CHAPTER 2

SUPPLY CHAIN PERFORMANCE

AND STRATEGY

Part 1: Supply Chain Performance:

Achieving Strategic Fit and Scope

Strategy

iPhone will be ranking number one in the

smartphone market.
• Do you think this is a strategy or no?

What is Strategy?

• Comes for the word strategos , which is the art

of the general.

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 Competitive Strategies
• Defines the set of customer needs that is
seeks to satisfy through its products and
service
• Competitive strategy is defined based on how
the customer prioritizes product cost, delivery
time, variety, and quality.

Competitive Strategies
Example:
– Low-cost carriers like AirAsia have implemented cost-
effective measures to offer competitive ticket prices
– Seven-Eleven responds quickly to orders makes
responsive supply chain.
– Apple Inc. has attained a distinct position in the
industry through its competitive strategy which is
innovation and premium pricing policy.

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 The Value Chain: Linking Supply
Chain and Business Strategy
Value chain is referred to as a series of interrelated business processes that create and add
value for customers.
Finance, Accounting, Information Technology, Human Resources

New Marketing
Product and Operations Distribution Service
Development Sales

• All these function play a role and each must develop its own strategy.
• 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 specifies what the operations, distribution, and service
functions,
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whether performed in-house or outsourced, should do particularly well.

Supply Chain Strategy

Determines the nature of material procurement, transportation
of materials, manufacture of product or creation of service,
distribution of product.
Example:
– Dell's initial decision to sell direct than selling through
resellers,
– HP decision to start selling PCs through retailer
– Toyota uses global, regional and local location strategies.
Toyota's decision to have production facilities in each of
its major markets is part of its supply chain strategy.

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 Achieving Strategic Fit
Strategic fit
Competitive and supply chain strategies have
aligned goals
– Consistency between customer priorities of
competitive strategy and supply chain
capabilities specified by the supply chain
strategy

Achieving Strategic Fit

• Failure at any one process or function, however, may lead to
failure of the overall chain. A company's success or failure is
thus closely linked to the following keys:
1. The competitive strategy and all functional strategies must
fit together to form a coordinated overall strategy.
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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 How is Strategic Fit Achieved?
• Step 1: Understanding the customer and
supply chain uncertainty
• Step 2: Understanding the supply chain
capabilities
• Step 3: Achieving strategic fit

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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.
• In general, customer demand from different
segments varies along several attributes as
follows:
• Quantity of product needed in each lot
• Response time customers will tolerate
• Variety of products needed
• Service level required
• Price of the product
• Desired rate of innovation in the product

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 Step 1: Understanding the Customer and
Supply Chain Uncertainty
• Demand uncertainty: uncertainty of customer
demand for a product
• Implied demand uncertainty : Resulting
uncertainty for the supply chain given the portion
of the demand the supply chain must handle and
attributes the customer desires
• 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,
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Customer Need Causes implied demand

uncertainty to increase because
…
Range of quantity increases Wider range of quantity implies
greater variance in demand
Lead time decreases Less time to react to orders
Variety of products required Demand per product becomes
increases more disaggregated
Number of channels increases Total customer demand is now
disaggregated over more
channels
Rate of innovation increases New products tend to have more
uncertain demand
Required service level increases Firm now has to handle unusual
surges in demand

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 Step 2: Understanding the
Supply Chain
• How does the firm best meet demand?
• Effectiveness and responsiveness -measuring the
supply chain.
• whether it can meet its customers’ needs at the
lowest cost rates in other terms being effective
• or by having quick responses to customers’ needs,
even if it costs higher which is known as being
responsive.
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Step 2: Understanding the

Supply Chain
• Supply chain responsiveness -- 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 very high service level

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 Step 2: Understanding the
Supply Chain
• There is a cost to achieving responsiveness
• Supply chain efficiency: The cost of making
and delivering the product to the customer
• Increasing responsiveness results in higher
costs that lower efficiency
• Second step to achieving strategic fit is to map
the supply chain on the responsiveness
spectrum

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Understanding the Supply Chain: Cost-

Responsiveness Efficient Frontier
Responsiveness

High

Low
Cost
High Low
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 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.

Achieving Strategic Fit Shown on the

Uncertainty/Responsiveness Map
Responsive
supply chain

Responsiveness
spectrum

Efficient supply
chain

Certain Implied Uncertain

demand uncertainty demand
2-18 spectrum

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 Step 3: Achieving Strategic Fit
• All functions in the value chain must support
the competitive strategy to achieve strategic
fit –
• Two extremes: Efficient supply chains (Barilla)
and responsive supply chains (Dell)
• Two key points
– there is no right supply chain strategy
independent of competitive strategy
– there is a right supply chain strategy for a given
2-19 competitive strategy

Step 3: Achieving Strategic Fit

• For example, the competitive strategy of Dell targets customers who value having
customized PCs delivered within days. Given the vast variety of PCs, the high level of
innovation, and rapid delivery, demand from Dell customers can be characterized as
having high demand uncertainty.
• Dell has the option of designing an efficient or responsive supply chain.
• An efficient supply chain may use slow, inexpensive modes of transportation and
economies of scale in production. If Dell made these choices, it would have difficulty
supporting the customer's desire for rapid delivery and a wide variety of customizable
products.
• Building a responsive supply chain, however, will allow Dell to meet its customers'
needs. Therefore, a responsive supply chain strategy is best suited to meet the needs
of Dell's targeted customers.
• 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 very 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.

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 Activity 1

• Example of Industry for Efficiency Supply

Chain
• Example of Industry for Responsiveness
Supply Chain

CHAPTER 2
SUPPLY CHAIN PERFORMANCE
AND STRATEGY

Part 2: Supply Chain Drivers and

Metrics

2017/2018 – Sem. 1

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 DRIVERS OF SUPPLY CHAIN PERFORMANCE
o To understand how a company can improve supply chain
performance in terms of responsiveness and efficiency, we
must examine the logistical and cross-functional drivers of
supply chain performance: facilities, inventory, transportation,
information, sourcing and pricing.
-These drivers interact with each other to determine
the supply chain’s performance in terms of responsiveness
and efficiency.
o As a result, the structure of these drivers determines if and how
strategic fit is achieved across the supply chain.

A Framework for
Structuring
Drivers

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 Facilities
• Role in the supply chain
– The “where” of the supply chain
– Manufacturing or storage (warehouses)
• Role in the competitive strategy
– Economies of scale (efficiency priority)
– Larger number of smaller facilities
(responsiveness priority)

Facilities
• Components of facilities decisions
– Role
• Flexible, dedicated, or a combination of the two
• Product focus or a functional focus
– Location
• Where a company will locate its facilities
• Centralize/decentralize, macroeconomic factors,
quality of workers, cost of workers and facility,
availability of infrastructure, proximity to
customers, location of other facilities, tax effects

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 Facilities
• Components of facilities decisions
– Capacity
• A facility’s capacity to perform its intended
function or functions
• Excess capacity – responsive, costly
• Little excess capacity – more efficient, less
responsive

Facilities
• Components of facilities decisions
– Facility-related metrics
• Capacity
• Utilization
• Processing/setup/down/idle time
• Production cost per unit
• Quality losses
• Theoretical flow/cycle time of production
• Actual average flow/cycle time

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 Facilities
• Overall trade-off: Responsiveness versus
efficiency
– Cost of the number, location, capacity, and
type of facilities (efficiency) and the level of
responsiveness
– Increasing the number of facilities increases
facility and inventory costs but decreases
transportation costs and reduces response
time
– Increasing the flexibility or capacity of a
facility increases facility costs but decreases
inventory costs and response time

Inventory
• Role in the Supply Chain
– Mismatch between supply and demand
– Satisfy demand
– Exploit economies of scale
– Impacts assets, costs, responsiveness, material
flow time

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 Inventory
• Role in Competitive Strategy
– Form, location, and quantity of inventory allow a
supply chain to range from being very low cost to
very responsive
– Objective is to have right form, location, and
quantity of inventory that provides the right level
of responsiveness at the lowest possible cost

Components of Inventory Decisions

• Cycle inventory
– Average amount of inventory used to satisfy
demand between shipments
– Function of lot size decisions
• Safety inventory
– Inventory held in case demand exceeds
expectations
– Costs of carrying too much inventory versus cost
of losing sales

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 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
• Level of product availability
– The fraction of demand that is served on time
from product held in inventory
– Trade off between customer service and cost

Components of Inventory Decisions

• Inventory-related metrics
– Cash-to-cash cycle time
– Average inventory
– Inventory turns
– Products with more than a specified
number of days of inventory
– Average replenishment batch size

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Components of Inventory Decisions
• Inventory-related metrics
– Average safety inventory
– Seasonal inventory
– Fill rate
– Fraction of time out of stock
– Obsolete inventory

Inventory
• Overall trade-off: Responsiveness versus
efficiency
– Increasing inventory generally makes the
supply chain more responsive
– A higher level of inventory facilitates a
reduction in production and transportation
costs because of improved economies of
scale
– Inventory holding costs increase

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 Transportation
• Role in the Supply Chain
– Moves the product between stages in the supply
chain
– Impact on responsiveness and efficiency
– Faster transportation allows greater
responsiveness but lower efficiency
– Also affects inventory and facilities

Transportation
• Role in the Competitive Strategy
– Allows a firm to adjust the location of its facilities
and inventory to find the right balance between
responsiveness and efficiency
• Components of Transportation Decisions
– Design of transportation network
• Modes, locations, and routes
• Direct or with intermediate consolidation points
• One or multiple supply or demand points in a single run

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 Transportation
– Choice of transportation mode
• Air, truck, rail, sea, and pipeline
• Information goods via the Internet
• Different speed, size of shipments, cost of shipping, and
flexibility

Transportation
– Transportation-related metrics
• Average inbound transportation cost
• Average income shipment size
• Average inbound transportation cost per shipment
• Average outbound transportation cost
• Average outbound shipment size
• Average outbound transportation cost per shipment
• Fraction transported by mode

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 Transportation
• Overall trade-off: Responsiveness versus
efficiency
– The cost of transporting a given product
(efficiency) and the speed with which that product
is transported (responsiveness)
– Using fast modes of transport raises
responsiveness and transportation cost but lowers
the inventory holding cost

Information
• Role in the Supply Chain
– Improve the utilization of supply chain assets
and the coordination of supply chain flows to
increase responsiveness and reduce cost
– Information is a key driver that can be used to
provide higher responsiveness while
simultaneously improving efficiency

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 Information
• Role in the Competitive Strategy
– Right information can help a supply chain better
meet customer needs at lower cost
– Improves visibility of transactions and
coordination of decisions across the supply chain
– Share the minimum amount of information
required to achieve coordination

Components of Information Decisions

• Push versus Pull
– Different information requirements and uses
• Coordination and information sharing
– Supply chain coordination, all stages of a supply
chain work toward the objective of maximizing
total supply chain profitability based on shared
information
• Sales and operations planning (S&OP)
– The process of creating an overall supply plan
(production and inventories) to meet the
anticipated level of demand (sales)

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Components of Information Decisions

• Enabling technologies
1. Electronic data interchange (EDI)
2. The Internet
3. Enterprise resource planning (ERP) systems
4. Supply chain management (SCM) software
5. Radio frequency identification (RFID)

Components of Information Decisions

• Information-related metrics
– Forecast horizon
– Frequency update
– Forecast error
– Seasonal factors
– Variance from plan
– Ratio of demand variability to order variability

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 Information
• Overall trade-off: Complexity versus value
– Good information helps a firm improve both
efficiency and responsiveness
– More information is not always better
– More information increases complexity and cost
of both infrastructure and analysis exponentially
while marginal value diminishes
– Evaluate the minimum information required to
accomplish the desired objectives

Sourcing
• Role in the Supply Chain
– Set of business processes required to purchase
goods and services
– Will tasks be performed by a source internal to the
company or a third party
– Globalization creates many more sourcing options
with both considerable opportunity and potential
risk

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 Sourcing
• Role in the Competitive Strategy
– Sourcing decisions are crucial because they
affect the level of efficiency and
responsiveness in a supply chain
– Outsource to responsive third parties if it is
too expensive to develop their own
– Keep responsive process in-house to maintain
control

Components of Sourcing Decisions

• In-house or outsource
– Perform a task in-house or outsource it to a third
party
• Supplier selection
– Number of suppliers, evaluation and selection
criteria, direct negotiations or auction
• Procurement
– The supplier sends product in response to
customer orders

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Components of Sourcing Decisions
• Sourcing-related metrics
– Days payable outstanding
– Average purchase price
– Range of purchase price
– Average purchase quantity
– Supply quality
– Supply lead time
– Fraction of on-time deliveries
– Supplier reliability

Sourcing
• Overall trade-off: Increase the supply chain
surplus
– Increase the size of the total surplus to be shared
across the supply chain
– Impact of sourcing on sales, service, production
costs, inventory costs, transportation costs, and
information cost
– Outsource if it raises the supply chain surplus
more than the firm can on its own
– Keep function in-house if the third party cannot
increase the supply chain surplus or if the
outsourcing risk is significant

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 Pricing
• Role in the Supply Chain
– Pricing determines the amount to charge
customers for goods and services
– Affects the supply chain level of responsiveness
required and the demand profile the supply chain
attempts to serve
– Pricing strategies can be used to match demand
and supply

Pricing
• Role in the Competitive Strategy
– Firms can utilize optimal pricing strategies to
improve efficiency and responsiveness
– Pricing strategies vary to meet different customer
responsiveness requirements

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 Components of Pricing Decisions
• Pricing and economies of scale
– The provider of the activity must decide how to
price it appropriately to reflect these economies
of scale
• Everyday low pricing versus high-low pricing
– Different pricing strategies lead to different
demand profiles that the supply chain must serve

Components of Pricing Decisions

• Fixed price versus menu pricing
– If marginal supply chain costs or the value to the
customer vary significantly along some attribute,
it is often effective to have a pricing menu
– Can lead to customer behavior that has a negative
impact on profits

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 Components of Pricing Decisions
• Pricing-related metrics
– Profit margin
– Days sales outstanding
– Incremental fixed cost per order
– Incremental variable cost per unit
– Average sale price
– Average order size
– Range of sale price
– Range of periodic sales

Pricing
• Overall trade-off: Increase firm profits
– Understand of the cost structure of performing a
supply chain activity and the value this activity
brings to the supply chain
– Strategy may support efficiency in the supply
chain, lower supply chain costs, defend market
share, or steal market share
– Differential pricing may be used to attract
customers with varying needs
– Strategy should help either increase revenues or
shrink costs or preferably both

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