Chaper one is concerned with the question what is a supply chain?
Competitive Strategy and Supply Chain Strategy
A company's competitive strategy clearly spells out the set of customer needs that it seeks to satisfy through its products and services having a defined set of attributes.
The supply chain design or supply chain strategy must be in alignment with competitive strategy. A supply chain design can be taken up only after the competitive strategy is finalised and a supply chain needs to be redesigned or modified whenever there is a change in competitive strategy.
Chopra and Meindl use the concept of strategy to refer to what each function will try to do particularly well. They indicate that product strategy specifies the portfolio of products that will be offered for sale by the company and product development strategy specifies the portfolio of new products that the company will develop. A marketing and sales strategy specifies how the market will be segmented and the products of the company are positioned, priced and promoted. The supply chain strategy determines the procurement process of the raw materials, transportation of materials, manufacture of the product, distribution channels, warehousing and transportation of the products, and the follow-up services.
The supply chain strategy includes supplier strategy, operations strategy, and logistics strategy. Design decisions regarding inventory, transportation, operating facilities, and information flows in the supply chain of a company are all part of supply chain strategy.
The Process of Achieving Strategic Fit
Strategic fit between competitive strategy and supply chain strategy refers to the consistency between the customer needs that the competitive strategy aims to satisfy and the supply chain capabilities that the supply chain strategy aims to build. Chopra and Meindl stated an important point: no one function can ensure the chain's success. However, failure at one function may lead to failure of the overall chain.
Three steps are involved.
1. Understanding the customer needs regarding attributes of supply.
2. Understanding the supply chain attributes (alternatives available).
3. Achieving strategic fit. Making decision on the supply chain to best serve the needs of the target segment customers.
Understanding the Needs of the Customer Regarding Supply Attributes
Some of the attributes or dimensions of the supply are as follows:
The quantity of the product needed in each lot purchased. Preferred purchase quanity of the customer.
The response time from customer's enquiry.
The variety of products needed (applicable in case of a retail store, restaurant etc.).
The service level required (shortage of items)
The price of the product or service.
The desired rate of innovation.
Chopra and Meindl argued that while there are many attributes of the supply system which are to be understood from customer point of view and built into the supply chain, one key measure captures the variation for many of these attributes. That measure according to them is implied demand uncertainty. It is different from demand uncertainty. Demand uncertainty reflects the uncertainty of customer demand for a product. Implied demand uncertainty is uncertainty for a specific supply chain for the portion of the demand (target market) it caters to.
Implied demand uncertainty is defined in the context of multiple supply chains supplying the same product. Multiple supply chains come due to different attributes that they satisfy. An example is a firm supplying a product, say medicines, 24 hours versus a firm that supplies during normal day hours. The implied demand uncertainty for the 24 hour firm can be high as on some days there is heavy demand and some days very less demand and also the demand for specific medicines can be high on some days and can be even zero on some days.
A spectrum can be visualized in terms of implied demand uncertainty from low uncertainty to high uncertainty and a firm can be placed on this line or spectrum at some point.
Understanding the Supply Chain (Characteristics)A supply chain can be described initially by two characteristics responsiveness and efficiency.
Various supply chain characteristics contribute to responsiveness and efficiency.
Supply chain responsiveness is measured by the abilities of the chain to do the following:
Ability to respond to fluctuations in demand
Ability to provide short lead times
Ability to handle large variety of products
Ability to come out with innovations and highly innovative products
Ability to provide a very high service level
Supply chain efficiency is the cost of making and delivering a product to the customer. Increase in costs lower efficiency.
Cost-Responsiveness Efficient Frontier
It is a chart or graph with cost on the X-axis (origin is high cost) and Responsiveness on the Y axis (origin is low responsiveness). See Example
The frontier shows the minimum cost for a given responsiveness. If a company is operating within the frontier, at a higher cost, it can decrease the cost by appropriate actions but keep the responsiveness same. When it is operating on the efficient frontier, any increase in responsiveness can only come by incurring extra cost.
The frontier curve is a short-run phenomena and companies continually try to improve their supply chain by reducing cost further and increasing responsiveness and thus change the frontier over each period.
Achieving strategic fit
The greater the implied demand uncertainty, the more responsive a supply chain has to be. More responsive supply chains are more costly supply chains. When compared directly with less responsive but more efficient supply chains, their costs may look excessive. But the fit demands that for target markets with greater implied demand uncertainty, more responsive supply chain is to be employed.
Therefore it is to be emphasized that there is no right supply chain strategy independent of the competitive strategy. For a given competitive, a right supply chain can be specified.
Other Issues affecting the Strategic Fit Decision
Multiple Target Markets: Most companies may serve two or more target markets and the supply chain has to serve them both. In this case some tailoring has to be done by having common facilities and in some supply chain activities and dedicated facilities in some supply chain activities so that economies of scale where exist can be utitlized without deterioration in service for either target markets.
Product Life Cycle: As the product is new, implied demand uncertainty is high and as it matures, implied demand uncertainty is low. Hence supply chain design has to change over the life cycle of the product.
Competitive situation: As the product matures, more competitors emerge and implied demand uncertainty keeps chaging.
Expanding the Supply Chain Optimization and Strategic Fit Scope
Intracompany Intraoperation scope: The most limited scope over which strategic fit and optimization can be attempted is one with one operation within a functional area in a company. For example each warehouse of the company has its own goal.
Intracompany Intrafunctional scope: If the competitive strategy and supply chain strategy are aligned across all the supply chain activities (supplier strategy, operations strategy, and logistics strategy ) or functions of the company and optimization is attempted in an integral manner including the raw material inventory, manufacturing operations, finished goods inventory and warehouse, and transportation, the scope is extended to intracompany intrafuctional level.
Intracompany Interfunctional scope: At this level of scope, the entire company's activities are viewed and modeled as one single system, and optimization is done and company profit is maximized.
Intercompany Interfunctional scope: The Maximum Supply Chain Surplus view: At this level of optimization and fit making, the entire supply chain (including various different organizations) is modeled as a system and optimization and fit is designed so that supply chain surplus is maximized.
Flexible Intercompany interfunctional scope: The flexibility refers to dynamic situation. Physically, the participants in the supply chain keep changing, products keep changing, technologies keep changing, facilities keep changing. Mathematically, there are changes in number of variables and variable values. A supply chain capable of optimizing and fit making dynamically over time is a flexible intercompany interfuctional scope supply chain.
Sunil Chopra and Peter Meindl, Supply Chain Management: Strategy, Planning and Operations, Prentice Hall, 2001.
Fisher, Marshall L. "What is the Right Supply Chain for Your Product?" Harvard Business Review, March-April 1997, pp. 83-93.
For Further Reading
The Strategic Fit of Supply Chain Integration in TFL-LCD Industry
Sustaining Strategic Fit across Culturally Diverse Supply Chain Relationships
Relating Structure of Supply Chain Organization to Objectives: Few Propositions and a Pilot Study
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