Corporate Strategy vis-a-vis Supply Chain Management

Prof. Rushen Chahal

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Fit Between Corporate and Functional Strategies (Chopra & Meindl)

Corporate Competitive Strategy

Product Development Strategy

Supply Chain or Operations Strategy

Marketing and Sales Strategy

Information Technology Strategy Finance Strategy Human Resources Strategy Page 2

Corporate Mission
The mission of the organization
defines its purpose, i.e., what it contributes to society states the rationale for its existence provides boundaries and focus defines the concept(s) around which the company can rally

Functional areas and business processes define their missions such that they support the overall corporate mission in a cooperative and synergistic manner.

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Corporate Mission Examples

Merck: The mission of Merck is to provide society with superior products and services-innovations and solutions that improve the quality of life and satisfy customer needs-to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return. FedEx: FedEx is committed to our People-Service-Profit philosophy. We will produce outstanding financial returns by providing totally reliable, competitively superior, global airground transportation of high-priority goods and documents that require rapid, time-certain delivery. Equally important, positive control of each package will be maintained utilizing real time electronic tracking and tracing systems. A complete record of each shipment and delivery will be presented with our request for payment. We will be helpful, courteous, and professional for each other, and the public. We will strive to have a completely satisfied customer at the end of each transaction. Page 4

Defining the Corporate Strategy

Responsiveness (Reliability; Quickness; Flexibility; e.g., Dell, Overnight Delivery Services)

Competitive Advantage through which the company market share is attracted Cost Leadership (Price; e.g., Wal-Mart, Southwest Airlines, Generic Drugs)

Differentiation (Quality; Uniqueness; e.g., Luxury cars, Fashion Industry, Brand Name Drugs)

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Defining the Corporate Strategy

Corporate Strategy: The organizations positioning in terms of responsiveness, cost leadership and product differentiation requirements, i.e., the sought competitive advantage(s). The corporate strategy dictates the detailed strategies for each functional area (i.e., Operations, Finance, Marketing) but it is also affected by those areas. Collectively, all these strategies seek to exploit (external) opportunities and (internal) strengths, neutralize (external) threats, and address (internal) weaknesses

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Factors affecting Corporate Strategy

External
Emerging strengths and weaknesses of competitors => new threats and opportunities, respectively New industry entrants Development of substitute products Development of new technologies Legal developments (e.g., environmental concerns and regulations) Economic and political developments (e.g., new international agreements, political crises)

Internal
Company politics and restructuring Modified relationships with customers and suppliers Product Life Cycle Page 7

Strategy and Issues during a Products Life

(J. Heizer & B. Render, Operations Management, Prentice Growth Maturity Decline Introduction Hall) Poor time to change Cost control
Best period to increase market share R&D engineering critical Practical to change price or quality image Strengthen niche image, price or quality Competitive costs become critical Defend market position critical

Sales

Time
Frequent product and process changes Short production runs High production costs Limited models Attention to quality Forecasting critical Products and process reliability Increase capacity Shift towards product focus Enhance distribution Standardization minor product changes Optimum capacity Process stability Long production runs Little product differentiation Overcapacity in the industry Reduce capacity and eventually prune line to eliminate items not returning good margin Page 8

The Zone of Strategic Fit

Responsive Supply Chain

Responsiveness Spectrum

Efficient Supply Chain Certain Demand Implied Uncertainty Spectrum Uncertain Demand

Implied Demand Uncertainty: The uncertainty that exists due to the portion of Demand that the supply chain is required to meet. Page 9

Operations Frontier, Trade-offs, and Operational Effectiveness

Responsiveness

Cost Leadership

Differentiation

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Expanding the Operations frontier: Dells revolution in the PC market

Dells competitive advantage: Provide customized PC configurations, with short delivery times and affordable prices. Dells success in PC market:

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Supporting Dells competitive advantage through a new operational model

Focused on strategic partnerships: suppliers down from 200 to 47 Suppliers maintain nearby ship points; delivery time 15 minutes to 1 hour Suppliers own inventory until used in production Demand pull throughout value chain information for inventory substitution Demand forecasting is critical changes are shared immediately within Dell and with supply base Customers frequently steered to recommended configurations with high availability to balance supply and demand External logistics supplier used to manage inbound supply chain

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PC SUPPLY CHAINS

Customer

Customer

PULL
Distribution Channels Virtual Integration

PULL
Dell

PUSH
Manufacturer

Suppliers

Suppliers

PUSH

Typical PC Supply Chain (Compaq, HP, IBM, etc.)

Dell Supply Chain Page 13

The CSFs underlying Dells competitive advantage

Very high product (configurable) variety mass customization! Direct fulfillment - no intermediaries No production launch until customer order booked (pure pull!) Very low finished goods inventory (costs) high inventory turns (raw material inventory influenced by recommended configurations) High velocity material flows & fulfillment

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Dell performance

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Emerging factors and trends enabling Dells strategy

The commoditization of the PC industry
Standardized and interchangeable components Emergence of reliable manufacturing service providers

Recent advances in Supply Chain Management

Information Technology (IT) platforms that allow the effective and efficient information exchange and coordination across the entire supply chain 3rd party logistics service providers Emerging emphasis on virtual rather than vertical company integration

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The Primary drivers for achieving strategic fit in Supply Chain Strategy
Corporate Strategy

Supply Chain Strategy Efficiency Responsiveness

Facilities

Inventory

Transportation

Information

Market Segmentation

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The Role of Facilities

Facilities: The locations where inventory is
processed and transformed into another state (manufacturing) or staged before being shipped to the next stage (warehousing)

In general, centralization boosts efficiency, while decentralization boosts responsiveness (but not always) Primary decisions:
Location
Proximity to the customer Proximity to resources Access to markets (ability to circumvent quotas and tariffs) Infrastructure Operational costs and tax incentives

Capacity
Capital cost vs. responsiveness

Operations Methodology for Manufacturing Facilities

Product vs. functional focus Flexible vs. dedicated capacity

Warehousing methodology
SKU-based storage Job lot storage Cross-docking

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The Role of Inventory

Primary inventory components:
Raw Material Work In Process (WIP) Finished Goods

It exists because of the finiteness of the production and transportation rates (Littles Law: I=TH*T) Types of Inventory
Cycle Inventory: It is incurred in an effort to control the impact of fixed ordering and set-up costs. Safety Inventory: It is used to deal with the randomness in the experienced demand; it is set so that it meets the supply chain to meet some service level (i.e., control the probability that no stock-out will be experienced at any replenishment cycle). Seasonal Inventory: It is used to help the supply chain deal with predictable variability in demand. Opportunistic Inventory: Takes advantage of bargains.

Sourcing: Determine the set of suppliers / subcontractors to be used, and develop the contracts that will govern the relationship. Page 19

The Role of Transportation

Transportation: The SC element that moves product between its different stages. Primary decisions:
Mode(s) of Transportation
Air: fastest but most expensive Truck: Relatively quick, inexpensive and very flexible mode Rail: Inexpensive mode to be used for large quantities Ship: Slowest but often the most economical choice for large overseas shipments Pipeline: Used (primarily) for oil and gas Electronic transportation: for goods as music and movies

Route and Network Selection Inhouse or Oursource to some 3PL provider

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The Role of Information

Information exchange is necessary for the most extensive modes of coordination sought in contemporary supply chains. It allows the supply chain to improve simultaneously its efficiency and responsiveness. Information-related decisions
Push vs. pull Extent and modes of information sharing and coordination Forecasting and Aggregate Planning schemes Pricing and revenue management policies Enabling Technologies:
Electronic Data Interchange (EDI): Enables paperless transactions, primarily for backend operations of the SC. The Internet and the WWW. Enterprise Resource Planning (ERP): enables transactional tracking and global visibility of information in the SC. Supply Chain Management (SCM) software: decision support tools.

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Current Trends and Challenges in the SCM

Increasing variety of products Decreasing product life cycles Increasingly demanding customers Fragmentation of Supply Chain Ownership: vertical vs. virtual integration Globalization and Market Segmentation Closed Loop SC

Production

Distribution

Consumption

Retrieval

Disposal

Disassembly/ Reprocessing

Reverse Logistics and Re-manufacturing network

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