[PDF] 2 Supply Chain and Operations Strategy

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The real measure of supply chain success is how well activities coordinate across the supply chain to create value for consumers, while increasing the profitability of every link in the supply chain In other words, supply chain management is the integrated process of producing value for the end user or ultimate consumer

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Supply chain management was at the forefront of importance in managing the flow of products and services A supply chain is designed to deliver products and services to customers in an efficient manner (Leonard, 2003) Consumers demand an error-free supply chain, which increases the pressure of managing demand and supply

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Supply Chain Management deals with the management of materials, information, and financial flows in a network consisting of suppliers, manufacturers, distributors and customers Stanford Supply Chain Forum Logistics involves “managing the flow of items, information, cash and ideas through the coordination of supply chain

SCDigest Top 11 Supply Chain Disasters

cite supply chain initiatives and prowess in annual reports and meetings with financial analysts But of course the opposite effect must then also occur – supply chain snafus are increasingly cited by CEOs and CFOs to explain poor financial performance Which got us thinking, what have been the greatest supply chain disasters we’ve

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Supply chain layer two: Supply chain planning, at the tactical level, occurs regularly but is not a daily task Most organizations are short term in nature and plan along a timeline of one quarter to one year The overall purpose is to develop plans that it here to supply chain strategy well achieving maximum benefit from supply chain resources

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sustainability and supply chain logistics If they can establish an efficient, strong supply chain then they will further deter new entrants into a heavily competitive market With the dairy company only being as successful as its suppliers giving them a fair deal in

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20 2

Supply Chain and

Operations Strategy

CHAPTER OUTLINE AND

L

EARNING OBJE

C TIVES � Understand and Use Generic SC&O Strategies

List and explain the three generic strategies.

Explain how managers use alignment to achieve

strategic goals.

Describe how managers assess customer value.

� Explain How to Apply SC&O Strategy Process and

Content

Explain Hoshin Kanri strategy and planning.

De�ne and differentiate between capabilities and competencies.

Explain the resource-based view.

��Describe and Understand How to Use the

Competitive Landscape and Porter's Five Forces

De�ne and explain Porter's �ve forces.

Outline how managers address each challenge in their strategies. ��Explain How Managers Use Supply Chain Strategy to Build Relationships

Describe how the strategy has changed.

Describe the types of relationships managers leverage. ��Execute Strategy

Describe how managers align strategic levels.

Explain why and how managers align incentives to

achieve optimum levels of output. Explain why and how focusing on processes helps managers reach their goals. ��Understand and Apply Strategic Metrics and

Measurements

Describe correct strategic behavior and how it is

implemented. Explain how managers use actionable and predictive metrics to achieve their strategic goals. List and describe commonly used supply chain metrics. Explain why managers need to think about their strategy in a holistic way. ��Describe the Changing Strategic Environment globalization, sustainability, and innovation.IMPROVINGQUALITY MANAGEMENT AND LOGISTICS

Customer

Relationship

Management

Downstream

Processes

Operations

Management

Core

Processes

Supply

Management

Upstream

Processes

IMPACTING

GLOBAL SC&O STRATEGY

INNOVATING

INTEGRATING

M02_FOST2403_01_CH02_pp020-050.indd 2019/11/14 5:39 PM

Winning at Medrad through Strategy

Medrad, Inc. was started in 1964, when Dr. M. Stephen Heilman created the flrst angiographic injector in the kitchen of his home near Pittsb urgh. As an emergency room physician, Heilman realized that being able to precisely inject a liquid contrast agent into blood vessels would make X -ray images clearer, improving diagnosis of cardiovascular diseases. Today, Medrad is a worldwide leader in developing, manufacturing, marketing, and servicing medical devices that enhance imaging of the human body. The success of Medrad"s strategic approach is demonstrated by overall customer satisfaction and Medrad"s strong flnancial performance. In an industry survey,

Medical Imaging

magazine asked readers to rate 57 medical imaging companies, includ ing Medrad, in 10 areas such as product quality, service, support and price, ability to capitalize on new and niche products, and company leadership. Medrad ranked among the top 10 in eight of the performance areas measured, including two flrst-place rankings. Medrad ranked second out of 57 for overall satisfaction and was in the t op two in price, quality of products, ease of integration, and service and support. As a comparison, the company"s key competitor did not flnish in the top 10 in any of the performanc e areas. As you read through this chapter, think about the way Medrad uses strategy to achieve high customer service ratings. At the end of the chapter, we will return to this company"s philosophy and how Medrad executes its strategy by using some of the concepts and tools from this chapter. leaders establish vision and guide others toward achieving important goals. Supply chain and operation (SC&O) strategy addresses many issues that are essential for competitiveness. much of SC&O strategy has to do with matching resources with business needs.

Strategy is a long-

term plan that de�nes how the company will win customers, create game-winning capabilities, �t into the competitive environment, and develop relationships. Strategy includes long-term planning that is performed at the highest organizational levels.

Supply chain strategy

is the supply chain portion of the strategic plan. it includes develop

ing the ability of the �rm to leverage internal relationships, supplier alliances, and customer re

lationships to create sustained competitive advantage.

Operations strategy focuses on allocating

resources within the �rm to provide value to customers. Our use of

SC&O strategy

encompasses

both of these considerations. in this chapter, we will �rst discuss generic SC&O strategies. We will

then discuss process (how to create strategies) and content (what is included in SC&O strategy), followed by the ways in which managers use the competitive landscape to drive strategy, the types of relationships supply chain managers have with their suppliers, and how managers measure their

strategic success. �e chapter concludes with a discussion of the changing strategic environment.

EnERi C

SC&O StRAtEGiE

S AnD A

LiGnMEnt

in this section, we de�ne generic strategies. it is important to understand how �rms compete

so that managers can align SC&O strategy with overall company goals. in addition to align ment, you will learn about agility and adaptability. G

Source:

National Institute of Standards and Technology, “Medrad,"

Pro?les of Baldridge Winners

, 2012, http://www.nist.gov. strategy

A long-term plan that deflnes

how the company will win customers, create game-winning capabilities, flt into the competitive environment, and develop relationships. supply chain strategy

The supply chain portion of the

strategic plan. operations strategy

Allocating resources within the flrm

to provide value to customers.

SC&O strategy

A strategy that encompasses both

supply chain management and operations management. M02_FOST2403_01_CH02_pp020-050.indd 2119/11/14 5:39 PM

22 CHAPTER 2 Supply Chain and Operations Strategy

G eneric Strategies

before getting to the nuts and bolts of SC&O strategy, we �rst must de�ne di�erent strate

gies and how �rms compete. michael Porter, a Harvard economist, suggests that there are three main ways that companies may gain an advantage over their competition (

FIGURE 2.1).

Some companies, such as Walmart, use a

cost strategy and �nd ways to reduce costs and provide customers with a lower price than competitors. Others, such as amazon.com, use a focus strategy and seek to service only select customers and provide these niche customers with a narrow range of unique products and services. Others still, such as apple, inc., use a di?erentiation strategy and seek to provide such distinctive products or services that com- petitors cannot compete with them. in each case, the company focuses on unique ways to gain advantage over competitors and win customers. �e company must then develop plans in order to achieve a life-long commitment from customers.

SC&O CURRENT

E VENT S

2.1 takes a

look at how three very successful �rms have adapted these three generic strategies. A lignment each generic strategy discussed (cost, focus, and di�erentiation) must be in alignment with the company's SC&O strategy.

Alignment

means that SC&O decisions will be consistent with the strategic directions for the �rm. For example, companies with a low-cost emphasis will need processes, systems, labor, and policies that support low cost. �e same need for alignment exists for di�erentiation and focus. Fi SHER St RAtEGy MODEL alignment in SC&O strategy matches capabilities with the sup- ply chain needs of the customer. �e

Fisher strategy model in

TABLE 2.1 shows one example

of alignment. in this model, managers match the type of supply chain they use with their customer's needs. as a manager, you might ask yourself if customers want your products to be functional or interactive? Functional products, such as kitchen appliances, tend to be more mass produced, and interactive products, such as tailored clothing or custom-made shoes, tend to be more customized. trade-o�s between functionality and interactivity have to be made relative to e�ciency and responsiveness in the supply chain. cost strategy

A generic strategy that focuses on

reducing cost. focus strategy

A generic strategy that emphasizes

select customers or markets. differentiation strategy

A generic strategy that emphasizes

providing special value to customers in a way that is difflcult for competitors to replicate. alignment

Consistency among strategic,

supply chain, and operational decisions.

Fisher strategy model

A model developed by Marshall

Fisher that matches capabilities

with customer needs.

FIGURE 2.1 >

P orter's G eneric S trategies

FocusDifferentiationCost

Generic

Strategies

Fisher's Supply Chain Alignment Model

Functional ProductsInteractive Products

Ef?cient Supply ChainsMatchMismatch

Responsive Supply ChainsMismatchMatch

TABLE 2.1 >

Based on data from Fisher, M., ‘What is the Right Supply Chain for Your Product?"

Harvard Business

Review

, March-April 1997, pp. 105-116. M02_FOST2403_01_CH02_pp020-050.indd 2219/11/14 5:39 PM

Generic SC&O Strategies and Alignment 23

SC&O CURRENT EVENTS 2.1

Cost Walmart is a good example of how using a cost advantage provides value to customers. Walmart shares point-of-sale cash register data with partners, reduces product lines to only the most protable stock-keeping units, and reformats store shelves to reduce waste and variability. Walmart also teaches suppliers to produce consumer goods more ef ciently and directs suppliers toward more cost-effective outsourcing options. In addition, Walmart is well known for ultra-efcient transportation, fast warehouses, and mini mized inventories to provide consumers with the lowest possible supply c hain and logistics costs. Walmart's unique, cost-saving capabilities appeal to consumers' desires for low pric es. Walmart's low-cost strategy provides it with a competitive advantage over other big-box stores and has allowed it to win and keep customers. Focus Amazon.com, on the other hand, does not outcompete competitors by charging lower prices but instead makes its considerable prot by employing a focus strategy. Before Amazon began selling goods, if you wanted to nd a unique item such as a particular baseball card, you had to conduct a time-consuming search. Even if you found the card you wanted, you did not know if the price was competitive or if the card was in good shape. Amazon saw such consumer struggles and made it easy for customers to locate and com pare prices for hard-to-nd products. Most companies reduce their product offerings to only very protable items, and the companies strategically locate these "A" items at retailers (e.g., BestBuy, Target, Walmart). A large store wouldn't stock rare baseball cards on the off chance that one customer may buy one. Amazon, on the other hand, sells a broad assortment of difcult-to-nd goods and electronically presents these "C" items to niche customers. Amazon has also implemented processes that minimize its risk by asking s uppliers to hold low-demand items in the supplier's inventory until it actually sells the products. The supplier then ships directly to the customer. Amazon avoids the high inventory-carrying costs of niche items while also creating competitive advantage by selling to niche cust omers. Customers are faithful to Amazon because they know they can nd their difcult-to-locate items at

Amazon.com without much hassle.

differentiation Apple, Inc. is a good example of a company that wins cus tomers through differentiating its products. Apple does not attempt to make the lowest-priced products or sell products that only select customers will appreciate. Instead, Apple prides itself on making iconic, easy-to-use products. Contrary to popular perception, the iPod was not the rst MP3 player on the market. When Apple introduced the iPod, however, it also offered consumers iTunes, a system to download copyrighted music. By bundling both the hardware and content into an integrated package, Apple provided customers a product unlike any other on the market. This easy-to-use system soon drove products like Microsoft's Zune and Dell's MP3 music player out of the marketplace and dominated market share. Because of the great demand for its highly sought-after products, Apple is able to charge a premium for its products. Apple's capability to create highly differentiated products creates a sustained competitive advantage for the company. examples of generic Strategies M02_FOST2403_01_CH02_pp020-050.indd 2319/11/14 5:40 PM

24 CHAPTER 2 Supply Chain and Operations Strategy

THE IMPORTANCE OF AGILITY even when �rms align their tactics with strategies, strategic planners must be prepared for the dynamics of supply and demand. in other words, SC&O strategic planners must be able to plan for and have the capabilities to adapt to the changes in the business environment. Agility, the ability of a supply chain to quickly respond to short-term changes in demand or supply, is another key SC&O consideration managers must make when creating strategy. manufacturers must be prepared to respond to short-term, rapid increases or decreases in demand as well as be able to react to interruptions in supply. manufacturers that are unpre pared for short-term change lose out to manufacturers that are prepared. For example, Span ish fashion retailer zara understood that fashion changes quickly and created the capabilities to respond in kind. So, rather than outsource its production to an asian manufacturer far away from its target markets, zara mostly manufactures within its own markets. While other manufacturers take months to design, create, and deliver product, zara does so in �ve weeks. manufacturing close to demand allows zara to adjust to frequently changing customer de mand quickly. �is agile capability allowed zara to not only capture market share from slower competitors, but also reduced marked-down merchandise from an industry average of 50 per- cent to 15 percent. its agile capability, in part, has allowed this european company to become the third largest clothing retailer in the world. A DAP TABILITY although agility may be important to capturing the value in short-term changes, adaptability is equally as important when capturing the value of long-term changes. Sometimes, the capability to change your entire supply chain or entire manufacturing strategy keeps a business viable.

Adaptability

is the capability to adjust a supply chain's design (i.e., the supply network, manufacturing capabilities, and distribution network) to meet major struc tural shi�s in the market. 1 For instance, a company should be able to judge when products are moving from an innovative, disruptive product to a more mature product. as products become more mature, companies must be prepared to shi� their supply chain to focus more on

e�ciency and less on responsiveness. to execute an e�ective change strategy, SC&O strategists

must identify the capabilities needed to make this transition. O RDER WINN ERS A N D Q UAL I F I ERS another method for achieving strategic alignment is by identifying how the �rm generates business.

Order winners

are those attributes that di�erentiate a company's products. 2 For example, for some products, such as most anything purchased at Kmart, the reason people buy is low price. if that is true, marketing can sell products based on low price. also, SC&O managers can provide processes, standardization, and high production volumes to support low price. �erefore, identifying how the �rm wins orders allows marketing and SC&O to align their e�orts in a way that will satisfy the customer.

Order quali?ers

are those necessary attributes that allow a �rm to enter into and compete in a market, and a �rm's strategy must account for these necessities. For example, a minimal level of product quality may be required simply to allow a �rm to compete. �e u.S. auto mobile industry supports such a marketplace. For example, Kia, made in Korea, had to meet basic quality standards for north america before they were allowed in u.S. markets. Having done so, Kia now competes successfully in the united States. identifying order quali�ers allows marketing and SC&O to align customer needs with operational choices, such as production technologies and process choices. Managing Across Majors 2.1 Marketing majors, the order-winning criterion occurs at the point of impact between SC&O and marketing. It can serve as a tool for marketing and SC&O managers to come to agreement on how the flrm will compete at a strate gic level. 1

Hau l. lee, "�e triple a Supply Chain"

Harvard Business Review, Oct. 2004, 1-12.

2 t. Hill, Manufacturing Strategy (basingstoke: uK, Palgrave, 2009). adaptability

The capability to adjust a

supply chain"s design (i.e., the supply network, manufacturing capabilities, and distribution network) to meet major structural shifts in the market. order winners

Those attributes that differentiate a

company"s products. order qualifiers

Necessary attributes that allow a

flrm to enter into and compete in a market; a flrm"s strategy must

account for these necessities.agilityThe ability of a supply chain to respond quickly to short-term changes in demand or supply.

M02_FOST2403_01_CH02_pp020-050.indd 2419/11/14 5:40 PM

Generic SC&O Strategies and Alignment 25

Assessing Customer Value

to achieve alignment in SC&O strategy, SC&O managers need to integrate closely with market ing managers, who are focused on customer needs. �e need to win and retain customers mo

tivates all three generic strategies and their alignment with a �rm's strategy. Customers provide

all the pro�t and most of the capital for a �rm. When a �rm is beginning to develop its strategy

of how to compete in a market, it must �rst identify key customers. managers identify their customers through market studies and conversations between marketing and SC&O managers. Furthermore, successful companies focus on the concept of the lifetime value (ltv) of the key customers rather than a onetime transaction. ltv examines the potential long-term worth that each customer provides to a company instead of the immediate pro�t that the customer may contribute. For example, if your new laptop breaks a�er only a few days of use and the retailer that sold it to you refuses to honor your warranty, not only will you never buy from that store again, but you will also make sure that all your friends know about the store's predatory practices. even though the electronics retailer received the pro�t from your one broken laptop, it will miss out on the potential pro�t that you and your friends may have provided them over your entire lifetime. Strategic decision makers must evaluate and consider the potential ltv of its customers instead of concentrating on the value of a single transaction. SC&O managers understand that customers are not all equally valuable. Some custom ers simply are not worth the cost or e�ort to serve. �e 80/20 rule, also called

Pareto's law,

suggests that 20 percent of customers account for 80 percent of revenues. �e key for strategy makers is to identify the very best customers and provide outstanding service to those top customers. identifying your top customer is not always simple, but in the end it is worth the e�ort (as

SC&O CURRENT

E VENT S

2.2 demonstrates). Other customers may still provide value, but

your best service should be o�ered to high-value customers. Strategists must understand key customers' needs for a �rm to survive and prosper. Customers are the judge and jury in competitive advantage. no matter how many of your shareholders, your competitors, or the media praise your company, your customer decides your long-term success.

SC&O CURRENT EVENTS 2.2

WebTV (relabeled as MSN TV) was celebrated as the rst tel evision set to allow viewers to surf websites. The product and service were envisioned by its originators as revolutionary steps forward toward interactive television. Despite its technological advances, WebTV quickly en countered problems because of its customers. Technologi cally naive mainstream consumers were the typical subscrib ers. They checked e-mail and chatted with other WebTV subscribers through their television, but rarely interacted with television programs, did not shop online, and did not regularly click on Internet advertisements. In short, they did not interact with their interactive TV and failed to bring in any advertisement and sales revenue. The people who used WebTV were not WebTV's target customer. Because they had very little tech savvy, however, they created extensive customer service problems. They called when the connection timed out. They called for e-mail advice. They even called to ask about websites unafliated with WebTV. While the company was spending money providing them with customer support services, WebTV consumers were not bringing in any revenue to offset these costs, putting WebTV in the red. "WebTV had clearly discovered where the TV enabled on-line market existed," wrote Laura Buddine, president of Lacta, a consulting and applications company. "The problem was that it wasn't the market they wanted." Microsoft scrapped the WebTV brand. It never passed the one-million-subscriber mark. However, this doesn't mean that the market doesn't have potential. Apple TV and Google Fiber have made signicant in-roads into this market.

Sources:

David Bank, "Foot in the Door: Microsoft Says It Already Has a Set-Top Box: It's Called Web

TV," Wall Street Journal, June 15, 1998, R12; and A. Figler, "Why WebTV Failed to Grow," Cable World,

Feb. 18, 2002.

WebTV Attracts the Wrong Customers

M02_FOST2403_01_CH02_pp020-050.indd 2519/11/14 5:40 PM

26 CHAPTER 2 Supply Chain and Operations Strategy

strategy process

The method pursued for creating

strategy. strategy content

That which construes a strategy.

operational subplans

Portions of the strategic plan

pertaining to the differing functional areas of the flrm that help ensure attainment of strategic objectives.

Hoshin Kanri planning

Policy deployment through

a strategic planning process that utilizes project-based improvement. catchball

Strategic back-and-forth dialogue

between successive levels of managers and their teams in

Hoshin Kanri.

C&O Strategy Pr

OC e SS and C O ntent We will now turn our attention from generic strategies to developing SC&O strategy. ?ere are two main components to SC&O strategy: process and content. Strategy process is the method pursued for creating strategy. Strategy content is what construes the strategy and includes (1) the already-discussed generic strategies, (2) the recognition and consideration of your competitors, (3) the creation and maintenance of supplier relationships, and (4) how you measure and react to your strategies' successes and failures. Figure 2.2 shows a hierarchy for SC&O strategic planning, and table 2.2 shows de?nitions of all the steps in the hierarchy. All planning starts with a forecast and requires an under- standing of the economic environment. Mission and vision also help inform strategic decision making. Managers use the forecast, mission, and vision, coupled with customer research and market analysis, to set strategic plans. From the strategic plan, operational subplans are estab- lished in the areas of ?nance, operations, supply chain management, information systems, hu man resources, and marketing. ?ese operational subplans are portions of the strategic plan pertaining to the di�ering functional areas of the ?rm that help ensure attainment of strategicquotesdbs_dbs15.pdfusesText_21