Chapter 3

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Supply Chain Performance: Achieving Strategic Fit and Scope

Date : 25/02/15Lecturer: Ibtihaj abbas khan

Supply Chain Management

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Outline

• Competitive and supply chain strategies• Achieving strategic fit

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What is Supply Chain Management?

• Managing supply chain flows and assets, to maximizesupply chain surplus

• What is supply chain surplus?

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Competitive and Supply Chain Strategies

• Competitive strategy: defines the set of customer needs a firm seeks to satisfy through its products and services, relative to it’s competitors. Examples: TCS, Siemens, Apple, Chase VS Agha’s, Dell, Wall Mart, Seven Eleven.– Is based on how customer prioritizes product cost, delivery time, variety,

quality and convenience.– 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• Supply chain strategy:

– determines the nature of material procurement, transportation of materials, manufacture of product or creation of service, distribution of product

– Its important to recognize that the supply chain strategy defines both processes within the firm and roles played by each entity in supply chain. (Outsourced functions)

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

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NewProduct

Development

Marketingand

SalesOperations Distribution Service

Finance, Accounting, Information Technology, Human Resources

The Value Chain: Linking Supply Chain and Business Strategy

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Achieving Strategic Fit

• Introduction• How is strategic fit achieved?• Other issues affecting strategic fit

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Achieving Strategic Fit• Strategic fit:

– Competitive and supply chain strategies have the same goals

– Consistency between customer priorities of competitive strategy and supply chain capabilities specified by the supply chain strategy

• 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—product variety at low cost

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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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• Overall attribute of customer demand– 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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• Implied demand uncertainty also related to customer needs and product attributes

• First step to strategic fit is to understand customers by mapping their demand on the implied uncertainty spectrum

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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• Figure 2.3: cost-responsiveness efficient frontier• Figure 2.4: 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

High Low

Low

High

Responsiveness

Cost

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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 (Figure 2.4)

Integratedsteel mill

Dell

Highlyefficient

Highlyresponsive

Somewhatefficient

Somewhatresponsive

Hanesapparel

Mostautomotiveproduction

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Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map (Fig. 2.5)

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 – Fig. 2.7

• Two extremes: Efficient supply chains (Barilla) and responsive supply chains (Dell) – Table 2.3

• 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 (Table 2.4)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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1. Different organizations in the supply chain may have different, conflicting objectives Purchasing

• Stable volume requirements • Flexible delivery time• Little variation in mix• Large quantities

Manufacturing• Long run production• High quality• High productivity• Low production cost

Difficulties In Achieving Strategic Fit

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Warehousing• Low inventory • Reduced transportation costs• Quick replenishment capability

Customers• Short order lead time• Enormous variety of products• Low prices

2. Supply chains are dynamic - they evolve and change over the period of time – Dell Example

Difficulties In Achieving Strategic Fit

Chapter 3

CREATING AND MANAGING SUPPLIER RELATIONSHIPS

Date : 25/02/2015

Lecturer : Ibtihaj abbas khan

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LEARNING OBJECTIVES

You should be able to:• Explain the importance of supplier partnerships• Understand the key factors for developing successful partnerships• Develop a supplier evaluation & certification program• Explain the importance of a supplier recognition program• Understand the capabilities of Supplier Relationship Management• Explain the benefits of using SRM software to manage suppliers

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CHAPTER OUTLINE

• Introduction • Developing Supplier Relationships• Supplier Evaluation & Certification• Supplier Development• Supplier Recognition Programs• Supplier Relationship Management

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Keys to Successful Partnerships

Strong supplier partnerships– Important to achieving win-win competitive

performance for the buyer and supplier -- these require a strategic perspective as opposed to a tactical position

– Involve “a mutual commitment over an extended time to work together to the mutual benefit of both parties, sharing relevant information and the risks and rewards of the relationship”

Keys to Successful Partnerships (Continued)

Building Trust With trust, partners are more willing to work together, find

compromise solutions to problems, work toward achieving long-term benefits for both parties, &, in short, go to the extra mile.

Shared Vision & Objectives Both partners must share the same vision & have objectives

that are not only clear but mutually agreeable. The focus must move beyond tactical issues & toward a more strategic path to corporate success.


Personal Relationships It is people who communicate & make things happen

Mutual Benefits & Needs Partnership should result in a win-win situation, which can

only be achieved if both companies have compatible needs. An alliance is much like a marriage, & if only one party is happy, then the marriage is not likely to last


Commitment & Top Management Support Commitment must start at the highest management level.

Partnerships tend to be successful when top executives are actively supporting the partnership

Change Management Companies must be prepared to manage change that comes

with the formation of new partnerships


Information Sharing & Lines of Communication

Both formal & informal lines of communication should be set up to facilitate free flow of information. Confidentiality of sensitive information must be maintained

Capabilities Key suppliers must have the right technology & capabilities

to meet cost, quality, & delivery requirements in a timely manner


Performance MetricsYou can’t improve what you can’t measure Measures related to quality, cost, delivery, & flexibility are

used to evaluate suppliers. Metrics should be:1) understandable, 2) easy to measure, &

3) focused on real value-added results A multi-criteria approach is best Total cost of ownership (TCO), is made up of all costs

associated w/acquisition, use, & maintenance of a good or service


Continuous Improvement Making a series of small improvements over time results in

the elimination of waste in a system

Buyers & suppliers must be willing to continuously improve their capabilities in meeting customer requirements of cost, quality, delivery, & technology

Supplier Evaluation & Certification

A process to identify best & most reliable suppliers Sourcing decisions are made on facts & not on perception Frequent feedback can help avoid surprises & maintain

good relationships. Suppliers should be allowed to provide constructive

feedback to the customer– Supplier Certification refers to “an organization’s process for

evaluating the quality systems of key suppliers in an effort to eliminate incoming inspections.” -Institute for Supply Management

Supplier Evaluation & Certification (Continued)

Criteria Used in Certification Programs No incoming product lot rejections (e.g., less than 0.5

percent defective) for a specified time period. No incoming non-product rejections (e.g., late delivery) for a

specified time period No significant supplier production-related negative incidents

for a specified time period ISO 9000/Q9000 certified or successfully passing a recent,

on-site quality system evaluation Mutually agreed-upon set of clearly specified quality

performance measures Fully documented process & quality system with cost controls

& continuous improvement capabilities Supplier’s processes stable & in control


The Weighted-Criteria Evaluation System1. Select the key dimensions of performance mutually

acceptable to both customer & supplier.2. Monitor & collect performance data.3. Assign weights to each of the dimensions.4. Evaluate performance measures between 0 & 100.5. Multiply dimension rating by weight & sum of overall score.6. Classify vendors based on their overall score: Unacceptable,

Conditional, Certified, & Preferred7. Audit & perform ongoing certification review.



Supplier Scorecard Used for the XYZ CompanyPerformance Measure Rating x Weight = Final ValueTechnology 80 0.10 8.00Quality 90 0.25 22.50Responsiveness 95 0.15 14.25Delivery 90 0.15 13.50Cost 80 0.15 12.00Environmental 90 0.05 4.50Business 90 0.15 13.50Total score 1.00 88.25

(Table 3.3. )


ISO 9000 Developed by International Organization for Standardization

(ISO) - series of management & quality standards in design, development, production, installation, & service.

Companies wanting to sell in the global market seek ISO 9000 certification.

ISO 14000 A family of standards for environmental management. The benefits include reduced energy consumption,

environmental liability, waste & pollution, & improved community goodwill.

Supplier DevelopmentSupplier development

A buyer’s activities to improve a supplier’s performance and/or capabilities based on the following approach –

1. Identify critical products & services2. Identify critical suppliers3. Form a cross-functional team4. Meet with top management of supplier5. Identify key projects6. Define details of Agreement7. Monitor status & modify strategies

Supplier Recognition Programs

Three Attributes – Companies should recognize & celebrate the

achievements of their best suppliers. Award winners exemplify true partnerships

continuous improvement, organizational commitment, & excellence.

Award-winning suppliers serve as role models for other suppliers.

Supplier Relationship Management

Supplier Relationship Management (SRM) – Improves profits & reduces costs.

– Refers to extended procurement processes such as sourcing analytics, sourcing execution, procurement execution, payment & settlement, supplier scorecarding and performance monitoring.

Supplier Relationship Management (Continued)

Five key points of an SRM system 1. Automation handles routine transactions2. Integration spans multiple departments,

processes, & software applications3. Visibility of information & process flows4. Collaboration through information sharing5. Optimization of processes & decision making

Supplier Relationship Management (Continued)

SRM Software Suppliers – – EcVision www.ecvision.com

– i2 Technologies, Inc. www.i2.com – Oracle www.oracle.com

– SAP www.sap.com – SAS Institute www.sas.com

– SupplyWorks www.supplyworks.com

Trends in Supplier Relationship Management

Sourcing & procurement are increasing in importance in organizations. They are becoming more strategic

More companies expect more cost reductions to come from their procurement functions

Staff is being reallocated from low-level transaction activities to more strategic & higher value-added positions

Companies with effective transaction activities tend to reduce costs better & have strategic & automated systems

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Chapter 3