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Supply Chain Strategy
Supply Chain Strategy & Strategic SCM | AIMS UKadmin2022-09-24T12:04:33+00:00
What is Supply Chain Strategy?
Supply Chain Strategy or Strategic Supply Chain Management is defined as: “A strategy for how the supply chain will function in its environment to meet the goals of the organization’s business and organization strategies”.
There’s a kind of magic in some words, “strategy” and “strategic” being key examples. Place “strategic” in front of the name of any business process and suddenly that process acquires an aura of great importance. Strategic objectives cry out to be achieved in a way that simple objectives do not. Strategic planning sounds considerably more sophisticated and powerful than plain old planning. There’s a reason those words have such power. Strategy, originally a military term, is how generals marshal all available resources in pursuit of victory. Strategy wins football games and chess matches—or loses them. It’s really the same in the business world.
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Benefits of Strategic Supply Chain Management:
Each company has a business strategy that paints a broad picture of how it will compete in the marketplace. Since business strategy is like military strategy in that it requires the marshaling and organizing of all its resources, then it becomes clear that the business’s supply chain can be its most potent strategic resource. Designing and building the right supply chain, one that promotes the business strategies, may just be the most powerful way to gain an edge on the competition, move faster, deliver more value, and be more flexible in the face of both steady change and surprises. The supply chain strategy is a complex and evolving means that organizations use to distinguish themselves in the competitive contest to create value for their customers and investors. These strategies are discussed in more detail during the supply chain management courses & training and 100% online MBA with Supply Chain Management programs offered at AIMS.
Supply Chain Strategies:
You can see how the direction of a firm or organization is predicated on its business strategy. Of course, many organizations now also use mission and vision statements to give clarity to their purpose. If these strategies are not aligned, the direction and fit will be askew. All these strategies are linked and dependent.
1. Business Strategy:
A plan for choosing how to compete. Three generic business strategies are:
- Least cost.
- Differentiation.
- Focus.
2. Organizational Strategy:
The strategy of an enterprise identifies how a company will function in its environment. This supply chain strategy specifies how to satisfy customers, how to grow the business, how to compete in its environment, how to manage the organization and develop capabilities within the business, and how to achieve financial objectives.
Prior to discussing organizational and supply chain strategy in more detail, the first topic in the section addresses business strategy and competitive advantages. Competitive advantages are closely related to business strategy because they outline the advantages the organization should realize once it has decided how it will compete. Other concepts related to supply chain strategic planning covered in this section include:
- Organizational and supply chain strategy.
- Prioritization options.
- Organizational capabilities.
- Alignment of capabilities and strategy.
- Resolving misalignment or gaps.
Business Strategy:
Typically a business strategy among supply chain strategies will outline how to grow the business, how to distinguish the business from the competition and outperform them, how to achieve superior levels of financial and market performance, and how to create or maintain a sustainable competitive edge. As per the definition provided previously, business strategies include the least cost, differentiation, and focus. The least cost relates to a lower cost than the competition for an otherwise equivalent product or service. Differentiation relates to a product or service with more features, options, or models than the competition. Focus relates to whether the product or service is designed for a broad audience or a well-defined market segment or segments. There are many ways that these generic strategies can be combined or made into hybrids. For example, common business strategies that are generic to many industries and manufacturers include the following variations:
BEST COST:
It creates a hybrid, low-cost approach for providing a differentiated product or service.
LOW COST:
It focuses on delivering low-price and no-frills basics with prices that are hard to match.
BROAD DIFFERENTIATION:
It creates product and service attributes that appeal to many buyers looking for a variety of goods.
FOCUSED DIFFERENTIATION:
It develops unique strategies for target market niches to meet unique buyer needs.
FOCUSED LOW COST:
It is designed to meet well-defined buyer needs at a low cost.
Competitive Advantages:
Competitive advantages mirror the strategies used to create them: A competitive advantage exists when an organization is able to provide the same benefits from a product or service at a lower cost than a competitor (low-cost advantage), and deliver benefits that exceed those of a competitor’s product or service (differentiation advantage), or create a product or service that is better suited to a given customer segment than what the competition can offer (focus advantage). The result of this competitive advantage is superior value creation for the organization and its customers. If this advantage is successfully implemented and marketed, it should result in improved profits and market share.
Focus Advantage Strategies:
The following discussion is divided into two ways to create a focused advantage:
- Niche marketing (versus mass marketing).
- Responsiveness.
NICHE MARKETING (VS MASS MARKETING):
Firms can choose to develop products and services for a mass market or for a relatively small slice of a larger market – a market niche. Some examples of niche market approaches include
- Catering to high-net-worth customers with products such as luxury automobiles, yachts, large homes, or specialized services such as estate planning, personal training, or expensive cruises.
- Designing for a limited age group, such as children or senior citizens with special needs instead of serving a broader population.
- Providing products or services for residents of a particular geographic area, such as growing vegetables for a neighborhood market rather than for packaging and shipping around the nation or world.
Niche marketing shares some characteristics with product service differentiation. In both cases, the product or service provided to customers has special features. Differentiation by quality, for example, can be the same thing as catering to high-net-worth customers. (Low-net-worth customers, or value shoppers, can also be niche.) Therefore, supply chain strategic planning will work for both approaches. Collaboration to achieve distinctive design is one example. Depending upon the niche, the sourcing may focus more on finding special expertise or high-quality materials rather than on low-cost labor.
RESPONSIVENESS:
Perhaps the most obvious example of responsiveness is the fast-food industry that grew up in the last half of the 20th century, led by McDonald’s. Diners at fine restaurants will happily wait half an hour for their specially cooked steak, but employees on short lunch breaks become impatient with even a few minutes in line as their sandwiches are prepared by the supply chain or supplier relationship management.
- In the early days of the Toyota Prius automobile – a highly differentiated car—buyers were known to wait for months for a new vehicle. (The same phenomenon occurred when the Volkswagen “Beetle” first came to the United States, where it was both highly differentiated and a low-cost option.) But businesspeople or diplomats on assignment expect a rental car or limousine to be ready immediately when they arrive at the airport. Manufacturers of clothing prosper or go bankrupt by their ability to bring the latest seasonal designs to market rapidly.
- Perishable products, such as raw food items, must be delivered rapidly, unlike preserved foods. Services may also compete on the basis of speed by cutting time spent waiting on the phone, standing in line, or processing paperwork.
- Supply chains designed for responsiveness may rely on substantial supplies of safety stock to avoid outages. (Overstocked seasonal items typically go on sale at the end of the season.) They may also have multiple warehouses to place products nearer to users. Third-party providers of rapid transportation, such as package delivery services, were developed to suit the needs of such or the global supply chain management.
Organizational Strategy:
While some firms may focus primarily on one business strategy, others may pursue a mix of strategies. Note, however, that making one strategy the priority may make other strategies difficult to achieve. For example, providing high quality at the lowest price is a challenge. But not all the strategies are mutually exclusive. Product differentiation and niche marketing fit well together. Either responsiveness or low cost may be a key competitive factor that differentiates a firm from its market rivals.
Once an organization has decided on a business strategy, it uses these choices to drive the organizational strategy and eventually the supply chain strategy.
When to Build an Organizational Strategy?
Recall that the supply chain strategy of an enterprise identifies how a company will function in its environment. The strategy specifies how to satisfy customers, how to grow the business, how to compete in its environment, how to manage the organization and develop capabilities within the business, and how to achieve financial objectives.
Where do you start when building an organization’s strategy? As author and business consultant Stephen R. Covey says in The Seven Habits of Highly Effective People, “begin with the end in mind,” that is, think first about the goals of the supply chain strategy.
Goals of Organizational Strategy:
Whatever strategy the corporation adopts to satisfy customers, grow, compete, organize itself, and make money, the supply chain has to operate in a manner that furthers those goals. To give a simple example, if customers are clamoring for deeply discounted prices on durable, high-volume goods with stable demand, a supply chain strategy that invests heavily in sourcing lower-cost materials in emerging markets would be on target for accomplishing that goal. Low-cost sourcing is probably the best option for this strategy because purchasing machines involves high capital investment and lower labor expenses could help offset the investment costs. However, you might also look into investing in equipment, as the high investment is covered by lower labor costs and increased revenue. (It is possible for an organization to both¬ invest in automation and move into a geographic area where labor costs are less. That decision would be based on volume, payback period, product life cycle, etc.).
IN THE CASE OF HORIZONTAL SUPPLY CHAINS:
Horizontal supply chains will contain a number of independent organizations, each with its own goals, processes, operations, technology, and strategy. So, when we refer to the necessity of aligning supply chain strategy with organizational strategy, we are referring to the strategies of a channel master or nucleus firm. Traditionally, that’s the manufacturer of a product—the company that sits right at the center of the chain (or network) with suppliers in tiers on one side and customers on the other.
IN THE CASE OF DOMINANT FIRMS:
If a supply chain has a dominant firm with a dominating supply chain strategy (one that is dictating its requirements to others), for example, a large retailer, then supplier and manufacturer strategies and goals must align with that retailer’s organizational and supply chain strategies. The suppliers of suppliers also have strategies to be brought into alignment. Finally, the strategies, once aligned, have to do two things: serve the end customers’ needs and be profitable for the chain as a whole and each company individually.
Business Plan:
A business plan is a written document that describes the overall direction of the firm and what it wants to become in the future. A business plan is defined in part as follows:
Introduction:
A statement of long-range strategy and revenue, cost, and profit objectives is usually accompanied by budgets, a projected balance sheet, and a cash flow (source and application of funds) statement. A business plan is usually stated in terms of dollars and grouped by product family. The business plan is then translated into synchronized tactical functional plans through the production planning process (or the sales and operations planning process). Although frequently stated in different terms (dollars versus units), these tactical plans should agree with each other and with the business plan.
Objectives:
The business plan provides general direction regarding how the firm plans on achieving its long-term objectives. Key functions such as finance, engineering, marketing, and operations typically have input into the plan. The overall strategic plan cascades down to those same functions.
Functions of Finance:
The finance function manages and tracks the sources of funds, amounts available for use, cash flows, budgets, profits, and return on investment. Engineering is responsible for research and development and the design and redesign of products that can be made most economically. Marketing’s focus is on analysis of the marketplace and how the firm positions itself and its products. (You will learn more about the role of marketing in the next section.) The goal of the operations function is to meet the demands of the marketplace via the organization’s products. Operations also manage the manufacturing facilities, machinery, equipment, labor, and materials as efficiently as possible. These functional roles collectively support the success of the supply chain.
Alignment with Business Strategy:
The business plan is based on and aligned with the business strategy and with market requirements. It provides a framework for the organization’s performance objectives that are tied to strategic goals. In the ideal world, the formation of and changes to the business plan come from top management’s modifications to the business strategy and organizational strategy. But in reality that may not always be the case.
Key Objectives of Supply Chain Strategies:
The supply chain has the overarching goal of providing customers with goods and services when they want them, at a competitive price, while being consistent with the organization’s extended supply chain strategies. If the supply chain cannot successfully execute this supply chain strategy, the business, or product line, may cease to exist.
When you think about the role the supply chain plays in the bigger context of your company, the functional strategies underlying supply chain management must articulate with the business plan, and remember also that the purpose of supply chains is to be globally competitive. Time, distance, and collaboration are basic elements in modern supply chains that impact the chain’s ability to respond to competitive changes in the global marketplace. The relationships of time, distance, and collaboration weave like three bright threads through the fabric of any supply chain on the globe. Therefore, collaborative relationships are explored further as they are a primary component of supply chain strategy.
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