Supply Chain Performance:

Achieving Strategic Fit

A
Presentation
By
Prof. Pawan K. Chugan
Institute of Management
Nirma University,
Ahmedabad
 Supply Chain Performance:
Outline
Achieving Strategic Fit

Competitive and supply chain strategies

and
Achieving strategic fit

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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
(It is relative to its competitors)
Wal-Mart: high availability of variety of products of reasonable
quality at low prices.
McMaster-Carr: sells maintenance, repair and operations (MRO)
products. More than 5,00,000 products through catalogue and
website. Its competitive strategy is built around providing the
customer with convenience, availability and responsiveness. It
does not compete based on low price.
Clearly the competitive strategy of Wal-Mart is different from
that of McMaster-Car

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 Competitive and Supply
Chain Strategies
Blue Nile: On line retailing for diamonds. Variety of diamonds
through its website with significant lower margins than its brick-
and-mortar competition. Customers, however, have to wait to get
jewellery and do not have opportunity to touch and see it before
purchase (though Blue Nile provide 30 days return period). It
offers over 70,000 stones on its sites
Zales: sells diamond jewellery through retail outlets. Customer
can walk into retail store, be helped by the sales person, and leave
immediately with a diamond ring. The available variety however,
is limited and a typical Zales store carries less than 1000 stones.
In each of the above four cases, the competitive strategy is
defined based on how customer prioritizes product cost, delivery
time, variety, and quality
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 Competitive and Supply
Chain Strategies
• A McMaster-Carr customer places greater emphasis on
product variety and response time than on cost.
• A Wal-Mart customer, in contrast, places greater emphasis on
cost.
• A Blue Nile customer, purchasing online, places great emphasis
on product variety and cost
• A customer purchasing jewellery at Zales is most concerned
with fast response time and help in product selection.

Thus, a firm’s competitive strategy will be defined based on its

customers’ priorities.
Competitive strategy targets one or more customer segments and
aims to provide products and services that satisfy these
customers’ needs
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 Competitive and Supply Chain Strategies
Competitive Strategies and Supply Chain Strategies
Value Chain
• Value chain begins with new product development, which
creates specifications for the product.
• Marketing and sales strategies generate demand by publicizing
the customers’ prioriteis that the product / service will satisfy
and also brings customers’ input back to new product
development.
• Using new product specifications, operations transform inputs
to outputs to create the product
• Distribution takes the product to customer or brings customer
to products
• Service responds to customers’ requests during or after the
sales.
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 Competitive and Supply
Chain Strategies
These are the core processes or functions that must be
performed for successful sale.
Finance, accounting, information technology, and human
resources support and facilitate the functioning of the value
chain

Finance, Accounting, Information Technology, Human Resources

New Marketing
Product and Operations Distribution Service
Development Sales

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 Competitive and Supply
Chain Strategies
• Product development strategy: specifies the portfolio of new
products that the company will try to develop. It also dictates
whether the development efforts will be made internally or
outsources.
• Marketing and sales strategy: specifies how the market will be
segmented and product positioned, priced, and promoted
• Supply chain strategy:
– determines the nature of raw material procurement,
transportation of materials to and from the company,
manufacture of product or creation of service, distribution of
product to customer and any follow up service. Whether the
process will be in-house or outsourced.

Consistency and support between supply chain strategy,

competitive strategy, and other functional strategies is important
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 Achieving Strategic Fit
For any company to be successful, its supply chain
strategy and competitive strategy must fit together.

Strategic fit means that both the competitive and

supply chain strategies have aligned goals.
It refers to the consistency between the customers’
priorities that the competitive strategy hopes to
satisfy with its supply chain capabilities.
The issue of achieving strategic fit is key
consideration during supply chain strategy or design
phase.
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 Achieving Strategic Fit
A company may fail because of a lack of strategic fit
Or
because its overall supply chain design, processes
and resources do not provide the capabilities to
support the desired strategic fit.
If alignment is not achieved, conflict arise between
different functional goals within the firm, or
between the goals of different supply chain stages.
To elaborate on strategic fit let us see the example
of Dell and its Supply Chain
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 Supply Chain Performance: Achieving
Strategic Fit

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 How is Strategic Fit Achieved?
A competitive strategy will specify, either explicitly or
implicitly, one or more customer segments that the
company hopes to satisfy.
To achieve strategic fit a company must ensure that
its supply chain capabilities support its ability to
satisfy the targeted customer segments.
There are following three basic steps to achieving
this strategic fit:
• Step 1: Understanding the customer and supply
chain uncertainty
(unpredictability of demand, disruption, and delay that
supply chain must be prepared for)
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 Step 1: Understanding the Customer
and Supply Chain Uncertainty
First, a company must understand the customer
needs for each targeted segment and the
uncertainty these needs impose upon the supply
chain.
These need help the company define the desired
cost and service requirements.
The supply chain uncertainty helps the company
identify the extent of unpredictability - of
demand, disruption, and delay that supply chain
must be prepared for.
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 Step 1: Understanding the Customer and
Supply Chain Uncertainty
To understand the customer, a company must
identify the needs of the customer segment being
served. Let us compare 7-Eleven Japan and a
discounter such as Sam’s Club (a part of Wal-Mart).
When customers go to 7-Eleven to purchase
detergent, they go there for the convenience of a
nearby store and are not necessarily looking for the
lowest price.
In contrast, low price is very important to a Sam’s
Club customer. This customer may be willing to
tolerate less variety and even purchase very large
package sizes as long as the price is low.
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Step 1: Understanding the Customer and
Supply Chain Uncertainty
Even though customers purchase detergent at both
places, the demand varies along certain attributes.
In the case of 7-Eleven, customers are in a hurry
and want convenience.

In the case of Sam’s Club, they want a low price and

are willing to spend time getting it.
In general, customer demand from different
segments varies along several attributes as follows:
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Step 1: Understanding the Customer and
Supply Chain Uncertainty
In general, customer demand from different
segments varies along several attributes such as:
• Quantity of product needed in each lot
• Response time customers are willing to tolerate
• Variety of products needed
• Service level required
• Price of the product
• Desired rate of innovation in the product
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 Achieving Strategic Fit
• Understanding the Customer
– Lot size
– Response time Implied
– Service level Demand
– Product variety Uncertainty
– Price
– Innovation

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Step 1: Understanding the Customer and Supply Chain
Uncertainty
Demand Uncertainty V/s Implied Demand Uncertainty
Demand Uncertainty : reflects the uncertainty of
customer demand for a product
Implied Demand Uncertainty: in contrast is the resulting
uncertainty for only the portion of the demand that
supply chain plan to satisfy based on the attributes the
consumer desires. For example
a firm supplying only emergency orders for a product will
face a higher implied demand uncertainty than
a firm supply the same product with a long lead time, as
the second firm has an opportunity to fulfill the orders
evenly over a long lead time.
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 Step 1: Understanding the Customer
and Supply Chain Uncertainty
Demand Uncertainty V/s Implied Demand
Uncertainty

Both the product demand uncertainty and

various customer needs that the supply chain
try to fill, affect implied demand uncertainty.

Following table illustrates how various customer

needs affect implied demand uncertainty
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 Impact of Customer Needs on Implied Demand
Uncertainty
Customer Need Causes implied demand
uncertainty to increase because …
• Range of quantity required Wider range of quantity required
increases implies greater variance in demand
• Lead time decreases Less time to react to orders

• Variety of products required Demand per product becomes more

increases disaggregated
• Number of channels through Total customer demand is now
which product may be acquired disaggregated over more channels
increases
• Rate of innovation increases New products tend to have more
uncertain demand
• Required service level Firm now has to handle unusual
increases surges in demand
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 Step 1: Understanding the Customer and Supply
Chain Uncertainty
Implied demand uncertainty is often correlated with other
characteristics of demand (Fisher 1977)such as:
1. Product 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 stock-
out or an oversupply situation. Increased implied demand
uncertainty thus leads to both higher over-supply and a
higher stock-out rate.
4. Markdowns are high for products with high implied
2-21 demand uncertainty because over-supply often results
Correlation Between Implied Demand Uncertainty
and Other Attributes
Implied demand uncertainty is also related to customer needs
and product attributes as shown in the following table:

Attribute Low Implied High Implied

Uncertainty Uncertainty
Product margin Low High
Avg. forecast error 10% 40%-100%
Avg. stockout rate 1%-2% 10%-40%
Avg. forced season- 0% 10%-25%
end markdown
Source: Adapted from Fisher Marshall L. (1977), “What Is the Right Supply Chain
for Your Products?” Harvard Business Review, March –April, pp. 83-93
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Step 1: Understanding the Customer and
Supply Chain Uncertainty
Example of a product with low implied
demand uncertainty
• Table salt: has a very low margin, accurate demand
forecasts, low stock-out rates, and virtually no
markdowns. These characteristics match well with
Fisher’s Chart.
Example of a product with high implied
demand uncertainty
• Spectrum: a new cell phone has high implied
uncertainty, it will have high margin, very inaccurate
demand, high stock-out rates (if it is successful), and
large markdown if it is a failure. This too matches well
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Fisher’s Chart.
Step 1: Understanding the Customer and Supply Chain
Uncertainty
Along with demand uncertainty, it is important to consider
uncertainty resulting from the capability of the supply chain.
For example when a new component is introduced in the PC
industry, the quality yield of the production process tend to be
low and break-downs are frequent.
As a result, companies have difficulty in delivering according to
a well-defined schedule, resulting in high supply uncertainty for
PC manufacturers.
As the production technology matures and yields improve,
companies are able to follow a fixed delivery schedule,
resulting in low supply uncertainty.
The following table shows how various characteristics of supply
sources affect the supply uncertainty.
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 Step 1: Understanding the Customer
and Supply Chain Uncertainty
Impact of Supply Source Capability on Supply
Uncertainty
Supply Source Capability Causes Supply Unctainty to …
Frequent breakdowns Increase
Unpredictable and low yields Increase
Poor quality Increase
Limited supply capacity Increase
Inflexible supply capacity Increase
Evolving production process Increase

Source: Adapted from “Aligning Supply Chain Strategies with Product

Uncertainties”, Hau L. Lee, California Management Review (Spring 2002), 105-119
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 Step 1: Understanding the Customer
and Supply Chain Uncertainty
Supply uncertainty is also strongly affected by
the life cycle position of the product.
New products being introduced have higher supply
uncertainty because designs and production processes
are still evolving.
In contrast, mature products have less supply
uncertainty.
We can create a spectrum of uncertainty by combining
the demand and supply uncertainty.
The implied uncertainty spectrum is shown in the
following figure
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 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

Figure 2.2: The Implied Uncertainty (Demand and Supply)

Spectrum

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 Step 1: Understanding the Customer
and Supply Chain Uncertainty

Key Point for step -1

The first step in achieving strategic fit between
competitive strategies 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.
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 Step 2: Understanding the Supply Chain
In step 2, next question is…
• How does the firm best meet demand in that uncertain
environment?
Creating strategic fit is all about creating a supply chain
strategy that best meets the demand a company has
targeted given the uncertainty it faces.
• Now let us see the characteristics of supply chains and
categorize them based on different characteristics that
influence their responsiveness and efficiency.
• Supply chain responsiveness includes a supply chain’s
ability to do the following:
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 Step 2: Understanding the Supply Chain
– 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
These abilities are similar to many of the characteristics
of demand and supply that led to high implied
uncertainty.
The more of these abilities a supply chain has,
the more responsive is it.

Responsiveness, however, comes at cost.

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 Step 2: Understanding the Supply Chain
For example to respond a wide range of quantities
demanded, capacity must be increased, which increases
cost.
This increase in cost leads to another definition:
“Supply chain efficiency is the inverse of the cost of
making and delivering a product to the customer”.
Supply chain efficiency means : cost of making and
delivering the product to the customer.
Increases in cost , lower efficiency
For every strategic choice to increase responsiveness,
there are additional cost that lower efficiency.
Increasing responsiveness results in higher costs that
lower efficiency
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 Responsiveness Spectrum
The following diagram shows the responsiveness spectrum
and where some supply chains fall on this spectrum

Highly Somewhat Somewhat Highly

efficient efficient responsive responsive

1. Integrated 2. Hanes 3. Most 4. Seven-

steel mill: apparel automotive Eleven
production
1. Production scheduled weeks or months in advance with little variety or
flexibility.
2. A traditional make to order manufacturer with production lead time of
several weeks.
3. Delivering a large variety of products in a couple of weeks.
4.
2-32Changing merchandising mix by location and time of day
 Responsiveness Spectrum
7-Eleven Japan replenishes it stores with breakfast items
in the morning, lunch items in the afternoon, and dinner
items at night.
As a result, the available product variety changes by time
of day. It responds very quickly to orders, with store
managers placing replenishment orders less than 12
hours before they are supplied. The practice makes 7-
Eleven supply chain very responsive.

An efficient supply chain, in contrast, lowers cost by

eliminating some of its responsive capabilities. For
example, Sam’s Club sells a limited variety of products in
large package sizes. The supply chain is capable of low
costs, and the focus of this supply chain is clearly on
efficiency.
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 Step 2: Understanding the Supply Chain

Key Point for step -2

The second step in achieving strategic fit

between competitive strategies and supply
chain strategies is to understand the supply
chain and map it on the responsiveness
spectrum.

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 Step 3: Achieving Strategic Fit
After mapping the level of 1. implied uncertainty
and understanding the
2. supply chain position on responsiveness spectrum,
the third and 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

efficiency for a supply chain facing low implied

uncertainty.
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 Step 3: Achieving Strategic Fit
Example: McMaster-Carr
• Its Competitive strategy targets customers who value
having a large variety of MRO products delivered to
them within 24 hours.
• Given the large variety of products and rapid desired
delivery, demand from McMaster-Carr customer can be
characterized as having high implied demand
uncertainty.
• It has options of designing an efficient or responsive
supply chain.
• An efficient supply chain may carry less inventory and
maintain a level load on the warehouse to lower
picking and packing costs.
Contd…
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 Step 3: Achieving Strategic Fit
Example: McMaster-Carr
• If McMaster-Carr made these choices, it would
have difficulty supporting customer’s desire for a
wide variety of products that are delivered within
24 hours.
• To serve its customers effectively, McMaster-Carr
carries a high level of inventory and picking and
packing capacity.
• Clearly, a responsive supply chain is better suited
to meet the needs of customers targeted by it
even if it results in higher costs.
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 Step 3: Achieving Strategic Fit
Example: Barilla (Italian manufacturer of Pasta)
1. Pasta is a product with relatively stable customer
demand, giving it a low implied demand uncertainty.
Supply is also quite predictable.
2. Barilla could design a highly responsive supply chain
in which pasta is custom–made in very small batches
in response to customer orders and shipped via a
rapid transportation mode such as FedEx.
3. This choice would obviously make pasta prohibitively
expensive, resulting in a loss of customers.
4. Barilla, therefore, is in a much better position if it
designs a more efficient supply chain with a focus on
cost reduction.
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 Step 3: Achieving Strategic Fit
It thus, follows that

increasing implied uncertainty from customers

and supply sources
is best served by

increasing responsiveness from supply the

supply chain

This relation is represented by the “Zone of Strategic Fit”

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 Achieving Strategic Fit Shown on the
Uncertainty/Responsiveness Map
Responsive
supply chain

o f t
Responsiveness
o ne ic Fi
spectrum Z eg
a t
r
St

Efficient
supply chain

Certain Implied Uncertain

demand uncertainty demand
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 Step 3: Achieving Strategic Fit
The first step in achieving strategic fit is to assign roles
to different stages of the supply chain that ensure the
appropriate level of responsiveness.
It is important to understand that the desired level of
responsiveness required across the supply chain may be
attained by assigning different levels of responsiveness
and efficiency to each stage of the supply chain.
Making one stage more responsive allows other
stages more to focus on becoming more efficient. The
best combination of roles depends on the efficiency and
flexibility available at each stage. This can be illustrated
from the following figure:
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Different Roles and Allocations of Implied Uncertainty
for a Given Level of Supply Chain Responsiveness
Supplier absorbs the least Manufacturer absorbs Retailer absorbs most of
implied uncertainty and less implied uncertainty the implied uncertainty
must be very efficient and must be somewhat and must be very
efficient responsive

Supplier Manufacturer Retailer Supply

Chain - I

Extent of Implied Uncertainty for the Supply Chain

Supply
Supplier Manufacturer Retailer Chain - II

Supplier absorbs less Manufacturer absorbs Retailer absorbs the

implied uncertainty and most of the implied least implied
must be somewhat uncertainty and must be uncertainty and must be
efficient
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very responsive very efficient
 Step 3: Achieving Strategic Fit
• To achieve strategic fit a firm must also ensure
that all functions in the value chain must support
the competitive strategy.

• All functional strategies must support the goals of

the competitive strategy.

• All sub-strategies within the supply chain – such

as manufacturing, inventory, and purchasing –
must also be consistent with the supply chain’s
level of responsiveness.
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 Step 3: Achieving Strategic Fit
Competitive Strategy
Supply Chain Strategy
• Manufacturing
Product • Inventory Marketing
Development and Sales
• Lead time
Strategy Strategy
• Purchasing
• Transportation

Information Technology Strategy

Finance Strategy
Human Resources Strategy
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 Step 3: Achieving Strategic Fit

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 functional

strategies within the firm must also support the
supply chain’s level of responsiveness.
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 Step 3: Achieving Strategic Fit
For a high level of performance,
companies should move their competitive
strategy (and resulting implied uncertainty)
and
supply chain strategy (and resulting
responsiveness)
towards the zone of strategic fit.

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 Supply Chain Performance: Achieving
Strategic Fit

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