Aligning Supply Chain Strategies with Product Uncertainties. Lee, Hau L. California Management Review, Vol. 44, No. 3, (2002) pp.

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1 Aligning Supply Chain Strategies with Product Uncertainties 1 Lee, Hau L. California Management Review, Vol. 44, No. 3, (2002) pp April 1 3, 2013

2 Overview 2 Issue addressed Fit into broader field Findings Contributions Limitations Suggestions for future research

3 Issue Addressed 3 Do a product s supply and demand characteristics affect its optimal supply chain strategy? Marshall Fisher proposed a link between the demand characteristics of a product and its optimal supply chain The Fisher framework did not account for supply characteristics

4 Fit into broader field 4 Fisher s framework created two product categories based on demand characteristics: Functional products predictable demand, long product life cycle, low product variety, stock-out rate and contribution margin Innovative products unpredictable demand, short product life cycle, high product variety, stock-out rate and contribution margin Supply chain strategy should match product type Functional products -> Efficient supply chain Innovative products -> Responsive supply chain

5 Fit into broader field 5 Efficient supply chains seek to minimize physical costs production, transportation and inventory storage Responsive supply chains seek to minimize market mediation costs markdowns and stock-outs The most common supply chain mismatch is implementing an efficient strategy for an innovative product Less common mismatch is responsive strategy for a functional product

6 Hau Lee s Extensions Lee extended Marshall s work by introducing supply characteristics: Stable processes low supply uncertainty Evolving processes high supply uncertainty The framework consists of four product categories: Functional products with stable supply processes Functional products with evolving supply processes Innovative products with stable supply processes Innovative products with evolving supply processes Lee s uncertainty framework considers demand and supply uncertainty in designing SC strategy 6

7 Lee s summary of Demand Characteristics 7 Functional Product Low demand uncertainties Innovative Product High demand uncertainties More predictable demand Difficult to forecast Stable demand Long product life Low inventory cost Low profit margins Low product variety Higher volume per SKU Low stock-out cost Low obsolescence Variable demand Short selling season High inventory cost High profit margins High product variety Low volumes per SKU High stock-out cost High obsolescence Predictability of demand is the key distinguishing feature of products in this dimension Demand uncertainty can be reduced by information sharing and close coordination

8 Lee s introduction of Supply Characteristics 8 Stable Process Less breakdowns Stable and higher yields Less quality problems More supply sources Reliable suppliers Less process changes Less capacity constraint Easier to change over Flexible Dependable lead time Evolving Process Vulnerable to breakdowns Variable and lower yields Potential quality problems Limited supply sources Unreliable suppliers More process changes Potential capacity constrained Difficult to changeover Inflexible Variable lead time Key driving features are the stability and maturity of the manufacturing process, underlying technology and supply base Free exchange of information, collaboration and supplier hubs decrease supplier uncertainty

9 Generic Supply Chain Strategies 9 Efficient supply chains Focus on cost efficiency Initiatives: eliminate non-value adding activities, pursue scale economies, optimize capacity utilization and implement efficient information transmission Responsive supply chains Focus on flexibility in responding to customer needs Initiatives: Postponement, build-to-order processes, mass customization, information sharing and ensuring of order accuracy

10 Generic Supply Chain Strategies 10 Risk-hedging supply chains Focus on pooling and sharing resources across the supply chain Initiatives: increased safety stocks, multiple suppliers for critical components and real-time sharing of inventory and demand information Agile supply chains Hybrid of responsive and risk-hedging strategies Implement strategies that allow flexibility in response to changing customer needs and pool inventory and other resources to mitigate shortages and supply disruptions

11 Supply Uncertainty Matched Strategy Framework 11 Fisher s original insight Low (Stable Process) Demand Uncertainty Low (Functional Products) High (Innovative Products) Efficient supply chains Examples: groceries, basic apparel, food, oil and gas Responsive supply chains Examples: fashion apparel, computers, pop music High (Evolving Process) Lee s extension Risk-hedging supply chains Examples: hydro-electric power, some food produce Agile supply chains Examples: telecom, high-end computers, semiconductor

12 Role of the Internet in Supply Chain Strategy 12 Efficient supply chains: the internet enables tight and cost-effective information integration among supply chain members Responsive supply chains: accurate and timely capturing and transfer of customer requirements can be done very effectively via the internet Risk-hedging supply chains: information transparency in real-time through the internet makes pooling risks more manageable

13 Contributions 13 Provides a workable framework for aligning a firm s strategy with its products Enables the coordination of the entire supply chain around common strategy Highlights the importance of variation and uncertainty in supply and demand to strategic alignment and performance

14 Limitations 14 Framework does not adequately address products whose dominant uncertainty is neither supply nor demand e.g. regulatory uncertainty for pharmaceuticals

15 Suggestions for future research 15 Investigate whether the uncertainty framework is applicable to service industries Document the cost-benefit analysis that demonstrates improved performance when transitioning from a misaligned to an aligned strategy Validate the framework with more rigorous research methodologies

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