.
• Two extremes of the responsiveness spectrum are “Highly Efficient Supply Chain”
and “Highly Responsive Supply Chain”.
• Supply chain efficiency is the inverse of the cost of making and delivering the product
to the customer.
• Supply chain responsiveness is the ability to

 Respond to wide ranges of  Build highly innovative

quantities demanded products
 Meet short lead times  Meet a very high service
level
 Handle a large variety of
products

• There is a cost to achieving responsiveness.

• Increasing responsiveness results in higher costs that lower efficiency.
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Kumkum Sultana 26th Batch, Management, CU

Figure: The Responsive Spectrum

• The more capabilities constituting responsiveness a supply chain has, the more responsive
it is.

Step 3: Achieving strategic fit:

• After mapping the level of implied demand uncertainty and understanding the supply chain
position on the responsiveness spectrum the final step is to ensure that the degree of supply
chain responsiveness is consistent with the implied uncertainty.
• The goal is to target high
responsiveness for a supply
chain facing high implied
uncertainty, and high efficiency
for a supply chain facing low
implied uncertainty.
• Because increasing implied
demand uncertainty from
customers and supply sources is
best served by increasing
responsiveness from the supply chain. Figure: Zone of Strategic Fit
• This relationship is represented by “Zone of Strategic Fit”.
• For a high level performance, companies should move their competitive strategy (and
resulting implied uncertainty) and supply chain strategy (resulting responsiveness) toward
the zone of strategic fit.
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Ques: Discuss the attributes along which customer needs from different segments varies.

a) Quantity of product needed in each lot: An emergency order for material needed to repair
a production line is likely to be small, whereas an order for material to construct a new
production line is likely to be large.

b) Response time that customers are willing to tolerate: The tolerable response time for the
emergency order is likely to be short, whereas, the allowable response time for the
construction order is likely to be long.

c) Variety of products needed: A customer may place a high premium on the availability of all
parts of an emergency repair order from a single supplier, this may not be the case for the
construction order.

d) Service level required: A customer placing an emergency order expects a high level product
availability. This customer may go elsewhere if all parts of the order are not immediately
available. This is not happen in the case if the construction order, for which a long lead
time is common.

e) Price of the product: The customer placing the emergency order tend to be much less
sensitive to price than the customer placing the construction order.

f) Desired rate of innovation in the product: Customers at a high end department store expect a
lot of innovation and new designs in the store’s apparel. Customers at Walmart may be less
sensitive to new product innovation.

Ques: Differences between Demand Uncertainty and Implied Demand Uncertainty

Demand Uncertainty reflects the uncertainty of customer demand for a product.

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

Implied demand uncertainty related to customer needs and product attributes.

For example, a firm supplying only emergency orders for a product will face a higher implied
demand uncertainty than a firm that supplies the same product with a long lead time, as the
second firm has an opportunity to fulfill the orders evenly over the long lead time.
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Ques: How Various Customer Needs Affect Implied Demand Uncertainty? / What Are
the Factors that Influence Implied Demand Uncertainty? Define each of them. ****

Customer Need Factors Customer Need Causes implied demand

uncertainty to increase
because
Range of quantity: Range of quantity Range of quantity Wider range of quantity implies
measure how much or how many products increases greater variance in demand
are required to keep.
Lead time: Customer lead time is defined Lead time decreases Less time to react to orders
as the time it takes for a customer to
receive a product or service from the time
the customer places the order or performs
a purchase transaction.
Variety of products Variety of products Demand per product becomes
The total product offering expressed in required increases more disaggregated
terms of width and depth.
Width: Number of types of product
category Depth: Amount of choice of
product and brand variation offered within
a product category.
Number of channels Number of channels Total customer demand is now
A distribution channel is a chain increases disaggregated over more
intermediaries through which a good or channels.
service passes until it reaches the end
consumer.
Rate of innovation Rate of innovation New products tend to have more
Here innovation means new product with increases uncertain demand.
new design.
Required service level Required service Firm now has to handle unusual
Service level measures the performance of level increases waves in demand
a system. In supply-chain management
service level measure the performance of
inventory replenishment policies.
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Ques: Comparison of Efficient and Responsive Supply Chains***

Efficient Supply Chain Point of Differences Responsive Supply Chain

When a supply chain is able to Definition When a supply chain is able to satisfy
deliver goods in accordance with the customer requirements in a timely
customer’s expectations with least manner is referred to as Responsive
cost is referred to as Efficient Supply Chain.
Supply Chain.
Lowest Cost: Meet demand at the Primary Goal Quick Response: Respond quickly to
lower cost demand
Maximize performance at a Product Design Strategy Creates modularity to allow
minimum product cost postponement of product differentiation
Lower margins because price is a Pricing Strategy Higher margins because price isn't a
prime customer driver. prime customer driver.
Lower costs through high Manufacturing Strategy Maintain capacity flexibility to lessen
utilization. the impact of demand/ supply
uncertainty
Minimize inventory to lower cost. Inventory Strategy Maintain buffer inventory to deal with
demand/supply uncertainty.
Reduce, but not at expense of Lead Time Strategy Reduce aggressively even if the costs
greater costs. are significant
Select based on cost and quality Supplier Selection Strategy Select based on speed, flexibility,
reliability, and quality.
Greater reliance on low cost modes Transportation Strategy Greater reliance on responsive (fast)
modes

Ques: Cost-Responsiveness Efficient Frontier

• Cost-Responsiveness Efficient Frontier is the curve showing the lowest possible cost for
a given level of responsiveness.
• Lowest cost is defined based on the existing technology, not every firm is able to operate
on the efficient frontier, which represents the cost responsiveness performance of the best
supply chains.
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Kumkum Sultana 26th Batch, Management, CU

• A firm that is not on the efficient frontier can improve both its
responsiveness and its cost performance by moving toward
the efficient frontier.
• In contrast, a firm on the efficient frontier can improve its
responsiveness only by increasing cost and becoming less
efficient. Such a firm must then make a trade-off between
efficiency and responsiveness.
• Of course, firms on the efficient frontier are also continuously improving their process and
changing technology to shift the efficient frontier itself.
• Given the trade-off between cost and responsiveness, a key strategic choice for any supply
chain is the level of responsiveness it seeks to provide.

Issues Affecting Strategic Fit

Multiple Products and Customer Segments

- Supply chains for each product or not?

Many firms are required to achieve strategic fit while serving many customer segments with a
variety of products across multiple channels. In such a scenario, a “one size fits all” supply
chain cannot provide strategic fit, and a tailored supply chain strategy is required.

A tailor supply chain is able to be efficient when implied uncertainty is low and responsive
when it is high. By tailoring supply chain, a company can provide responsiveness to fast
growing products, customer segments, and channel, while maintaining low cost for mature
stable products and customer segments.

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.

• Toward the beginning stages of a product’s life cycle

1. Demand is very uncertain, and supply may be unpredictable.
2. Margins are often high, and time is important to gaining sales,
3. Product availability is most important to capturing the market,
4. Cost is often a secondary consideration.

In such a situation, responsiveness is the most important characteristics of the supply chain.
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• As the product becomes a commodity product later in its life cycle,

1. Demand has become more certain, and supply is predictable,
2. Margins are lower as an increase in competitive pressure,
3. Price becomes a significant factor in customer choice.

In such a situation, efficiency becomes the most important characteristics of the supply chain.

• Examples: pharmaceutical firms, Intel.

• Thus as the product goes through the life cycle, the supply chain changes from one
emphasizing responsiveness to one emphasizing efficiency

Competitive Strategy Changes over Time

• In economic downtimes people go for a low cost retailer, in uptimes they go for special
products (high end retailer).
• Moreover competitive pressures change over time. More competitors may result in an
increased emphasis on variety at a reasonable price.
• Thus changes in the economic situation and competitive landscape, force companies to
change their competitive strategy. The supply chain must change to meet these changing
competitive conditions.

Expanding Strategic Scope

Scope of strategic fit refers to the functions and stages within a supply chain that devise an
integrated strategy with a shared objective.

• At one extreme, every operation within each functional area devises its own independent
strategy, with the objective of optimizing its local performance. In this case, the scope of
strategic fit is restricted to an operation in a functional area within a stage of the supply
chain.
• At the opposite extreme, all functional areas across all stages of the supply chain devise
aligned strategies that maximize supply chain surplus. In this case, the scope of strategic fit
extends tot eh entire supply chain.

Five Categories: 1. Intracompany Intra-operation scope: The most limited scope. Each
stage of the supply chain devised its strategy independently with the aim to minimize its own
costs. In such a setting, the resulting collection of strategies typically does not align, resulting
in conflict.
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2. Intracompany Intra-functional scope: With intracompany intra-functional scope, firms

attempt to align all operations with in a function. All supply chain functions, including
sourcing, manufacturing, warehousing, and transportation, has to align their strategy to
minimize total functional cost. As a result, product can be sourced from a higher-cost local
supplier because the resulting decrease in inventory and transportation costs more than
compensated for the higher unit cost.
1. Intracompany Inter-functional scope: With the intracompany inter-functional scope, the goal
is to maximize company profit. All functional strategies are developed to align with one
another and with the competitive strategy.
2. Intercompany Inter-functional scope: The intercompany inter-functional scope of strategic
fit requires firms to evaluate every action in the context of the entire supply chain. This
broad scope increases the size to the surplus to be shared among all stage of the supply
chain.
3. Flexible Intercompany inter-functional scope:
Physically, the participants in the supply
chain keep changing, products keep changing, technologies keep changing, and facilities
keep changing.
Mathematically, there are
changes in number
of variables and variable
values. Flexible intercompany
inter-functional scope refers
to a firm’s ability to achieve
strategic fit in a changing
environment.

Ques: Compare implied demand uncertainty of a large super store such as ‘Agora’ and
a small grocery at your locality***

• When customers go to a large super store such as Agora, they go there for the convenience
of a nearby store and are not necessarily looking for the lowest price. Implied demand
uncertainty would be high as customers are looking for a variety of products and demand
levels are hard to predict.
• Implied demand uncertainty for a small grocery tends to be low. Shoppers are typically
repeat customers and have a constant demand level. Customer demand can be more
predictable. The grocery supply chain must be responsive by receiving produce quickly to
ensure freshness and have a high service level. Supermarket supply chains tend to be well-
established and can improve strategic fit by emphasizing speed to maintain freshness, hence
perceived quality. Customer is willing to tolerate less variety.