Supply Chain Strategy and Performance

• A firm's supply chain strategy should deliver superior value to

customers efficiently and at a reasonable price.
• Customers typically demand more variety, faster service, and lower
prices. Companies must balance customer service and costs to remain
competitive.
• Managers must manage trade-offs between cost and service, but over
time, firms must innovate to improve both.
• To enhance supply chain performance, companies need to implement
initiatives that simultaneously improve costs and customer service
continuously.
Customer Service and Cost Trade-offs
• A firm must align its business strategy with its supply chain strategy.

• The business strategy determines the target market segment and the
desired level of customer service, while the supply chain strategy focuses
on the costs needed to achieve that service level.

• Successful firms identify and develop both external market opportunities

and internal supply chain capabilities, ensuring they are mutually
consistent.
• Firms must recognize the trade-offs between supply chain costs and
customer service. Improving customer service typically results in
higher costs, and vice versa.
• For example, a pizza company aiming to reduce delivery time from 40
to 20 minutes would face increased costs.
• The "efficiency frontier" represents the optimal trade-offs between
cost and service; firms can choose points along this frontier but
cannot exceed it.
• The frontier shows the best possible compromise, where firms
operate at the highest achievable level of performance based on their
supply chain structure and processes.
• Customer service in supply chains includes multiple dimensions
beyond just cost and service. These four dimensions are:

1.Order delivery lead time

2.Responsiveness

3.Delivery reliability

4.Product variety
Order Delivery Lead Time

• Improving any of these aspects—such as reducing lead time,

increasing responsiveness, or offering more variety—enhances
customer service but also raises costs. The impact of each dimension
on overall customer service varies depending on customer
expectations and the product type.
• Order delivery time is the total time taken by a supply chain to
complete all activities from order to delivery, and it significantly
impacts supply chain design.
• Customer expectations can vary, from immediate delivery for FMCG
products to up to a week for consumer durables. For example, pizza
outlets may promise delivery within 15 minutes, while e-retailers like
Fabmart offer 48-hour delivery.
• Firms like Caterpillar commit to delivering within 48 hours worldwide.
These promised delivery times have major implications on how firm
structure and operate their supply chains.
• In a pizza home delivery business, activities like procurement and
pizza preparation must be done in advance to meet the 40-minute
delivery expectation.
• The decoupling point is where activities shift from forecast-based
(before the order) to order-specific (after the order).
• The firm must keep a stock ready at the decoupling point and manage
pre- and post-order activities separately to meet customer demand
efficiently.
Supply Chain Responsiveness
• Responsiveness refers to a firm's ability to handle market demand
uncertainty.
• Products are classified into functional (e.g., groceries) with stable,
predictable demand, long life cycles, and low profit margins, and
innovative (e.g., fashion, tech) with high variety, unpredictable
demand, short life cycles, high profit margins, and frequent stock-
outs.
• The nature of demand uncertainty affects how supply chains are
designed and operated for different product types.
• Supply chain functions include physical transformation (converting
raw materials into products and transporting them) and market
mediation (matching product variety with customer needs).
• For functional products (e.g., groceries), the focus is on meeting
predictable demand efficiently, with low stock-outs and costs related
to production, transportation, and storage.
• For innovative products (e.g., fashion, tech), the focus is on handling
unpredictable demand efficiently, with market mediation being
critical to manage high stock-outs and margins, requiring responsive
supply chains.
• A responsive supply chain is agile and adapts quickly to changes in
demand, focusing on flexibility and speed, ideal for unpredictable
markets.

• An efficient supply chain focuses on minimizing costs and optimizing

processes to maximize productivity, suitable for stable demand and
low-margin products.
Delivery Reliability
• Delivery reliability captures the percentage of orders that are delivered
within the promised delivery lead time.

• Providing higher service levels is more expensive, requiring firms to

balance inventory costs and stock-out costs to find an optimal service level.

• Firms must maintain higher inventory to offer higher service levels, and
must optimize the trade-off between cost and service when deciding on
inventory and capacity strategies.
Product Variety
• Product variety in a supply chain refers to the range of different
products or variations of a product that a company offers to meet
diverse customer preferences.
• This can include variations in color, size, features, packaging, or even
product configurations. Managing product variety in a supply chain
can increase complexity, as it requires additional resources for
production, inventory, and distribution to ensure that all variations
are available to customers when needed.
• While product variety can enhance customer satisfaction, it may also
lead to higher costs and supply chain inefficiencies.
Supply Chain Performance Measures

• Supply Chain Operations Reference (SCOR) model, developed by the

Supply-Chain Council, which is widely accepted as a standard for
supply chain performance measurement.

• The SCOR model identifies six major processes: Plan, Source, Make,
Deliver, Return, and Enable.
• It categorizes performance measures into five broad areas:
• Cost
• Assets
• Reliability
• Responsiveness
• Agility.
• These measures are further divided into internal-facing (costs and
assets) and customer-facing (reliability, responsiveness, and agility)
measures.
• The SCOR model enables benchmarking across firms, revealing
significant performance differences in various industries.
 Benchmarking Supply Chain Performance
Using Financial Data
• Asia suffer from the problem of data availability. Even if the relevant
data are available, one is not sure of the validity and reliability of the
data.
• All the listed companies maintain their data on their Web sites and
most countries have an agency that compiles these data and makes it
available to interested parties at a nominal price.
• Using the data, one can calculate the following three performance
measures:
• Total length of the chain. The total length of the chain is arrived at by
adding up the days of inventory for raw materials, work in progress
and finished goods. The firm that has the minimum total length of the
chain is said to have the best performance.
• Supply chain inefficiency ratio. This ratio measures the relative
efficiency of internal supply chain management. The ratio will be low
for the firms with better performance.
• Supply chain working capital productivity. The analysis of firms on this
metric will also be based on the levels of inventory, accounts
receivable and accounts payable. Firms with efficient supply chains
will usually have high supply chain working capital productivity
 Linking Supply Chain and Business
Performance
• Cost reduction is achieved by
– Reducing inventory
– Reducing logistics expenses
– Reducing direct material expenses
– Reducing indirect material expenses
• Improving revenue and profitability by
– Selling higher margin products
– Achieving higher market share
– Reducing backorder and lost sales
– Attacking new markets
– Decreasing supply time to market
• Improving operational efficiency by
– Reducing procurement expenses
– Increasing assets utilization
– Delaying capital expenditure
• Reducing working capital by
– Reducing inventory
– Reducing accounts receivables
Enhancing Supply Chain Performance
• Firms often operate inefficiently, positioned far from the efficiency
frontier on a cost-service map.
• By improving current processes and ensuring tasks are done correctly
the first time, firms can move closer to the efficiency frontier without
changing their structure, technology, or processes. Once on the
frontier, any improvement in one area (cost or service) requires
sacrificing the other.
• To improve both simultaneously, the firm must shift the efficiency
frontier downward, which can be achieved through integration,
optimization, or restructuring.
Supply Chain Optimization
• By improving forecasting, location, transportation, and inventory
management, a firm can enhance both cost and service, thereby
pushing the efficiency frontier downward.
• These improvements can be achieved using optimization tools, and
the set of initiatives focused on these practices is referred to as
supply chain optimization.
Supply Chain Integration
• Significant wastage occurs at departmental and organizational
interfaces. However, improving both intra- and inter-firm integration
in supply chains can reduce waste and enhance overall efficiency,
shifting the efficiency frontier downward.
• To achieve this, organizations must make changes to their structure,
processes, and performance measures.
• Supply chain restructuring helps a firm shift the entire efficiency
frontier downward. It involves making significant changes to the
supply chain structure, particularly in how materials and information
flow within the chain.
• Restructuring a supply chain allows a company to either flatten the
slope of the efficiency frontier curve or shift the entire frontier
downward.
• For functional products, the focus is on supply chain integration,
ensuring smooth material flow with minimal inventory.
• For innovative products, the focus shifts to supply chain restructuring,
emphasizing flexibility and maintaining higher inventory at strategic
points in the chain.