SUPPLY CHAIN STRATEGY

Dr. Debadyuti Das

Associate Professor

Faculty of Management Studies

University of Delhi – 110 007

debadyuti_das@yahoo.co.in, ddas@fms.edu

VALUE CHAIN

THE VALUE CHAIN: LINKING SUPPLY CHAIN AND BUSINESS STRATEGY

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NewProduct

Development

Marketingand

Sales Operations Distribution Service

Finance, Accounting, Information Technology, Human Resources

Business Strategy

New ProductStrategy

MarketingStrategy

Supply Chain Strategy

COMPETITIVE AND SUPPLY CHAIN STRATEGIES

Competitive strategy: defines the set of customer needs a firm 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

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COMPETITIVE AND SUPPLY CHAIN STRATEGIES

Supply chain strategy: determines the nature of material procurement,

transportation of materials, manufacture of product or creation of service, distribution of product

Consistency and support between supply chain strategy, competitive strategy, and other functional strategies is important

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EXAMPLES OF SC STRATEGY

Dell’s decision to sell direct. Gateway’s decision to sell PCs through

retailers. Cisco’s decision to use contract

manufacturers. Amazon’s decision to build warehouses to

stock some products and to continue using distributors as a source of other products.

Toyota’s decision to have production facilities in each of its major markets.

ACHIEVING STRATEGIC FIT

Strategic fit: Consistency between customer priorities of

competitive strategy and supply chain capabilities specified by the supply chain strategy

Competitive and supply chain strategies have the same goals

A company may fail because of a lack of strategic fit or because its processes and resources do not provide the capabilities to execute the desired strategy

Example of strategic fit -- Dell 7

HOW IS STRATEGIC FIT ACHIEVED?

Step 1: Understanding the customer and supply chain uncertainty

Step 2: Understanding the supply chain capabilities

Step 3: Achieving strategic fit

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STEP 1: UNDERSTANDING THE CUSTOMER AND SUPPLY CHAIN UNCERTAINTY

Identify the needs of the customer segment being served

Lot size Response time Variety of products Service level Price of the product Innovation

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STEP 2: UNDERSTANDING THE SUPPLY CHAIN CAPABILITIES

How does the firm best meet demand? Dimension describing the supply chain is

supply chain responsiveness Supply chain responsiveness -- ability to

respond to wide ranges of quantities demandedmeet short lead timeshandle a large variety of productsbuild highly innovative productsmeet a very high service level

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STEP 2: UNDERSTANDING THE SUPPLY CHAIN CAPABILITIES There is a cost to achieving

responsiveness Supply chain efficiency: cost of making

and delivering the product to the customer

Increasing responsiveness results in higher costs that lowers efficiency

Cost-responsiveness efficiency frontier Supply chain responsiveness spectrum Second step to achieving strategic fit is

to map the supply chain on the responsiveness spectrum

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UNDERSTANDING THE SUPPLY CHAIN: COST-RESPONSIVENESS EFFICIENT FRONTIER

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High Low

Low

High

Responsiveness

Cost

RESPONSIVENESS SPECTRUM

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Integratedsteel mill

Dell

Highlyefficient

Highlyresponsive

Somewhatefficient

Somewhatresponsive

Hanesapparel

Mostautomotiveproduction

STEP 3: ACHIEVING STRATEGIC FIT

Step is to ensure that what the supply chain does well is consistent with target customer’s needs

Uncertainty/Responsiveness map

Zone of strategic fit

Example: Dell, Barilla

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ACHIEVING STRATEGIC FIT SHOWN ON THE UNCERTAINTY/RESPONSIVENESS MAP

15uncertainty spectrum

Responsive supply chain

Efficient supply chain

Certain demand

Uncertain demand

Responsiveness spectrum Zone o

f

Strateg

ic Fit

SCM STRATEGIES – EFFICIENT VS. RESPONSIVE Responsive Strategy: ability to

respond to wide ranges of quantities demandedmeet short lead timeshandle a large variety of productsbuild highly innovative productsmeet a very high service level

Efficient Strategy: Focus is on improving efficiency and reducing cost by emphasizing on- procuring in bulk- manufacturing in bulk- distributing in bulk etc. by making use of economies of scale

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SCM STRATEGIES – EFFICIENT VS. RESPONSIVE Responsive strategy is useful for

products having high level of demand uncertainty, e.g. innovative products (Dell computer, Popular music, Fashion apparel, solar-powered wireless communication devices, mobility devices for children with disability etc.)

Efficient strategy is useful for products having a reasonable level of stable demand, e.g. functional products (Soap, detergent, tooth-paste, rice, wheat etc.) 17

STEP 3: ACHIEVING STRATEGIC FIT

All functions in the value chain must support the competitive strategy to achieve strategic fit

Two extremes: Efficient supply chains (Barilla) and responsive supply chains (Dell)

Two key pointsthere is no right supply chain strategy

independent of competitive strategythere is a right supply chain strategy for a given

competitive strategy 18

PRODUCT-SUPPLY CHAIN MATRIX

Right Supply Chain

Inefficient Supply Chain

Ineffective Supply Chain

Right Supply Chain

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Functional products

Innovative products

Efficient Strategies Responsive strategies

SC STRATEGY: A DIFFERENT PERSPECTIVE

Push-based supply chain

Pull-based supply chain

Push-Pull supply chain

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THE OLD PARADIGM: PUSH STRATEGIES

Production decisions based on long-term forecasts

Ordering decisions based on inventory & forecasts

What are the problems with push strategies? Inability to meet changing demand patterns Obsolescence The bullwhip effect:

Excessive inventory Excessive production variability Poor service levels

A NEWER PARADIGM: PULL STRATEGIES

Production is demand driven Production and distribution coordinated with true

customer demand Firms respond to specific orders

Pull Strategies result in: Reduced lead times (better anticipation) Decreased inventory levels at retailers and

manufacturers Decreased system variability Better response to changing markets

But: Harder to leverage economies of scale Doesn’t work in all cases

PUSH AND PULL SYSTEMS

What are the advantages of push systems?

What are the advantages of pull systems?

Is there a system that has the advantages of both systems?

A NEW SUPPLY CHAIN PARADIGM

A shift from a Push System... Production decisions are based on forecast

…to a Push-Pull System Initial portion of the supply chain is replenished

based on long-term forecasts For example, parts inventory may be replenished based on

forecastsFinal supply chain stages based on actual customer

demand. For example, assembly may be based on actual orders.

PUSH-PULL SUPPLY CHAINS

Push-Pull Boundary

PUSH STRATEGY PULL STRATEGY

Low Uncertainty High Uncertainty

The Supply Chain Time Line

CustomersSuppliers

CONSIDER TWO PC MANUFACTURERS:

Build to Stock Forecast demand Buys components Assembles computers Observes demand and

meets demand if possible.

A traditional push system

Build to order Forecast demand Buys components Observes demand Assembles computers Meets demand

A push-pull system

PUSH-PULL STRATEGIES

The push-pull system takes advantage of the rules of forecasting: Forecasts are always wrong The longer the forecast horizon, the worst is the

forecast Aggregate forecasts are more accurate

The Risk Pooling Concept

Delayed differentiation is another example Consider Benetton sweater production

WHAT IS THE BEST STRATEGY?

Pull Push

Pull

Push

I

Computer

II

IV III

Demand uncertainty

(C.V.)

Delivery costUnit price

L H

H

L

Economies of Scale

SELECTING THE BEST SC STRATEGY

Higher demand uncertainty suggests pull Higher importance of economies of scale

suggests push High uncertainty/ EOS not important such

as the computer industry implies pull Low uncertainty/ EOS important such as

groceries implies push Demand is stable Transportation cost reduction is critical Pull would not be appropriate here.

SELECTING THE BEST SC STRATEGY

Low uncertainty but low value of economies of scale (high volume books and CDs) Either push strategies or push/pull strategies might be

most appropriate

High uncertainty and high value of economies of scale For example, the furniture industry How can production be pull but delivery push? Is this a “pull-push” system?

LOCATING THE PUSH-PULL BOUNDARY

The push section: Uncertainty is relatively low Economies of scale important Long lead times Complex supply chain structures

Thus Management based on forecasts is appropriate Focus is on cost minimization Achieved by effective resource utilization –

supply chain optimization

LOCATING THE PUSH-PULL BOUNDARY

The pull section: High uncertainty Simple supply chain structure Short lead times

Thus Reacting to realized demand is important Focus on service level Flexible and responsive approaches

LOCATING THE PUSH-PULL BOUNDARY

The push section requires: Supply chain planning Long term strategies

The pull section requires: Order fulfillment processes Customer relationship management

Buffer inventory at the boundaries: The output of the tactical planning process The input to the order fulfillment process.

LOCATING THE PUSH-PULL BOUNDARY

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