Challenges to Achieving and Maintaining Strategic Fit in the Supply Chain

The key to achieving strategic fit is a company’s ability to find a balance between responsiveness and efficiency that best matches the needs of its target customers. In deciding where this balance should be located on the responsiveness spectrum, companies face many challenges. On one hand, these challenges have made it much more difficult for companies to create the ideal bal­ance. On the other hand, they have afforded companies increased opportunities for improving supply chain management. Managers need a solid understanding of the impact of these chal­lenges because they are critical to a company’s ability to grow its supply chain surplus.

1. Increasing Product Variety and Shrinking Life Cycles

One of the biggest challenges to maintaining strategic fit is the growth in product variety and the decrease in the life cycle of many products. Greater product variety and shorter life cycles increase uncertainty while reducing the window of opportunity within which the supply chain can achieve fit. The challenge gets magnified when companies continue to increase new products without maintaining the discipline of eliminating older ones. Apple, for example, has had great success limiting its product variety while continuing to introduce new products. This has allowed the company the luxury of dealing only with high-demand products, for which it becomes easier to design an aligned supply chain. In general, however, firms must design product platforms with common components and maintain a tailored supply chain that contains a responsive solution to handle new products and other low-volume products and a low-cost solution to handle successful high-volume products. Simultaneously, variety must be limited to what truly adds value to the customer. This often requires the continual elimination of older products.

2. Globalization and increasing uncertainty

Globalization has increased both the opportunities and risks for supply chains. The twenty-first century has started with significant fluctuations in exchange rates, global demand, and the price of crude oil, all factors that affect supply chain performance. In 2008 alone, the euro peaked in value at about $1.59 and went as low as $1.25. In 2001, the euro went as low as $0.85. After demand for automobiles in the United States peaked at more than 17 million vehicles, demand dropped significantly between November 2007 and October 2008. In October 2008, auto sales in the United States dropped by more than 30 percent relative to the same month the previous year. The drop in sales of larger vehicles was much more significant than the drop for smaller, more fuel efficient, cars. Crude oil peaked at more than $145 a barrel in July 2008 and was less than $50 a barrel by November 2008.

Supply chains designed to handle these uncertainties have performed much better than those that ignored them. For example, Honda built flexible plants that were a great help in 2008 as demand for sport-utility vehicles (SUVs) dropped but demand for small cars increased. Honda’s flexible plants that produced both the CRV and small cars on the same line continued strong operations. In contrast, companies that had built plants dedicated to producing only large trucks and SUVs had a great deal of difficulty in 2008 as demand dried up. Clearly, firms must account for global risks and uncertainties if they want to maintain strategic fit.

3. Fragmentation of Supply Chain ownership

Over the past several decades, most firms have become less vertically integrated. As companies have shed noncore functions, they have been able to take advantage of supplier and customer com­petencies that they themselves did not have. This new ownership structure, however, has also made aligning and managing the supply chain more difficult. With the chain broken into many owners, each with its own policies and interests, the chain is more difficult to coordinate. This problem could potentially cause each stage of a supply chain to work only toward its local objectives rather

than those of the whole chain, resulting in the reduction of overall supply chain profitability. Align­ing all members of a supply chain has become critical to achieving supply chain fit.

4. Changing Technology and Business Environment

With a changing environment in terms of customer needs and technology, companies must con­stantly evaluate their supply chain strategy to maintain strategic fit. A strategy that may have been very successful in one environment can easily become a weakness in a changed setting. Dell is an excellent example of this difficulty. For more than a decade, Dell enjoyed tremendous success with a supply chain strategy based on selling customized PCs direct to customers. These PCs were built to order in flexible facilities. By about 2005, though, the market had moved toward laptops, and customers started to place less value on customization. As a result, Dell was forced to rethink its supply chain strategy and start selling through retail outlets. Simultaneously, it started to increase the amount of assembly that was outsourced to low-cost contract manufacturers.

Another example is that of Blockbuster (see the Case Study at the end of the chapter), which achieved tremendous success in the 1990s with stores that carried a larger variety of VHS tapes than existing video rental stores. With the growth of DVDs, however, Netflix used the postal system to ship an even greater variety of films at low cost from centralized distribution centers. The growth in bandwidth allowed Netflix to stream digital content directly to customer homes. Simultaneously, Redbox developed vending machines that allowed some DVDs to be rented at low cost. Blockbuster’s inability to adjust to this transformation in technology and the business environment resulted in its bankruptcy in 2010.

5. The Environment and Sustainability

Issues related to the environment and sustainability have grown in relevance and must be accounted for when designing supply chain strategy. In some instances, regulation has been driv­ing changes; in others, change has been driven by the perception of the lack of sustainability as a risk factor. For example, the Waste Electrical and Electronic Equipment (WEEE) and Restriction of Hazardous Substances (RoHS) directives from the European Union forced cell phone manu­facturers to rethink their design and sourcing strategies. Starbucks, in contrast, was forced to focus on local sustainability of its supply sources because a supply failure, especially for higher- quality coffee, would have significantly affected its ability to grow. The company developed sourcing guidelines to ensure that produced coffee met environmental and social performance criteria at each stage of the supply chain. Environmental issues represent a tremendous opportu­nity to firms that can often add value to customers and lower their own costs along this dimen­sion (for example, with more appropriate packaging). These issues also represent a major challenge because some of the greatest opportunities require coordination across different mem­bers of the supply chain. To be successful, firms will need to design a strategy that engages the entire supply chain to identify and address opportunities for improved sustainability.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.