ACHIEVING STRATEGIC FIT SUPPLY CHAIN DRIVERS AND OBSTACLES
Jan 21, 2016
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
RESPONSIVENESSSPECTRUM
EFFICIENT SUPPLY CHAINS
IMPLIED UNCERTAINTY CERTAIN SPECTRUM UNCERTAINDEMAND DEMAND
FINDING THE ZONE OF STRATEGIC FIT
Zone o
f Stra
tegic
Fit
RESPONSIVESUPPLYCHAIN
RESPONSIVENESSSPECTRUM
EFFICIENT SUPPLYCHAINS
IMPLIED UNCERTAINTY CERTAIN SPECTRUM UNCERTAINDEMAND DEMAND
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
EFFICIENT SUPPLY CHAIN
Maximise performance at minimum product cost
RESPONSIVE SUPPLY CHAIN
Create modularity to allow postponement of product differentiation
COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINSPRICING STRATEGY
EFFICIENT SUPPLY CHAIN
Lower margins because price is a prime customer driver
RESPONSIVE SUPPLY CHAIN
Higher margins as price is not a prime customer driver
COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINSMANUFACTURING STRATEGY
EFFICIENT SUPPLY CHAIN
Lower costs through higher utilisation
RESPONSIVE SUPPLY CHAIN
Maintain capacity flexibility to meet unexpected demand
COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINSINVENTORY STRATEGY
EFFICIENT SUPPLY CHAIN
Minimise inventory to lower cost
RESPONSIVE SUPPLY CHAIN
Maintain buffer inventory to meet unexpected demand
COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINSLEAD TIME STRATEGY
EFFICIENT SUPPLY CHAIN
Reduce but not at the expense of cost
RESPONSIVE SUPPLY CHAIN
Aggressively reduce even if the costs are significant
COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINSSUPPLIER STRATEGY
EFFICIENT SUPPLY CHAIN
Select based on cost and quality
RESPONSIVE SUPPLY CHAIN
Select based on speed, flexibility and quality
COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINSTRANSPORTATION STRATEGY
EFFICIENT SUPPLY CHAIN
Greater reliance on low cost modes
RESPONSIVE SUPPLY CHAIN
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
Supply Chain Strategy
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
Supply Chain Strategy
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
Supply Chain Strategy
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