Supply Chain Management: Strategy,

Planning, and Operation

Seventh Edition, Global Edition

Chapter 2
Achieving Strategic Fit in a
Supply Chain

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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.

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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

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The Value Chain

Figure 2-1 The Value Chain in a Company

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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

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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 strategy.

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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.

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How Is Strategic Fit Achieved?

1. Understanding the customer and supply chain uncertainty

2. Understanding the supply chain capabilities
3. Achieving strategic fit

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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

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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

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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

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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 because oversupply often results.
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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%

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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

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Implied Uncertainty (Demand and Supply)
Spectrum

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

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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

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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

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Cost-Responsiveness Efficient Frontier

Figure 2-3 Cost-Responsiveness Efficient Frontier

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Responsiveness Spectrum

Figure 2-4 The Responsiveness Spectrum

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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

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Zone of Strategic Fit

Figure 2-5 Finding the Zone of Strategic Fit

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Roles and Allocations

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

Given Level of Supply Chain Responsiveness

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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

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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

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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

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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

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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.

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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

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Supply Chain Uncertainty

Figure 2-7 Five Key Levers to Deal with Supply Chain Uncertainty

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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).

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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

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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

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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

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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.

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