A key issue relating to strategic fit is the scope, in terms of supply chain stages, across which the strategic fit applies. Scope of strategic fit refers to the functions within the firm and stages across the supply chain that devise an integrated strategy with an aligned objective. At one extreme, every operation within each functional area devises its own independent strategy, with the objective of optimizing its local performance. In this case, the scope of strategic fit is restricted to an operation in a functional area within a stage of the supply chain. At the opposite extreme, all functional areas across all stages of the supply chain devise aligned strategies that maximize supply chain surplus. In this case, the scope of strategic fit extends to the entire supply chain.
In this section, we discuss how expanding the scope of strategic fit improves supply chain performance. For example, IKEA has achieved great success by expanding its scope of strategic fit to include all functions and stages within the supply chain. Its competitive strategy is to offer a reasonable variety of furniture and home furnishings at low prices. Its stores are large and carry all products in inventory. Its products are designed to be modular and easy to assemble. The large stores and modular design allow IKEA to move final assembly and last-mile delivery (two high- cost operations) to the customer. As a result, all functions within the IKEA supply chain focus on efficiency. Its suppliers concentrate on producing large volumes of a few modules at low cost. Its transportation function focuses on shipping large quantities of high-density unassembled modules at low cost to the large stores. The strategy at every stage and function of the IKEA supply chain is aligned to increase the supply chain surplus.
1. Intraoperation Scope: Minimizing Local Cost
The intraoperation scope has each stage of the supply chain devising its strategy independently. In such a setting, the resulting collection of strategies typically does not align, resulting in conflict. This limited scope was the dominant practice during the 1950s and 1960s, when each operation within each stage of the supply chain attempted to minimize its own costs. As a result of this narrow scope, the transportation function at many firms may have shipped full truckloads without any regard for the resulting impact on inventories or responsiveness, or the sales function may have offered trade promotions to enhance revenue without any consideration for how those promotions affected production, warehousing, and transportation costs. The resulting lack of alignment diminished the supply chain surplus.
2. Intrafunctional Scope: Minimizing Functional Cost
Over time, managers recognized the weakness of the intraoperation scope and attempted to align all operations within a function. For example, the use of air freight could be justified only if the resulting savings in inventories and improved responsiveness justified the increased transportation cost. With the intrafunctional view, firms attempted to align all operations within a function. All supply chain functions, including sourcing, manufacturing, warehousing, and transportation, had to align their strategies to minimize total functional cost. As a result, product could be sourced from a higher-cost local supplier because the resulting decrease in inventory and transportation costs more than compensated for the higher unit cost.
3. Interfunctional Scope: Maximizing Company Profit
The key weakness of the intrafunctional view is that different functions within a firm may have conflicting objectives. Over time, companies became aware of this weakness as they saw, for example, marketing and sales focusing on revenue generation, and manufacturing and distribution focusing on cost reduction. Actions the two functions took were often in conflict, hurting the firm’s overall performance. Companies realized the importance of expanding the scope of strategic fit and aligning strategy across all functions within the firm. With the interfunctional scope, the goal is to maximize company profit. To achieve this goal, all functional strategies are developed to align with one another and with the competitive strategy.
The goal of aligning strategies across functions results in warehouse operations within McMaster-Carr carrying high inventory and excess capacity to ensure that marketing’s promise of next-day delivery is always met. The company’s profits grow because the increased margin
that customers are willing to pay for high reliability more than compensates for the higher inventory and warehouse expense. The company enjoys high profits because all functions align their strategy around the common objective of customer convenience in the form of next-day delivery of a wide variety of MRO products.
4. Intercompany Scope: Maximizing Supply Chain Surplus
The goal of only maximizing company profits can sometimes lead to conflict between stages of a supply chain. For example, both the supplier and the manufacturer in a supply chain may prefer to have the other side hold most of the inventory, with the goal of improving their own profits. If the two parties cannot look beyond their own profits, the more powerful party will simply force the other to hold inventories without any regard for where inventories are best held. The result is a decrease in the supply chain surplus—the total pie that both parties get to share.
The intercompany scope proposes a different approach. Instead of just forcing the inventory onto the weaker party, the two parties work together to reduce the amount of inventory required. By working together and sharing information, they can reduce inventories and total cost, thus increasing the supply chain surplus. The higher the supply chain surplus, the more competitive the supply chain is.
A good example of the intercompany approach is how Walmart and P&G plan promotions jointly. The two companies have a team (with employees from both parties) that works to ensure that the promotion is timed and executed to benefit both sides. Before the initiation of this collaborative effort, promotions at Walmart sometimes required P&G to run its facilities with overtime at high cost. The result was a decrease in the supply chain surplus because the product was sold at a discount at a time when it was being produced at high marginal cost. The collaborative teams now try to increase the supply chain surplus by timing the promotion to have high sales impact while minimizing the marginal cost increase. They work to ensure that the product is produced in such a manner that all promotion demand is met without generating excess unsold inventories.
5. Agile intercompany Scope
Up to this point, we have discussed strategic fit in a static context; that is, the players in a supply chain and the customers’ needs do not change over time. In reality, the situation is much more dynamic. Product life cycles are getting shorter, and companies must satisfy the changing needs of individual customers. A company may have to partner with many firms, depending on the product being produced and the customer being served. Firms’ strategies and operations must be agile enough to maintain strategic fit in a changing environment.
Agile intercompany scope refers to a firm’s ability to achieve strategic fit when partnering with supply chain stages that change over time. Firms must think in terms of supply chains consisting of many players at each stage. For example, a manufacturer may interface with a different set of suppliers and distributors depending on the product being produced and the customer being served. Furthermore, as customers’ needs vary over time, firms must have the ability to become part of new supply chains while ensuring strategic fit. This level of agility becomes more important as the competitive environment becomes more dynamic.
Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.
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