Class 2- Competitive & SC Strategies

8/14/2019 Class 2- Competitive & SC Strategies

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COMPETITIVENESS AND SUPPLY CHAIN STRATEGIES

• Competitive strategy of a company defines the set of customer needs that it seeks tosatisfy through its products and services

• Defines how customer prioritizes product cost, delivery time, variety and quality

• Targets one or more customer segments and aims to provide products and services thatsatisfy these customer’s needs

• Some company’s competitive strategies are defined around the following

– High availability of a variety of reasonable quality products at low prices – eg: Wal-Mart

– Better customer convenience, availability and responsiveness – e.g.: (McMaster Carr,a hardware supply outfit that sells a bewildering variety of tools, equipment, and rawmaterials

– Better customization, and variety at reasonable cost – e.g. Dell

· To execute a competitive strategy of a company, all the functions play a role and eachmust develop its own strategy

· Supply chain strategy determines – the nature of procurement of raw materials,

– transportation of materials to and from the company,

– manufacture of the product or operations to provide the service, and

– distribution of the product to the customer, along with any follow-up service



Achieving Strategic Fit

• Strategic fit means that both the competitive and supply chain strategies havethe same goal

• It refers to consistency between

– The customer priorities that the competitive strategy hopes to satisfy and – The supply chain capabilities that the supply chain strategy aims to build

• Major task of chief executive officer (CEO) is aligning all of the core strategieswith the overall competitive strategy to achieve strategic fit

• During the supply chain design a key consideration is the strategic fit

• A company’s success or failure is closely linked to the following

1. The competitive strategy and all functional strategies must fit together to form acoordinated overall strategy

2. Different functions in a company must appropriately structure their process and

resources to be able to execute these strategies successfully



Competitive strategy: defines the target market/customer needs.

•Product Development strategy: portfolio of new products to be

developed to achieve competitive strategy.

•Marketing and sales strategy: specifies how the market will be

segmented and product positioned, priced, and promotedSupply chain strategy:

•determines the nature of material procurement, transportation of

materials, manufacture of product or creation of service, distribution ofproduct etc.



•Understanding the Customer and Supply Chain Uncertainty

•To understand the customer, a company must identify the needs of the customersegment being served

•Customer demand from different segments may vary along several attributes:

1. The quantity of the product needed in each lot2. The response time that customers are willing to tolerate

3. The variety of products needed

4. The service level required

5. The price of the product

6. The desired rate of innovation in the product



Efficient supply chains are designed to minimize cost that requires highutilization, minimizing inventory, and selecting vendors based primarily on cost andquality, and designing products that are produced at minimum cost. Importantsupply chain characteristics are responsiveness and efficiency

• Supply chain responsiveness includes a supply chain’s ability to do the following

- Respond to wide range of quantities demanded

- Meet short lead time

- Handle a large variety of products

- Build highly innovative products

- Meet a very high service level

- Handle supply uncertainty

Efficient supply chains focus on the reliable delivery of stable products ( e.g. foodand oil). Responsive supply chains focus on availability at the time of need for alarger variety of products (e.g. fashion and technology).



Implied Demand Uncertainty

• Demand uncertainty reflects the uncertainty of customer demand for product

• Implied demand uncertainty is the uncertainty in meeting a portion of customerdemand and it is the uncertainty the supply chain faces.

• It is mainly due to the attributes the customer desires Illustration1. As a supply chain raises its service level, it must be able to meet a higher and

higher percentage of actual demand, forcing it to prepare for rare surges indemand.

2. Thus raising the service level increases the implied demand uncertainty eventhough the product’s underlying demand uncertainty does not change.

• Product demand uncertainty and various customer needs that the supply chaintries to fill affect implied demand uncertainty



The following customer needs increases implied demand uncertainty

– Range quantity required increases

– Lead time decreases

– Variety of products required increases

– Number of channels through which product may be acquired increases

– Rate of innovation increases

– Required service level increases

Correlation between implied demand uncertainty and other attributes

Low Implied High Implied

Uncertainty Uncertainty

Product margin Low High

Average forecast error 10% 40% to 100%

Average stock out rate 1% to 2% 10% to 40%

Average forced season-

end markdown 0% 10% to 25%



Cost-Responsiveness Efficient Frontier

It is a chart or graph with cost on the X-axis (origin is high cost) andResponsiveness on the Y axis (origin is low responsiveness).The frontier shows the minimum cost for a given responsiveness. If a company isoperating at a higher cost, it can decrease the cost but keep the responsivenesssame. When it is operating on the efficient frontier, any increase in responsivenesscan only come by incurring extra cost, except when extra costs are equally matchedon a slope to outputs.

For high level of performance, companies should move their competitive strategyand supply chain strategy towards the zone of strategic fit



Efficient supply chain are aligned with make-to-stock (MTS) option. As cost is thefocus, the supply chains try to produce batches of products to achieve economicalproduction runs ( e.g. 10000 bottles of 300 ML coke before switching to producing asimilar size of 1L pack). As demand uncertainty is low, a reasonable quantity ofinventory can be kept as finished product ( in line with cost of holding the inventory).

The cost of transportation can be reduced by consolidating the shipment to benefitfrom economy of scale ( e.g. transporting a truck load instead of half truck load.

The responsive supply chain can be described as aligned with make-to-order(MTO). Due to higher demand uncertainty, it makes sense to have a flexibleprocessing capability to quickly changeover from one product to another to meetcustomer requirements. While efficient supply chain may focus on few (or one)production facility to have economy of scale, responsive supply chain build excesscapacity often at several locations. Responsive supply chain customize product(made to measure Sherwani or computer assembled to customer specifications)with ability to process single order. As responsiveness is the goal, premium

transportation is used to reduce lead time (e.g. courier or shipment by air).Please note responsiveness is also related to meeting requirement of a wide varietyof items on an ‘urgent’ basis. Responsive supply chain are not only MTO but alsobusinesses that keep a large variety of items in stock



Responsive spectrum covers all shades of requirements. From highly efficient tohighly responsive to responsive-efficient



•How does a supply chain make the efficiency / responsiveness tradeoff and position at the appropriatepoint - using Inventory, Transportation, Facilities, and Information decisions.

The goal of a supply chain strategy is to strike the balance between responsiveness and efficiency,resulting in a strategic fit with the competitive strategy. To reach this goal, a company uses the foursupply chain drivers. For each of the individual drivers, supply chain managers must make a trade-offbetween efficiency and responsiveness. The combined impact of these four drivers then determines theresponsiveness and efficiency of the entire supply chain.

Most companies begin with a competitive strategy and then decide what their supply chain strategyought to be. The supply chain strategy determines how the supply chain should perform with respect toefficiency and responsiveness. The supply chain must then use the supply chain drivers to reach theperformance level the supply chain strategy dictates.

The fundamental trade-off when making facilities decisions is between the cost of the number, location,and type of facilities (efficiency) and the level of responsiveness that these facil ities provide thecompany’s customers.

The fundamental trade-off when making inventory decisions is between responsiveness and efficiency.Increasing inventory will generally make the supply chain more responsive to the customer. This choice,however, comes at a cost as the added inventory decreases efficiency. Therefore, a supply chain

manager can use inventory as one of the drivers for reaching the level of responsiveness and eff iciencythe competitive strategy targets.

The fundamental trade-off for transportation is between the cost of transporting a given product(efficiency) and the speed with which that product is transported (responsiveness). The transportationchoice influences other drivers such as inventory and facilities. When supply chain managers thinkabout making transportation decisions, they frame the decision in terms of this trade-off.

Good information systems can help a firm improve both its responsiveness and efficiency. Theinformation driver is used to improve the performance of other drivers and the use of information isbased on the strategic position the other drivers support. Accurate information can help a firm improveefficiency by decreasing inventory and transportation costs. Accurate information can improveresponsiveness by helping a supply chain better match supply and demand.



Also see the last slide (note)



Functional products are staples that people buy in a wide range of retail outlets.Typically, they do not change much over time, have low profit margins, stablepredictable demand and long life cycles. Innovative products, on the other hand,give customers additional reasons to buy. Fashionable clothes and personalcomputers are examples of innovative products. Innovative products have short life

cycles, high profit margins, and volatile demand.



Having determined the nature of their products and their supply chain's priorities,managers can employ a matrix to formulate the ideal supply-chain strategy. The fourcells of the matrix represent the four possible combinations of products andpriorities. (See the slide above: "Matching Supply Chains with Products." By usingthe matrix to plot the nature of the demand for each of their product families and its

supply chain priorities, managers can discover whether the process the companyuses for supplying products is well matched to the product type: an efficient processfor functional products and a responsive process for innovative products.Companies that have either an innovative product with an efficient supply chain(upper right-hand cell) or a functional product with a responsive supply chain (lowerleft-hand cell) tend to be the ones with problems.

For understandable reasons, it is rare for companies to be in the lower left-handcell. Most companies that introduce functional products realize that they needefficient chains to supply them. If the products remain functional over time, thecompanies typically have the good sense to stick with efficient chains. Companies

often find themselves in the upper right-hand cell. The reason a position in this celldoesn't make sense is simple: for any company with innovative products, therewards from investments in improving supply chain responsiveness are usuallymuch greater than the rewards from investments in improving the chain's efficiency.



Process View of Supply Chain

· A supply chain is a sequence of processes and flows that take place within andbetween different stages and combine to fill a customer need for a product

· Two ways to view the processes performed in a supply chain

- Cycles view and- Push/pull view



Cycle view

•· Defines the processes involved and the owners of each process

•· Process in a supply chain are divided into a series of cycles

•· Cycles are performed at the interface between two successive stages of a supply

chain•· Supply chain process can be broken down into four process cycles such as

– Customer order cycle – Replenishment cycle – Manufacturing cycle – Procurement cycle

Each cycles occurs at the interface between two successive stages of the supplychain. A cycle view of the supply chain is very useful when considering operationaldecisions. It clearly specifies the roles and responsibilities of each member of thesupply chain. It helps the designer to consider the infrastructure required to supportthe processes

The supply chain is a concatenation (linking) of cycles with each cycle at the interfaceof two successive stages in the supply chain. Each cycle involves the customer stageplacing an order and receiving it after it has been supplied by the supplier stage.

• One difference is in size of order. Second difference is in predictability of orders -orders in the procurement cycle are predictable once manufacturing planning hasbeen done.

• This is the predominant view for ERP systems. It is a transaction level view andclearly defines each process and its owner.



Push/Pull View

· Categorizes processes in a supply chain based on whether they are initiated inresponse to a customer order (pull) or in anticipation of a customer order (push)

· Categorization is based on the timing of process execution relative to end

customer demand· At the time of execution of a pull process customer demand is known withcertainty

· In case of push process at the time of execution of a process demand is notknown and must be forecasted

· Pull process – reactive process

· Push process – speculative process

· Push/pull boundary in a supply chain separates push process from pullprocess

· Very useful when considering strategic decisions relating to supply chain· Forces more global consideration of supply chain processes as they relate to acustomer order

· More the pull process better the supply chain



•In this view processes are divided based on their timing relative to thetiming of a customer order. Define push and pull processes.

•They key difference is the uncertainty during the two phases.



Push strategy follows the traditional material requirement planning. Production planis based on forecast and the production schedule is prepared in advance.

In the production plant, the preplanned production schedule is handed over toworkstation-1. The production schedule information flows from WS-1 to downstream workstation. The material also flows downstream. As both information andmaterial flow in the downstream direction. The upstream station passes informationand material to downstream station irrespective of ability of downstream station toprocess the material ( e.g. if the WS2 has broken down. This results in excessivework-in-process.



In a Pull supply chain production and distribution are demand driven so that they arecoordinated with true customer demand rather than forecast. That is, in a pure Pullsystem, the firm does not hold any inventory and only produces to order. Thesesystems are intuitively attractive since they allow the firm to eliminate inventory,reduce the Bullwhip Effect, increase service levels, etc.

Unfortunately, it is very difficult to implement a Pull supply chain strategy when leadtimes are too long that it is impractical to react to demand information. Similarly, in aPull strategy, it is frequently more difficult to take advantage of economies of scale,since production and distribution decisions are in response to specific customerdemand and therefore batch production or efficient transportation modes, such astruckloads, are hard to achieve.

These advantages and disadvantages of Push and Pull supply chains have ledcompanies to look for a new supply chain strategy that takes advantage of the bestof both world; enter a hybrid of the two systems, Push-Pull Supply Chain systems.



Japanese for “sign” or “signboard”

• “A signaling device that gives authorization and instructions for the production orwithdrawal (conveyance) of items in a pull system.”

• Two types of Kanban

– Production Kanban (Make kanban) – Withdrawal Kanban (Move kanban)

This simple animation shows how production and Move kanbans can be used to pullproduct. Let us say that this company has decided to keep a buffer of 3 units (e.g. 3truck-loads) of product as finished stock. When one unit is dispatched from finishedproduct store, the store keeper will request another unit to make-up his outboundbuffer. He/she will raise a production card (make kanban). This production kanbanauthorises the machine operator to request semi- finished product from the previousstation to be ‘moved’ to his station (move kanban). As the semi-finished stock will godown by one unit, that would require the previous station to produce one more unit

to make-up the semi-finished buffer (raise a production card).This will require, for example, to move one unit (move card) requirement to bemoved to the machine for producing and making up semi finished stock. As one unitrequirement for the semi-finished stock is moved to the production station, thiswould require internal or external supplier to make up the stock (of semi-finishedproduct inputs).

Thus the production and move kanbans are used to pull product from upstreamstations.



As mentioned in previous sections, the disadvantages of Push and Pull supply chains alongwith changes in global business landscape have forced companies to look for a new supplychain strategy that takes advantage of the best of both world. This results into a hybrid ofthe two systems Push-Pull supply chain system.

In a Push-Pull strategy, the Push part is applied to the portion of the supply chain where

long- term forecasts have small uncertainty and variability. On the other hand, the Pull partis applied to the portion of the supply chain where uncertainty and variability are high andtherefore decisions are made only in response to realized demand.. The interface betweenthe Push-based stages and the Pull-based stages is referred as the Push-Pull boundary.

Amazon.com switched from a pure pull to a push-pull supply chain strategy after its salesreached a significant volume. It established regional warehouses in order to aggregatedemand across large geographical areas, and increase service levels. These regionalwarehouses form the boundary between the push and pull portions of the supply chain.

Similar to Amazon.com, Peapod moved from a pure pull to a push-pull strategy byestablishing warehouses in order to aggregate demand over geographical areas, andincrease service levels.

Computer components are standardized, and the demand for these components isdetermined by the finished goods that consume them. Thus, Dell achieves significanteconomies of scale and risk pooling by using a push-strategy in its supply chain up until theassembly operation.

Furniture is a highly customized product, but its handling and distribution are complex dueto its bulkiness. Therefore, the production phase is a pull system based on realized demandwhile transportation of furniture is implemented based on fixed delivery schedules in orderto achieve economies of scale and risk pooling



The appropriate supply chain strategy depends on the industry, the company andindividual products. The higher the uncertainty in customer demand, the moreimportant it is that parts of the supply chain will be managed based on a Pullstrategy. Similarly, the higher the delivery cost, relative to the unit price, the moreimportant it is that parts of the supply chain will be managed based on a Push

strategy.



The slide above provides a framework to match supply chain strategies withproducts and industries. The vertical coordinate provides information on uncertaintyin customer demand while the horizontal coordinate represents total delivery cost,including the costs of returns, relative to the unit price.

The region is partitioned into four boxes. The box marked I represents industries (or,more precisely, products) that are characterized by high uncertainty and low deliverycost, e.g., the computer industry. These are the industries and products for which itis important that parts of their supply chain will be managed based on a Pullstrategy. The box marked III represents products that are characterized by lowdemand uncertainty and high delivery costs, e.g., products in the grocery industrysuch as soft drinks, pasta, or soup. In this case, our analysis indicates that a Pullstrategy is not appropriate. Indeed, in this case, a traditional retail strategy, i.e., apush supply chain strategy, is appropriate, since managing inventory based on long-term forecast does not increase inventory holding costs while delivery costs arereduced due to economies of scale.

In Box II demand uncertainty is high and distribution cost is also high ( such as infurniture industry).

The box marked IV represents products characterized by low demand uncertainty,indicating a Push supply chain, and low delivery costs, suggesting a Pull supplychain. For instance, books and CDs fall in this category.



The two portions of the supply chain interact at the push-bull boundary orDecoupling Point.

Decoupling Point is the point at which real demand penetrates upstream in a supplychain . It is the point at which market ̀ `pull'’ meets upstream ̀ `push''. Also known asCustomer Order Decoupling Point (CODP)

It separates that part of the supply chain geared towards directly satisfyingcustomers' orders from that part of the supply chain based on planning

At this point there is an adequate Buffer Inventory that results from thecoordination of the two parts of the supply chain.

Buffer inventory is the output generated via push strategy but, at the same time,forms an input to the order fulfillment of push-based portion of the supply chain.



The manufacturing process starts by producing a generic or family product, whicheventually is modified to a specific end product as ordered.

The generic product is built and shipped according to long-term forecasts. Sincedemand for the generic product is an aggregation of demand for all itscorresponding end products, forecasts are more accurate, and thus, inventorylevels are reduced.

In contrast, customer demand for a customized end product has a high level ofuncertainty, so product differentiation occurs only in response to individual demand.The portion of the supply chain starting from the time of differentiation(customization) is a pull-based supply chain

The more the push-pull boundary is pushed toward the end of the supplychain, the better the cost reduction which can be achieved as a result of applicationof lean production principles.

Postponement Strategy tends to move the inventories upstream, because rawmaterial inventories are cheaper than end item inventories.

Moreover, the agility of a supply chain pull-based portion depends on the positionof the push-pull boundary along the supply chain and on the amount of buffer

inventory.



Delaying operations means that some phase, which usually precedes the point ofdifferentiation, is prolonged. In terms of inventory, companies may tend to move theinventories upstream, because raw material inventories are cheaper than end iteminventories. In this context, the best location for postponement is at the decouplingpoint. Delayed differentiation was discussed in the previous few slides (HP printer

and other examples.

Re-sequencing processes indirectly changes the location of CODP (the customerorder decoupling point), and thus should consider the effects of its upstream anddownstream shifting. It is important to note that re-sequencing processes may costhigher for manufacturing, develop new process and purchase new equipment.Companies have to balance it against other factors. The sequences of process arealso subject to technological constraints. However, with the increasing technologicaldevelopment, more and more processes sequences might be available.

Standard design is about using common components and processes from initialstages, so that products assume their unique attributes as late as possible. (e.g.

computer assembly)

Modularity means building a complex product or process from smaller subsystemsthat can be designed independently yet function together as a whole (e.g. Modularfurniture)



Re-sequencing processes indirectly changes the location of CODP (the customerorder decoupling point), and thus should consider the effects of its upstream anddownstream shifting. It is important to note that re-sequencing processes may costhigher for manufacturing, develop new process and purchase new equipment.Companies have to balance it against other factors. The sequences of process are

also subject to technological constraints. However, with the increasing technologicaldevelopment, more and more processes sequences might be available.



Demand uncertainty lowdemand volume high -- Push

Demand uncertainty lowdemand volume low -- Push- Pull ( push in production,pull in distribution)

Demand uncertainty high- demand volume low -- Pull

Demand uncertainty high- demand volume high -- Push- Pull ( delayeddifferentiation)



The production strategy in furniture industry has to follow a pull-based strategysince it is impossible to make production decisions based on long-term forecasts.On the other hand, the distribution strategy needs to take advantage of economiesof scale and thus use retail channels. This is exactly the strategy employed by manyretailers that do not keep any inventory of furniture. When a customer places an

order, it is sent to the manufacturer who orders the fabric and produces to order.Once the product is ready, it is shipped, typically using truckload carriers, togetherwith many other products to the retail store and from there to the customer. For thispurpose, the manufacturer typically has a fixed delivery schedule and this is used toaggregate all products that are delivered to stores in the same region. Thisdistribution strategy allows the supply chain to reduce not only transportation costs,due to economies of scale, but also to reduce return rates. This is true, since oncethe new furniture arrives at the store it can be inspected and, if needed, repaired.Thus, the supply chain strategy followed by furniture manufacturers is, in somesense, a Pull-Push strategy where production is done based on realized demand,

a Pull strategy, while delivery is according to a fixed schedule, a Push strategy.

Class 2- Competitive & SC Strategies

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