Supply Chain Management How is Strategic Fit Achieved

Supply Chain Management How is Strategic Fit Achieved? ¯ Step 1: Understanding the customer and demand uncertainty ¯ Step 2: Understanding the supply chain ¯ Step 3: Achieving strategic fit Operations Management OPIM 5110

Step 1: Understanding the Customer and Demand Uncertainty ¯ Identify the needs of the customer segment being served Ø Ø Ø Response time customers will tolerate Variety of products needed Service level required Price of the product Desired rate of innovation in the product ¯ 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 The first step to strategic fit is to understand customers by mapping their demand on the implied uncertainty spectrum Operations Management OPIM 5110

Impact of Customer Needs on Implied Demand Uncertainty Customer Need Causes implied demand uncertainty to increase because … Range of quantity required increases. Wider range of quantity implies greater variance in demand Lead time decreases Less time to react to orders Variety of products required Demand per product becomes more increases 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 In general, customers want more quantity, more variety, more novelty, more availability, they want it now, and they want it everywhere. Operations Management OPIM 5110

Levels of Implied Demand Uncertainty Detergent Long lead time steel Purely functional products High Fashion i. Pod Entirely new products Customer Need Price Responsiveness Low High Implied Demand Uncertainty Operations Management OPIM 5110

Correlation Between Implied Demand Uncertainty and Other Attributes Attribute Low Implied Uncertainty Product margin Low Avg. forecast error 10% Avg. stockout rate Avg. forced season-end markdown Operations Management OPIM 5110 High Implied Uncertainty High 40%-100% 1%-2% 10%-40% 0% 10%-25%

¯ There is a cost to achieving responsiveness Responsiveness Step 2: Understanding the Supply Chain 50 40 30 20 10 0 0 20 40 Cost Driver Inventory Transportation Facilities Information Efficiency Responsiveness Focus on Cost Focus on Time Cost of holding Availability Consolidation Speed Consolidation / Proximity / Flexibility Dedicated What information is best suited for each objective Operations Management OPIM 5110 60

Step 3: Achieving Strategic Fit ¯ Ensure that what the supply chain is consistent with target customer’s needs Responsive supply chain Dell f o ne gic o Z ate Str Fit Responsiveness spectrum Efficient supply chain Barilla Pasta Certain demand Operations Management OPIM 5110 Implied uncertainty spectrum Uncertain demand

Comparison of Efficient and Responsive Supply Chains Efficient Responsive Focus on Cost Focus on Time Primary goal Product design strategy Lowest cost Min product cost Quick response Modularity to allow postponement Pricing strategy Mfg strategy Inventory strategy Lead time strategy Lower margins High utilization Minimize inventory Reduce but not at expense of greater cost Higher margins Capacity flexibility Buffer inventory 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 Operations Management OPIM 5110