Supply Chain Management: Strategy, Planning, and Operation: Seventh Edition

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
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.
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
The Value Chain
Figure 2-1 The Value Chain in a Company
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
Achieving Strategic Fit (2 of 2)
1. 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.
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 Copyright
strategy.© 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.
How Is Strategic Fit Achieved?
1. Understanding the customer and supply chain

uncertainty
2. Understanding the supply chain capabilities
3. Achieving strategic fit
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
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
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 Increase because the total customer demand per channel
product may be acquired increases becomes less predictable
Implied Uncertainty and Other
Attributes (1 of 2)
1. Products 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 stockout or an oversupply
situation.
4. Markdowns are high for products with greater
implied demand uncertainty
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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 High Implied
Uncertainty 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%
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
Implied Uncertainty (Demand and Supply)
Spectrum
Figure 2-2 The Implied Uncertainty (Demand and Supply) Spectrum
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
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
Cost-Responsiveness Efficient Frontier
Figure 2-3 Cost-Responsiveness Efficient Frontier

Responsiveness Spectrum
Figure 2-4 The Responsiveness Spectrum
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
Zone of Strategic Fit
Figure 2-5 Finding the Zone of Strategic Fit

Roles and Allocations
Figure 2-6 Different Roles and Allocations of Implied Uncertainty for a

Given Level of Supply Chain Responsiveness
Efficient and Responsive Supply Chains
Table 2-4 Comparison of Efficient and Responsive Supply Chains
Blank Efficient Supply Chains Responsive Supply Chains

Supply demand at the lowest
Primary goal Respond quickly to demand
cost
Product design Maximize performance at a Create modularity to allow
strategy minimum product cost postponement of product differentiation
Lower margins because price is a Higher margins because price is not a
Pricing strategy
prime customer driver prime customer driver
Lower costs through high Maintain capacity flexibility to buffer
Manufacturing strategy
utilization against demand/supply uncertainty
Maintain buffer inventory to deal with
Inventory strategy Minimize inventory to lower cost
demand/supply uncertainty
Reduce, but not at the expense Reduce aggressively, even if the costs
Lead-time strategy
of costs are significant
Select based on speed, flexibility,
Supplier strategy Select based on cost and quality
reliability, and quality
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
Changes over Product Life Cycle (1 of 2)
• Beginning stages
1. Demand is very uncertain, and supply may be

unpredictable
2. Margins are often high, and time is crucial to
gaining sales
3. Product availability is crucial to capturing the
market
4. Cost is often a secondary consideration
Changes over Product Life Cycle (2 of 2)
• Later stages
1. Demand has become more certain, and supply

is predictable
2. Margins are lower as a result of an increase in
competitive pressure
3. Price becomes a significant factor in customer
choice
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
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
Supply Chain Uncertainty
Figure 2-7 Five Key Levers to Deal with Supply Chain Uncertainty
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).
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
• 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
• 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
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.
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Supply Chain Management: Strategy, Planning, and Operation: Seventh Edition

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Supply Chain Management: Strategy, Planning, and Operation: Seventh Edition

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Supply Chain Management: Strategy,

Planning, and Operation

2.1 Explain why achieving strategic fit is critical to

Figure 2-1 The Value Chain in a Company

Strategic fit requires that all functions within a firm

1. Understanding the customer and supply chain

Table 2-2 Correlation Between Implied Demand

Table 2-3 Impact of Supply Source Capability on Supply

Supply Source Capability Causes Supply Uncertainty to...

Frequent breakdowns Increase

Figure 2-2 The Implied Uncertainty (Demand and Supply) Spectrum

Figure 2-3 Cost-Responsiveness Efficient Frontier

Figure 2-4 The Responsiveness Spectrum

Figure 2-5 Finding the Zone of Strategic Fit

Figure 2-6 Different Roles and Allocations of Implied Uncertainty for a

Blank Efficient Supply Chains Responsive Supply Chains

1. Demand is very uncertain, and supply may be

1. Demand has become more certain, and supply

The implied uncertainty that a supply chain needs

The scope of strategic fit refers to the functions and

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