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1) Review the slide "Achieving Strategic Fit and Scope" power point slides for you will have to write up what you learned from this chapter. PLEASE EXEMPLIFY HIGH LEVEL ANALYSIS WITH YOUR WRITING (i.e. 3 Paragraphs Minimum) 2) Link for Ted Talk: This will be part of you participation points: (i.e. 3 Paragraphs Minimum): Supply Chain Management and Importance of People  https://www.youtube.com/watch?v=LKcGJAaPArY Only one document for both Supply Chain Management: Strategy, Planning, and Operation Seventh Edition Chapter 2 Achieving Strategic Fit in a Supply Chain Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved If this PowerPoint presentation contains mathematical equations, you may need to check that your computer has the following installed: 1) MathType Plugin 2) Math Player (free versions available) 3) NVDA Reader (free versions available) 1 Learning Objectives 2.1 Explain why achieving strategic fit is critical to a company’s overall success. 2.2 Describe how a company achieves strategic fit between its supply chain strategy and its competitive strategy. 2.3 Identify the main levers to deal with uncertainty in a supply chain. 2.4 Discuss the importance of expanding the scope of strategic fit across the supply chain. Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Competitive and Supply Chain Strategies Competitive strategy defines the set of customer needs a company 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, follow-up service, whether processes will be in-house or outsourced All functional strategies must support one another and the competitive strategy Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved The Value Chain Figure 2-1 The Value Chain in a Company Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Achieving Strategic Fit (1 of 2) Strategic fit – competitive and supply chain strategies have aligned goals 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 strategy Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Achieving Strategic Fit (2 of 2) 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. The different functions in a company must appropriately structure their processes and resources to be able to execute these strategies successfully. The design of the overall supply chain and the role of each stage must be aligned to support the supply chain strategy. Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Summary of Learning Objective 1 Strategic fit requires that all functions within a firm and stages in the supply chain target the same goal—one that is consistent with customer needs. A lack of strategic fit between the competitive and supply chain strategies can result in the supply chain taking actions that are not consistent with customer needs, leading to a reduction in supply chain surplus and a decrease in supply chain profitability. Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved How Is Strategic Fit Achieved? Understanding the customer and supply chain uncertainty Understanding the supply chain capabilities Achieving strategic fit Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Step 1: Understanding the Customer and Supply Chain Uncertainty (1 of 2) 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 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Step 1: Understanding the Customer and Supply Chain Uncertainty (2 of 2) Demand uncertainty – uncertainty of customer demand for a product Implied demand uncertainty – resulting uncertainty for only the portion of the demand that the supply chain plans to satisfy based on the attributes the customer desires Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Customer Needs and Implied Demand Uncertainty Table 2-1 Impact of Customer Needs on Implied Demand Uncertainty Customer Need Causes Implied Demand Uncertainty to … Range of quantity required increases Increase because a wider range of the 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 increases Increase because demand per product becomes less predictable Required service level increases Increase because the firm now has to handle unusual surges in demand Rate of innovation increases Increase because new products tend to have more uncertain demand Number of channels through which product may be acquired increases Increase because the total customer demand per channel becomes less predictable Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Implied Uncertainty and Other Attributes (1 of 2) Products with uncertain demand are often less mature and have less direct competition. As a result, margins tend to be high. Forecasting is more accurate when demand has less uncertainty. 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. Markdowns are high for products with greater implied demand uncertainty because oversupply often results. Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Implied Uncertainty and Other Attributes (2 of 2) Table 2-2 Correlation Between Implied Demand Uncertainty and Other Attributes Blank Low Implied Uncertainty High Implied 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 markdown 0% 10% to 25% Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Impact of Supply Source Capability Table 2-3 Impact of Supply Source Capability on Supply Uncertainty 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 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Implied Uncertainty (Demand and Supply) Spectrum Figure 2-2 The Implied Uncertainty (Demand and Supply) Spectrum Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Step 2: Understanding Supply Chain Capabilities (1 of 2) 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 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Step 2: Understanding Supply Chain Capabilities (2 of 2) Responsiveness comes at a cost Supply chain efficiency is the inverse to the cost of making and delivering the product to the customer The cost-responsiveness efficient frontier curve shows the lowest possible cost for a given level of responsiveness Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Cost-Responsiveness Efficient Frontier Figure 2-3 Cost-Responsiveness Efficient Frontier Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Responsiveness Spectrum Figure 2-4 The Responsiveness Spectrum Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Step 3: Achieving Strategic Fit Ensure that the degree of supply chain responsiveness is consistent with the implied uncertainty Assign roles to different stages of the supply chain that ensure the appropriate level of responsiveness Ensure that all functions maintain consistent strategies that support the competitive strategy Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Zone of Strategic Fit Figure 2-5 Finding the Zone of Strategic Fit Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Roles and Allocations Figure 2-6 Different Roles and Allocations of Implied Uncertainty for a Given Level of Supply Chain Responsiveness Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Efficient and Responsive Supply Chains Table 2-4 Comparison of Efficient and Responsive Supply Chains Blank Efficient Supply Chains Responsive Supply Chains Primary goal Supply demand at the lowest cost Respond quickly to demand Product design strategy Maximize performance at a minimum product cost Create modularity to allow postponement of product differentiation Pricing strategy Lower margins because price is a prime customer driver Higher margins because price is not a prime customer driver Manufacturing strategy Lower costs through high utilization Maintain capacity flexibility to buffer against demand/supply uncertainty Inventory strategy Minimize inventory to lower cost Maintain buffer inventory to deal with demand/supply uncertainty Lead-time strategy Reduce, but not at the expense of costs Reduce aggressively, even if the costs are significant Supplier strategy Select based on cost and quality Select based on speed, flexibility, reliability, and quality Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Tailoring the Supply Chain Achieve strategic fit while serving many customer segments with a variety of products across multiple channels Requires sharing operations for some links in the supply chain, while having separate operations for other links Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Changes over Product Life Cycle (1 of 2) Beginning stages Demand is very uncertain, and supply may be unpredictable Margins are often high, and time is crucial to gaining sales Product availability is crucial to capturing the market Cost is often a secondary consideration Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Changes over Product Life Cycle (2 of 2) Later stages Demand has become more certain, and supply is predictable Margins are lower as a result of an increase in competitive pressure Price becomes a significant factor in customer choice Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Summary of Learning Objective 2 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 supply chain must absorb. The second step is to understand the supply chain’s capabilities in terms of efficiency and responsiveness. The key to strategic fit is ensuring that supply chain responsiveness is consistent with customer needs, supply capabilities, and the resulting implied uncertainty. Tailoring the supply chain is essential to achieving strategic fit when supplying a wide variety of customers with many products through different channels. Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Supply Chain Levers Five basic levers to deal with uncertainty Capacity, combination of excess capacity and flexible capacity Inventory, one of the most common levers used in practice to deal with uncertainty Time, combination of speedy supply and the willingness of customers to wait Information, appropriate information can help a supply chain reduce uncertainty Price, prices of products and services that vary over time Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Supply Chain Uncertainty Figure 2-7 Five Key Levers to Deal with Supply Chain Uncertainty Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Summary of Learning Objective 3 The implied uncertainty that a supply chain 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 supply chain can use to deal with this uncertainty. Investing more in one lever generally allows the supply chain to invest less in one or more of the other levers. To achieve strategic fit, a supply chain must find the right balance between investments in the five levers to effectively serve the target customer segment(s). Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Expanding Strategic Scope (1 of 3) Scope of strategic fit – the functions within the firm and stages across the supply chain that devise an integrated strategy with an aligned objective Intraoperation Scope: Minimizing Local Cost Each stage of the supply chain devises strategy independently Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Expanding Strategic Scope (2 of 3) Intrafunctional Scope: Minimizing Functional Cost Firms align all operations within a function Interfunctional Scope: Maximizing Company Profit Functional strategies are developed to align with one another and with the competitive strategy Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Expanding Strategic Scope (3 of 3) Intercompany Scope: Maximizing 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 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Summary of Learning Objective 4 The scope of strategic fit refers to the functions and stages within a supply chain 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 supply chain surplus. As the scope of strategic fit is enlarged to include the entire supply chain, actions are evaluated based on their impact on overall supply chain performance, which helps increase supply chain surplus. Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Copyright Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Chapter 2 • Supply Chain Performance: Achieving Strategic Fit and Scope 25 Predictable supply and demand Predictable supply and uncertain demand, or uncertain supply and predictable demand, or somewhat uncertain supply and demand Highly uncertain supply and demand Salt at a supermarket An existing automobile model A new communication device FIGURE 2-2 The Implied Uncertainty (Demand and Supply) Spectrum 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. This implied uncertainty spectrum is shown in Figure 2-2. A company introducing a brand-new cell phone based on entirely new components and technology faces high implied demand uncertainty and high supply uncertainty. As a result, the implied uncertainty faced by the supply chain is extremely high. In contrast, a supermarket selling salt faces low implied demand uncertainty and low levels of supply uncertainty, result- ing in a low implied uncertainty. Many agricultural products such as coffee are examples of supply chains facing low levels of implied demand uncertainty but significant supply uncer- tainty based on weather. The supply chain thus has to face an intermediate level of implied uncertainty. STEP 2: UNDERSTANDING THE SUPPLY CHAIN CAPABILITIES After understanding the uncer- tainty that the company faces, the 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. We now consider the characteristics of supply chains and categorize them based on differ- ent characteristics that influence their responsiveness and efficiency. First, we provide some definitions. Supply chain responsiveness includes a supply chain’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 level • Handle supply uncertainty 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 respon- sive it is. 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. M02_CHOP3952_05_SE_C02.QXD 10/10/11 6:00 PM Page 25 26 Chapter 2 ◆ Achieving Strategic Fit in a Supply Chain We now categorize supply chains based on different characteristics that inf luence their responsiveness and efficiency. First, we provide some definitions. Supply chain responsiveness includes a supply chain’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 level • Handle supply uncertainty 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 respon- sive it is. Responsiveness, however, comes at a cost. For instance, to respond to a wider range of quantities demanded, capacity must be increased, which increases costs. This increase in cost leads to the second definition: Supply chain efficiency is 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. The cost-responsiveness efficient frontier is the curve in Figure 2-3 showing the lowest possible cost for a given level of responsiveness. Lowest cost is defined based on existing tech- nology; not every firm is able to operate on the efficient frontier, which represents the cost- responsiveness performance of the best supply chains. 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 processes 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. Supply chains range from those that focus solely on being responsive to those that focus on a goal of producing and supplying at the lowest possible cost. Figure 2-4 shows the responsive- ness spectrum and where some supply chains fall on this spectrum. Responsiveness Cost Low High Low High Figure 2-3 Cost-Responsiveness Efficient Frontier M02_CHOP1889_07_SE_C02.indd 26 8/23/17 7:48 PM Chapter 2 • Supply Chain Performance: Achieving Strategic Fit and Scope 27 Highly efficient Somewhat efficient Somewhat responsive Highly responsive Integrated steel mills: Production scheduled weeks or months in advance with little variety or flexibility Hanes apparel: A traditional make-to- stock manufacturer with production lead time of several weeks Most automotive production: Delivering a large variety of products in a couple of weeks Seven-Eleven Japan: Changing merchandise mix by location and time of day FIGURE 2-4 The Responsiveness Spectrum STEP 3: ACHIEVING STRATEGIC FIT After mapping the level of implied uncertainty and understanding the supply chain position on the 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. For example, the competitive strategy of McMaster-Carr 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 customers can be characterized as having high implied demand uncertainty. McMaster-Carr has the option of designing an efficient or responsive supply chain. An efficient supply chain may carry less inven- tory and maintain a level load on the warehouse to lower picking and packing costs. If McMaster-Carr made these choices, it would have difficulty supporting the 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 McMaster-Carr even if it results in higher costs. Now, consider a pasta manufacturer such as Barilla. Pasta is a product with relatively stable customer demand, giving it a low implied demand uncertainty. Supply is also quite predictable. Barilla could design a highly responsive supply chain in which pasta is custom made in small batches in response to customer orders and shipped via a rapid transportation mode such as FedEx. This choice would obviously make the pasta prohibitively expensive, resulting in a loss of customers. Barilla therefore is in a much better position if it designs a more efficient supply chain with a focus on cost reduction. From the preceding discussion, it follows that increasing implied uncertainty from customers and supply sources is best served by increasing responsiveness from the supply chain. This relationship is represented by the “zone of strategic fit” illustrated in Figure 2-5. 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. Key Point The second step in achieving strategic fit between competitive and supply chain strategies is to under- stand the supply chain and map it on the responsiveness spectrum. M02_CHOP3952_05_SE_C02.QXD 10/10/11 6:00 PM Page 27 28 Chapter 2 • Supply Chain Performance: Achieving Strategic Fit and Scope Responsive Supply Chain Responsiveness Spectrum Efficient Supply Chain Certain Demand Implied Uncertainty Spectrum Uncertain Demand Zo ne of St rat eg ic Fi t FIGURE 2-5 Finding the Zone of Strategic Fit 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. 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 as illustrated by the following examples. IKEA is a Swedish furniture retailer with large stores in more than 20 countries. IKEA has targeted customers who want stylish furniture at a reasonable cost. The company limits the variety of styles that it sells through modular design. The large scale of each store and the limited variety of furniture (through modular design) decrease the implied uncertainty faced by the supply chain. IKEA stocks all styles in inventory and serves customers from stock. Thus, it uses inventory to absorb all the uncertainty faced by the supply chain. The presence of inventory at large IKEA stores allows replenishment orders to its manufacturers to be more stable and predictable. As a result, IKEA passes along little uncertainty to its manufacturers, who tend to be located in low- cost countries and focus on efficiency. IKEA provides responsiveness in the supply chain, with the stores absorbing most of the uncertainty and being responsive, and the suppliers absorbing little uncertainty and being efficient. 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 responsive- ness, and most of the implied demand uncertainty is passed on to the manufacturer. For the supply chain to be responsive, the manufacturer now needs to be flexible and have low response times. An example of this approach is England, Inc., a furniture manufacturer located in Tennessee. Every week, the company makes several thousand sofas and chairs to order, deliver- ing them to furniture stores across the country within three weeks. England Inc.’s retailers allow customers to select from a wide variety of styles and promise relatively quick delivery. This imposes a high level of implied uncertainty on the supply chain. The retailers, however, do not carry much inventory and pass most of the implied uncertainty on to England, Inc. The retailers can thus be efficient because most of the implied uncertainty for the supply chain is absorbed by England, Inc., with its flexible manufacturing process. England, Inc., itself has a choice of how much uncertainty it passes along to its suppliers. By holding more raw material inventories, the company allows its suppliers to focus on efficiency. If it decreases its raw material invento- ries, its suppliers must become more responsive. M02_CHOP3952_05_SE_C02.QXD 10/10/11 6:00 PM Page 28 Chapter 2 • Supply Chain Performance: Achieving Strategic Fit and Scope 29 The preceding discussion illustrates that the supply chain can achieve a given level of responsiveness by adjusting the roles of each of its stage. Making one stage more responsive allows other stages to focus on becoming more efficient. The best combination of roles depends on the efficiency and flexibility available at each stage. The notion of achieving a given level of responsiveness by assigning different roles and levels of uncertainty to different stages of the supply chain is illustrated in Figure 2-6. The figure shows two supply chains that face the same implied uncertainty but achieve the desired level of responsiveness with differ- ent allocations of uncertainty and responsiveness across the supply chain. Supply Chain I has a very responsive retailer who absorbs most of the uncertainty, allowing (actually requiring) the manufacturer and supplier to be efficient. Supply Chain II, in contrast, has a very res- ponsive manufacturer who absorbs most of the uncertainty, thus allowing the other stages to focus on efficiency. To achieve complete strategic fit, a firm must also ensure that all its functions maintain consistent strategies that support the competitive strategy. All functional strategies must support the goals of the competitive strategy. All substrategies within the supply chain—such as manu- facturing, inventory, and purchasing—must also be consistent with the supply chain’s level of responsiveness. Table 2-4 lists some of the major differences in functional strategy between supply chains that are efficient and those that are responsive. Extent of Implied Uncertainty for the Supply Chain RetailerManufacturerSupplier Retailer absorbs most of the implied uncertainty and must be very responsive. Manufacturer absorbs less implied uncertainty and must be somewhat efficient. Supplier absorbs the least implied uncertainty and must be very efficient. Supply Chain I Supply Chain II Retailer absorbs the least implied uncertainty and must be very efficient. Manufacturer absorbs most of the implied uncertainty and must be very responsive. Supplier absorbs less implied uncertainty and must be somewhat efficient. RetailerManufacturerSupplier FIGURE 2-6 Different Roles and Allocations of Implied Uncertainty for a Given Level of Supply Chain Responsiveness Key Point The final step in achieving strategic fit is to match supply chain responsiveness with the implied uncer- tainty 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. M02_CHOP3952_05_SE_C02.QXD 10/10/11 6:00 PM Page 29 32 Chapter 2 ◆ Achieving Strategic Fit in a Supply Chain The better …