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The value chain for any organization begins with new product development, which creates specifications for the product. Marketing and sales generates demand by publicizing the customer priorities that the product and services will satisfy.

Marketing also brings customer input back to new product development. Using new product specifications, operations transforms inputs to outputs to create the product. Service responds to customer requests during or after the sale. These are core functions that must be performed for successful sales. Finance, information technology and human resources support and facilitate the functioning of the supply chain.

Supply chain strategy includes what many traditionally call supplier strategy, operations strategy, and logistics strategy. Decisions regarding inventory, transportation, operating facilities, and information flows in the supply chain are all part of supply chain strategy.

Achieving Strategic Fit

For any company to be successful, its supply chain strategy and competitive strategy must fit together. Strategic fit refers to consistency between the customer priorities that the competitive strategy is designed to satisfy and the supply chain capabilities that the supply chain strategy aims to build.

There are three basic steps to achieving this strategic fit: -

Step 1: Understanding the Customer

To understand the customer, a company must identify the needs of the customer segment being served. Customer demand from different segments may vary along different attributes: -

• The quantity of product needed in each lot
• The response time that customers are willing to tolerate
• The variety of products needed
• The service level required
• The price of the product
• The desired rate of the innovation in the product

Each customer in a particular segment will tend to have similar needs, whereas customers in different segments can have very different needs. The first step in achieving strategic fit between competitive and supply chain strategies is to understand customers by mapping where their demand is placed on the implied uncertainty spectrum (Figure 2).

Step 2: Understanding the Supply Chain

After understanding the characteristics of the demand that the company faces, the next question is: How does the firm best meet that demand? Creating strategic fit is all about creating a supply chain strategy that best meets the particular type of demand that a company has targeted. Next step is to consider characteristics of supply chains and categorize them. Similar to the way demand was placed on a one-dimensional spectrum (the implied uncertain spectrum), supply chain can also be placed on such a spectrum. If we search for a single idea to which all characteristics of the supply chain contribute, it is the idea of the trade-off between responsiveness and efficiency.

Supply chain responsiveness includes a supply chain's ability to do the following: -

Respond to wide ranges of quantities demanded

• Meet short lead times
• Handle a large variety of products
• Build highly innovative products
• Meet a very high service level

These abilities are similar to many of the characteristics of demand that led high implied uncertainty. The more of these abilities that a supply chain has, the more responsive it is.

To respond to a wider range of quantities demanded, capacity must be increased, which increases costs. This increase in cost leads to the second definition: Supply chain efficiency is the cost off making and delivering a product to the customer. For every strategic choice to increase responsiveness, there are additional costs that lower efficiency.

Supply chains range from those that focus on being responsive to those that focus on efficiency with a goal of producing and supplying at the lowest possible cost. Figure 3 shows the responsiveness spectrum and where some different supply chains fall on this spectrum.

Step 3: Achieving Strategic Fit
The third and final step in achieving strategic fit is to ensure that the supply chain is consistent with the targeted customer's needs. The degree of supply chain responsiveness should be consistent with implied demand uncertainty.

In order to achieve strategic fit, the greater the implied demand uncertainty, the more responsive the supply chain should be. This relationship is represented by the "zone of strategic fit" illustrated in Figure 4. For a high level of performance, companies should gear their competitive strategy (and resulting implied demand uncertainty) and supply chain strategy (and resulting responsiveness) toward the zone of strategic fit.

To achieve complete strategic fit, a firm must consider all functional strategies within the value chain; it must ensure that all functions in the value chain have consistent strategies that support the competitive strategy. All functional strategies must support the goals of the competitive strategy, and all sub-strategies within the supply chain - such as manufacturing, inventory, and purchasing - must also be consistent with the supply chain's level of responsiveness.

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