achieving strategic fit supply chain drivers and obstacles

ACHIEVING STRATEGIC FIT

SUPPLY CHAIN DRIVERS AND OBSTACLES

SUPPLY CHAIN DECISIONS

Direction and Extent of Vertical Integration Production/Procurement decisions Selection of Partners Nature of Relationships Facilities Location Inventory decisions Transportation decisions Communications Interface Design Decisions

Supply Chain Strategy

The first step in devising an effective supply-chain strategy is to consider the nature of the demand forthe products that a company supplies

Functional products Staples that people buy in a wide range of

retail stores and gas stations Have stable predictable demand and long

life cycles Innovative products

Demand is unpredictable Life cycle is short because imitators erode the

competitive advantage

ROUTES TO VALUE CREATION Manufacturing Logistics

– Flexible ProductionReduced Costs

Distribution Management– Speedy Movement to Market

Increased Market Share After Sales Service

– Improved Customer SatisfactionCustomer Loyalty

ACHIEVING STRATEGIC FIT

Competitive strategy and all functional strategies must fit together to from 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 too execute these strategies successfully.

METHODOLOGY FOR ACHIEVING STRATEGIC FIT

Understanding the customer

Understanding the supply chain

Achieving strategic fit

UNDERSTANDING THE CUSTOMER

The quality of product needed in each lot The response time that customers are

willing to tolerate The variety of products needed The service level required The price of the product The desired rate of innovation in the

product

DEMAND UNCERTAINTY

Apparent Implied Impact on customer needs Implied uncertainty spectrum Correlation between implied demand

uncertainty and other attributes

Demand uncertaintyLow High

PurelyFunctional Products

Demand moreCertain

Established Goods

Demand variable within limits

New Modelsof existing goods

Demandunpredictable

Entirely New Products

Demand highly uncertain

PRODUCT ATTRIBUTES AND DEMAND UNCERTAINTY

CORRELATION -IMPLIED DEMAND UNCERTAINTY AND OTHER ATTRIBUTES

Product Margin Ave Forecast Error Ave Stock out Rate

Ave forced season end mark down

LOW HIGH

LOW IDU HIGH IDU

SUPPLY CHAIN RESPONSIVENESS

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

HIGH

LOW

HIGH LOW

COST

RESPONSIVENESS

RESPONSIVENESS EFFICIENT

FRONTIER

RESPONSIVE SUPPLYCHAIN

RESPONSIVENESSSPECTRUM

EFFICIENT SUPPLY CHAINS

IMPLIED UNCERTAINTY CERTAIN SPECTRUM UNCERTAINDEMAND DEMAND

UNCERTAINTY RESPONSIVENESS MAP

LOGISTICS STRATEGIC PLANNING

A unified, comprehensive and integrated planning process to achieve competitive advantage through increased value and customer service, which results in superior customer satisfaction (where we want to be), by anticipating future demand for logistic services and manufacturing resources of the entire supply chain (how to get there).

This planning is done within the context of corporate goals and plans.

Strategic Planning for Logistics; Ohio State University

RESPONSIVE SUPPLYCHAIN


EFFICIENT SUPPLY CHAINS


FINDING THE ZONE OF STRATEGIC FIT

Zone o

f Stra

tegic

Fit

RESPONSIVESUPPLYCHAIN


EFFICIENT SUPPLYCHAINS


CHANGES IN SUPPLY CHAINSTRATEGY OVER A PRODUCT’S

LIFE CYCLE

Zone o

f Str

ateg

ic Fit

COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINSPRIMARY GOAL

EFFICIENT SUPPLY CHAIN

Supply demand at lowest cost

RESPONSIVE SUPPLY CHAIN

Respond quickly to demand

COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINSPRODUCT DESIGN STRATEGY


Maximise performance at minimum product cost


Create modularity to allow postponement of product differentiation

COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINSPRICING STRATEGY


Lower margins because price is a prime customer driver


Higher margins as price is not a prime customer driver

COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINSMANUFACTURING STRATEGY


Lower costs through higher utilisation


Maintain capacity flexibility to meet unexpected demand

COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINSINVENTORY STRATEGY


Minimise inventory to lower cost


Maintain buffer inventory to meet unexpected demand

COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINSLEAD TIME STRATEGY


Reduce but not at the expense of cost


Aggressively reduce even if the costs are significant

COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINSSUPPLIER STRATEGY


Select based on cost and quality


Select based on speed, flexibility and quality

COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINSTRANSPORTATION STRATEGY


Greater reliance on low cost modes


Greater reliance on responsive modes

EXPANDING STRATEGIC SCOPE

Intra- company and Intra-operation Scope– The minimse local cost view

Intra-company Intra-functional Scope

– The minimise functional cost view Intra-company Inter-functional Scope

– The maximise company profit view Inter-company Inter-functional view

– The maximise supply chain surplus view

Supply ChainThe Supply Chain performs two distinct types of functions:

1) Physical function- Includes converting raw materials into parts,components, and eventually finished goods, transporting all of them from one point in thesupply chain to the next- Physical costs include costs of production, transportation etc.

Supply Chain

2) Market mediation- Purpose is ensuring that the variety of

products reaching the marketplace matches what consumers want to buy

- Market mediation costs arise when supply exceeds demand

Supply Chain

There are also 2 types of supply chains- Physically efficient process

- Supplies predictable demand efficiently at the lowest possible cost- Generate high turns and minimise inventory throughout the chain

- Market responsive process- Respond quickly to unpredictable demand in order to minimise stock outs, forced markdowns, and obsolete inventory- Deploys significant buffer stocks of parts or finished goods


To devise the ideal supply chain strategy, companies have to:

- Determine if their products are functional orinnovative- Decide if company’s supply chain is physicallyefficient or responsive to the market- Employ a matrix to formulate the ideal supply-chain strategy

Matching Supply Chain Design to Demand

FunctionalProducts (e.gcontinuity products)

Innovative Products(e.g. Seasonal orpromotional)

Efficient SupplyChain

Match Mismatch

Responsive SupplyChain

Mismatch Match

Marshall Fisher. HBR Mar-Apr 1997


Functional Products Innovative Products

Efficient Supply Chain

ResponsiveSupply Chain

match

mismatch

mismatch

matchHowever not very common

withfunctional products

move

move

e.g. Campbell’s Soup

e.g. National Bicycle

Outline

Drivers of supply chain performance A framework for structuring drivers

– Inventory– Transportation– Facilities– Information

Obstacles to achieving fit

Drivers of Supply Chain Performance

Inventory– raw materials, WIP, finished goods within a

supply chain– inventory policies

Transportation– moving inventory from point to point in a

supply chain– combinations of transportation modes and

routes

Drivers of Supply Chain Performance

Facilities– places where inventory is stored, assembled,

or fabricated– production sites and storage sites

Information– data and analysis regarding inventory,

transportation, facilities throughout the supply chain

– potentially the biggest driver of supply chain performance

A Framework for Structuring Drivers

Efficiency Responsiveness

Inventory Transportation Facilities Information

Supply chain structure

Drivers


Competitive Strategy

Inventory:Role in the Supply Chain

Inventory in the supply chain exists because of a mismatch between supply and demand

Major source of cost and huge influence on responsiveness

Significant impact on material flow time in a supply chain

Inventory and flow time are “synonymous” in a supply chain

Inventory:Role in Competitive Strategy

If responsiveness is a strategic competitive priority, a firm can locate larger amounts of inventory closer to customers

If cost is more important, inventory can be reduced to make the firm more efficient

Components of Inventory Decisions

Cycle inventory– Average amount of inventory used to satisfy

demand between shipments– Depends on lot size

Safety inventory– inventory held in case demand exceeds

expectations– costs of carrying too much inventory versus cost

of losing sales

Components of Inventory Decisions

Seasonal inventory– inventory built up to counter predictable variability

in demand– cost of carrying additional inventory versus cost of

flexible production

Overall trade-off: Responsiveness versus efficiency– more inventory: greater responsiveness but

greater cost– less inventory: lower cost but lower

responsiveness

Inventory Control Systems

As demand and lead times are variable, we can either

order fixed quantities of stock at variable times or

order variable quantities at fixed times

Two-bin replenishment system

Imagine two equally sized bins (bays, pallets or similar) used for storage in the warehouse or at the workstation storage point. The ROL be thus be seen visually. With the first bin empty, a new full bin is "called" to arrive before the second bin is exhausted. The call is rotated. With proper rotation system is efficient (little paperwork). In a computerised enviroment the bins/pallets themselves can be bar coded and their movement/position and batch numbers of bin components can be traced.

Comparing Responsiveness as demand changes

Re-order level approach- average stock levels stay more or less the same and are less responsive to changes in demand. There is a risk of stock outs with Unexpected rising demand but outstanding re-supply orders can be chased.

Re-order cycle systems- rising demand can exhaust stocks with no outstanding orders in the pipeline.

Which System?

Of the systems (annual demand, two-bin, re-order cycle, re-order level) none are universally versatile. Many organisations operate a hybrid. Choosing between fixed quantity or fixed time approaches depends on risking unexpected movement in demand against the costs of administering convenient, scheduled replenishment. The safety stock penalty of fixed re-order cycle methods worsens as stock usage value and demand variability rise. Generally fixed time systems suit stock with stable/predictable demand patterns and low usage values

Transportation:Role in the Supply Chain

Moves the product between stages in the supply chain

Large impact on responsiveness and efficiency

Faster transportation allows greater responsiveness but lower efficiency

Also affects inventory and facilities

Transportation: Role in the Competitive Strategy

If responsiveness is a strategic competitive priority, then faster transportation modes can provide greater responsiveness to customers who are willing to pay for it

Can also use slower transportation modes for customers whose priority is price (cost)

Can also consider both inventory and transportation to find the right balance

Components of Transportation Decisions

Mode of transportation: – air, truck, rail, ship, pipeline, electronic

transportation– vary in cost, speed, size of shipment, flexibility

Route and network selection– route: path along which a product is shipped– network: collection of locations and routes

In-house or outsource Overall trade-off: Responsiveness versus

efficiency

Facilities

Role in the supply chain– the “where” of the supply chain

Role in the competitive strategy– economies of scale from fewer facilities

(efficiency priority)– larger number of smaller facilities

(responsiveness priority)

Components of Facilities Decisions

Location– centralization (efficiency) vs. decentralization

(responsiveness)– other factors to consider (e.g., proximity to

customers)

Capacity (flexibility versus efficiency)

Overall trade-off: Responsiveness versus efficiency

Information:Role in the Supply Chain

The connection between the various stages in the supply chain -- allows coordination between stages

Crucial to daily operation of the each stage in a supply chain -- e.g., production scheduling, inventory levels

Flows in a Supply Chain

Customer

Information

Product

Funds

Information: Role in the Competitive Strategy

Allows supply chain to become more efficient and more responsive at the same time – reduces the need for a trade-off

Information technology investments

What information is most valuable?

Components of Information Decisions

Coordination and information sharing Enabling technologies

– EDI– Internet– ERP systems– Supply Chain Management software

Overall trade-off: Responsiveness versus efficiency

Considerations for Supply Chain Drivers

Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation/ Dedicated

Proximity/ Flexibility

Information What information is best suited for each objective

achieving strategic fit supply chain drivers and obstacles

Documents

future demand

new products demand

demand forthe products

functional strategy

entire supply chain

customer service

competitive strategy

functional strategies