02 sc strategy

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Supply Chain Strategy

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Case StudyModern Book Distribution, Inc.

Founded 80 years ago MBD had been one of the largest efficient book distributors in

the country. Customers: booksellers (retailers) and major bookstore chains. Use of advanced forecasting technique to control inventory

levels and technological advanced warehouses to control operating expenses.

Good service levels – delivery within 2 days

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Evolution of two new types of retailers in the industry: large superstores & online stores

Challenges from large superstores:– Demand new services from their distributors.

– Superstores force the distributors to accept lower margins


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Challenges from online book sellers– Online book sellers later established their own DCs, due to

magnification of their business, where they kept inventory and handled packaging & shipment of books directly to end users.


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The changing business scenarios lead MBD to embark on a different strategic model and the list of queries popped by the manager are:– The impact of internet on business strategy used by the new categories

of book sellers– The utilization of internet by MBD to better serve the customers– Whether or not to move to pull distribution strategy


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Contents

Push based strategy

Pull based strategy

Push-pull based Supply Chain

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Push –Based Supply Chain

Traditional SC’s Production & distribution decisions are based on long term

forecasts Push-based SC reacts slowly to the changing market demand Variability in orders lead to bullwhip effect In push-based SC there is increased transportation costs, high

inventory levels, and/or high manufacturing costs due to emergency production change over.

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Principles of Forecast

The forecast is always wrong It is difficult to match supply and demand The longer the forecast horizon, the worse is the

forecast It is more difficult to predict customer demand for a

longer period of time Aggregate forecasts are more accurate It is easier to predict demand across all SKU’s

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Pull-Based Supply Chain Production and distribution are demand driven so that

there is co-ordination with the customer demand Reduced lead time, decreased inventory at retailers,

decreases variability in system, decreased inventory at manufacture due to reduction in demand variability.

Only produces to order Intuitively seems to be attractive.

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Pull-Based Supply Chain Production and distribution are demand driven so that

there is co-ordination with the customer demand Reduced lead time, decreased inventory at retailers,

decreases variability in system, decreased inventory at manufacture due to reduction in demand variability.

Only produces to order Intuitively seems to be attractive.

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Pull-Based Supply Chain

Often difficult to implement – when lead times are long

» impractical to react to demand information.

– more difficult to take advantage of economies of scale

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Push-pull Supply Chain

Advantages and disadvantages of push and pull supply chains:– new supply chain strategy that takes the best of both.

– Push–pull supply chain strategy

Some stages are operated in a push based manner Remaining stages are operated in a pull based manner

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Push-pull Supply Chain Initial stages are push based and later stages are pull

based

Push Strategy Pull Strategy

Push-Pull

boundary

EndCustomer

RawMaterials

Supply chain time line

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Example: PC manufacturer using a push-pull strategy. Component inventory is managed in based on forecast Final assembly is in response to specific customer

request Takes advantage of the third principle of forecast Reduces the uncertainty in component demand.

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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

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What is the appropriate supply chain strategy that the firm should apply for different products?

Push based? Pull based? Push-pull strategy?

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Matching Supply Chain Strategy

H

L

Pull

Push

Demand Uncertainty

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HL

Pull Push

Economies of Scale

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I II

IV III

H

L

Pull

Push

Demand Uncertainty

HL

Pull Push

Economies of Scale

Computer Furniture

GroceryCompact Discs

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Characteristics of the Push & Pull portions of Supply Chain

Portion Push Pull

Objective Minimize cost Maximize service level

Complexity High Low

Focus Resource allocation

Responsiveness

Lead time Long Short

Processes SC planning Order fulfillment

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The Uncertainty Framework

Two key uncertainties faced by the product: – Demand and

– Supply

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Demand Characteristics

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Supply Characteristics

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Examples

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Matched SC Strategies

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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

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How is Strategic Fit Achieved?

Step 1: Understanding the customer and supply chain uncertainty

Step 2: Understanding the supply chain 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

Quantity of product needed in each lot Response time customers will 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

Demand uncertainty: uncertainty of customer demand for a product

Implied demand uncertainty: resulting uncertainty for the supply chain given the portion of the demand the supply chain must handle and attributes the customer desires

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Achieving Strategic Fit

Understanding the Customer– Lot size

– Response time

– Service level

– Product variety

– Price

– Innovation

ImpliedDemand

Uncertainty

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Impact of Customer Needs on Implied Demand Uncertainty (Table 2.1)

Customer Need Causes implied demand uncertainty to increase because …

Range of quantity increases Wider range of quantity implies greater variance in demand

Lead time decreases Less time to react to orders

Variety of products required increases

Demand per product becomes more disaggregated

Number of channels increases Total customer demand is now disaggregated over more channels

Rate of innovation increases New products tend to have more uncertain demand

Required service level increases Firm now has to handle unusual surges in demand

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Levels of Implied Demand Uncertainty

Predictable supply and

demand

Salt at a supermarket

A new communication

device

Highly uncertain supply and demand

Figure 2.2: The Implied Uncertainty (Demand and Supply) Spectrum

Predictable supply and uncertain demand or uncertain supply and predictable demand or somewhat

uncertain supply and demand

An existing automobile

model

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Correlation Between Implied Demand Uncertainty and Other Attributes (Table 2.2)

Attribute Low Implied Uncertainty

High Implied Uncertainty

Product margin Low High

Avg. forecast error 10% 40%-100%

Avg. stockout rate 1%-2% 10%-40%

Avg. forced season-end markdown

0% 10%-25%

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Step 2: Understanding the Supply Chain

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 demanded

– meet short lead times

– handle a large variety of products

– build highly innovative products

– meet a very high service level

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Step 2: Understanding the Supply Chain

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

lower efficiency Second step to achieving strategic fit is to map the

supply chain on the responsiveness spectrum E.g. - restaurant

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Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier

High Low

Low

High

Responsiveness

Cost

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High Low

Low

High

Responsiveness

Cost

Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier

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Step 3: Achieving Strategic Fit

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

Examples: Dell, Barilla

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Responsiveness Spectrum

Integratedsteel mill

Dell

Highlyefficient

Highlyresponsive

Somewhatefficient

Somewhatresponsive

Hanesapparel

Mostautomotiveproduction

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Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map

Implied uncertainty spectrum

Responsive supply chain

Efficient supply chain

Certain demand

Uncertain demand

Responsiveness spectrum Zone o

f

Strateg

ic Fit

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Step 3: Achieving Strategic Fit

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

IKEA England Inc. Two key points

– there is no right supply chain strategy independent of competitive strategy

– there is a right supply chain strategy for a given competitive strategy

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Comparison of Efficient and Responsive Supply Chains

Efficient Responsive

Primary goal Lowest cost Quick response

Product design strategy Min product cost Modularity to allow postponement

Pricing strategy Lower margins Higher margins

Mfg strategy High utilization Capacity flexibility

Inventory strategy Minimize inventory Buffer inventory

Lead time strategy Reduce but not at expense of greater cost

Aggressively reduce even if costs are significant

Supplier selection strategy Cost and low quality Speed, flexibility, quality

Transportation strategy Greater reliance on low cost modes

Greater reliance on responsive (fast) modes

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Other Issues Affecting Strategic Fit

Multiple products and customer segments Product life cycle Competitive changes over time

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Achieving Strategic Fit Product Life Cycle Progresses/Competition

Implied uncertainty spectrum

Responsive supply chain

Efficient supply chain

Certain demand

Uncertain demand

Responsiveness spectrum Zone o

f

Strateg

ic Fit

INTRODUCTION

MATURING COMMODITY

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Expanding Strategic Scope Scope of strategic fit

– The functions and stages within a supply chain that devise an integrated strategy with a shared objective

– One extreme: each function at each stage develops its own strategy

– Other extreme: all functions in all stages devise a strategy jointly Five categories:

– Intracompany intraoperation scope– Intracompany intrafunctional scope– Intracompany interfunctional scope– Intercompany interfunctional scope– Flexible interfunctional scope

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Different Scopes of Strategic Fit Across a Supply Chain

Suppliers Manufacturer Distributor Retailer Customer

Competitive Strategy

Product Development

Strategy

Supply Chain Strategy

Marketing Strategy

IntracompanyIntraoperationat Distributor

IntracompanyIntrafunctionalat Distributor

IntracompanyInterfunctional

at Distributor

IntercompanyInterfunctional

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Summary of Learning Objectives

Why is achieving strategic fit critical to a company’s overall success?

How does a company achieve strategic fit between its supply chain strategy and its competitive strategy?

What is the importance of expanding the scope of strategic fit across the supply chain?

02 sc strategy

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