Corporate Strategy and its Connection to Supply Chain Management

Fit Between Corporate and Functional Strategies (Chopra & Meindl)

Corporate Competitive Strategy

Supply Chain

or Operations

Strategy

Product

Development

Strategy

Marketing

and Sales

Strategy

Information Technology Strategy

Finance Strategy

Human Resources Strategy

Corporate Mission

The mission of the organizationdefines its purpose, i.e., what it contributes to societystates the rationale for its existenceprovides boundaries and focusdefines the concept(s) around which the company can rally

Functional areas and business processes define their missions such that they support the overall corporate mission in a cooperative and synergistic manner.

Corporate Mission Examples

Merck: The mission of Merck is to provide society with superior products and services-innovations and solutions that improve the quality of life and satisfy customer needs-to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return.FedEx: FedEx is committed to our People-Service-Profit philosophy. We will produce outstanding financial returns by providing totally reliable, competitively superior, global air-ground transportation of high-priority goods and documents that require rapid, time-certain delivery. Equally important, positive control of each package will be maintained utilizing real time electronic tracking and tracing systems. A complete record of each shipment and delivery will be presented with our request for payment. We will be helpful, courteous, and professional for each other, and the public. We will strive to have a completely satisfied customer at the end of each transaction.

Defining the Corporate Strategy

Differentiation (Quality; Uniqueness;

e.g., Luxury cars, Fashion Industry,

Brand Name Drugs)

Cost Leadership (Price;

e.g., Wal-Mart, Southwest

Airlines, Generic Drugs)

Responsiveness (Reliability; Quickness; Flexibility;

e.g., Dell, Overnight Delivery Services)

Competitive Advantage through which

the company market share is attracted

Defining the Corporate Strategy

Corporate Strategy: The organizations positioning in terms of responsiveness, cost leadership and product differentiation

requirements, i.e., the sought competitive advantage(s).

The corporate strategy dictates the detailed strategies for each functional area (i.e., Operations, Finance, Marketing) but it is also affected by those areas.

Collectively, all these strategies seek to exploit (external) opportunities and (internal) strengths, neutralize (external) threats, and address (internal) weaknesses

Factors affecting Corporate Strategy

ExternalEmerging strengths and weaknesses of competitors => new threats and opportunities, respectivelyNew industry entrantsDevelopment of substitute productsDevelopment of new technologiesLegal developments (e.g., environmental concerns and regulations)Economic and political developments (e.g., new international agreements, political crises)

InternalCompany politics and restructuringModified relationships with customers and suppliersProduct Life Cycle

Strategy and Issues during a Products Life(J. Heizer & B. Render, Operations Management, Prentice Hall)

Introduction

Growth

Maturity

Decline

Time

Sales

Best period to increase market share

R&D engineering critical

Frequent product and process changesShort production runsHigh production costsLimited modelsAttention to quality

Practical to change price or quality imageStrengthen niche

Forecasting criticalProducts and process reliabilityIncrease capacityShift towards product focusEnhance distribution

Poor time to change image, price or qualityCompetitive costs become criticalDefend market position

Standardization - minor product changesOptimum capacityProcess stabilityLong production runs

Cost control critical

Little product differentiationOvercapacity in the industryReduce capacity and eventually prune line to eliminate items not returning good margin

The zone of strategic fit(adapted from Chopra & Meindl)

Implied Demand Uncertainty: The uncertainty that exists due to the portion of

Demand that the supply chain is required to meet.

The operations frontier, trade-offs, and the operational effectiveness

Differentiation

Cost Leadership

Responsiveness

Expanding the operations frontier:Dells revolution in the PC market

Dells competitive advantage: Provide customized PC configurations, with short delivery times and affordable prices.Dells success in PC market:

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Supporting Dells competitive advantage through a new operational model

Focused on strategic partnerships: suppliers down from 200 to 47Suppliers maintain nearby ship points; delivery time 15 minutes to 1 hourSuppliers own inventory until used in productionDemand pull throughout value chain information for inventory substitutionDemand forecasting is critical changes are shared immediately within Dell and with supply baseCustomers frequently steered to recommended configurations with high availability to balance supply and demandExternal logistics supplier used to manage inbound supply chain

PC SUPPLY CHAINS

The CSFs underlying Dells competitive advantage

Very high product (configurable) variety mass customization! Direct fulfillment - no intermediariesNo production launch until customer order booked (pure pull!)Very low finished goods inventory (costs) high inventory turns (raw material inventory influenced by recommended configurations)High velocity material flows & fulfillment

Dell performance

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3.bin

Emerging factors and trends enabling Dells strategy

The commoditization of the PC industryStandardized and interchangeable componentsEmergence of reliable manufacturing service providersRecent advances in Supply Chain ManagementInformation Technology (IT) platforms that allow the effective and efficient information exchange and coordination across the entire supply chain3rd party logistics service providersEmerging emphasis on virtual rather than vertical company integration

The primary drivers for achieving strategic fit in Supply Chain Strategy(adapted from Chopra & Meindl)

Corporate Strategy

Supply Chain Strategy

Efficiency

Responsiveness

Facilities

Inventory

Transportation

Information

Market

Segmentation

The role of Facilities

Facilities: The locations where inventory is processed and transformed into another state (manufacturing) or staged before being shipped to the next stage (warehousing)In general, centralization boosts efficiency, while decentralization boosts responsiveness (but not always)Primary decisions:Location Proximity to the customerProximity to resourcesAccess to markets (ability to circumvent quotas and tariffs)InfrastructureOperational costs and tax incentivesCapacityCapital cost vs. responsivenessOperations Methodology for Manufacturing FacilitiesProduct vs. functional focusFlexible vs. dedicated capacityWarehousing methodologySKU-based storageJob lot storageCross-docking

The role of Inventory

Primary inventory components: Raw MaterialWork In Process (WIP)Finished GoodsIt exists because of the finiteness of the production and transportation rates (Littles Law: I=TH*T)Types of InventoryCycle Inventory: It is incurred in an effort to control the impact of fixed ordering and set-up costs.Safety Inventory: It is used to deal with the randomness in the experienced demand; it is set so that it meets the supply chain to meet some service level (i.e., control the probability that no stock-out will be experienced at any replenishment cycle).Seasonal Inventory: It is used to help the supply chain deal with predictable variability in demand.Opportunistic Inventory: Takes advantage of bargains.Sourcing: Determine the set of suppliers / subcontractors to be used, and develop the contracts that will govern the relationship.

The role of Transportation

Transportation: The SC element that moves product between its different stages.Primary decisions:Mode(s) of TransportationAir: fastest but most expensiveTruck: Relatively quick, inexpensive and very flexible modeRail: Inexpensive mode to be used for large quantitiesShip: Slowest but often the most economical choice for large overseas shipmentsPipeline: Used (primarily) for oil and gasElectronic transportation: for goods as music and moviesRoute and Network SelectionInhouse or Oursource to some 3PL provider

The role of Information

Information exchange is necessary for the most extensive modes of coordination sought in contemporary supply chains. It allows the supply chain to improve simultaneously its efficiency and responsiveness.Information-related decisionsPush vs. pullExtent and modes of information sharing and coordinationForecasting and Aggregate Planning schemesPricing and revenue management policiesEnabling Technologies:Electronic Data Interchange (EDI): Enables paperless transactions, primarily for backend operations of the SC.The Internet and the WWW.Enterprise Resource Planning (ERP): enables transactional tracking and global visibility of information in the SC.Supply Chain Management (SCM) software: decision support tools.

Current Trends and Challenges in the SCM

Increasing variety of productsDecreasing product life cyclesIncreasingly demanding customersFragmentation of Supply Chain Ownership: vertical vs. virtual integrationGlobalization and Market SegmentationClosed Loop SC