SUPPLY CHAIN MANAGEMENT

BMEE310L
MODULE 2 EXAM PREPARATION GUIDE
Strategic Fit and Drivers of Performance

VIT Chennai | Dr. Avadhesh K Sharma

SECTION 1: CORE CONCEPTS & KEY TERMS
1.1 Supply Chain Management Basics
Supply Chain Management: Managing supply chain flows and assets to maximize supply chain
surplus.
Supply Chain Surplus: Customer value minus supply chain cost = Revenue from customer - Total
supply chain cost.
💡 EXAM TIP: Always remember: The GOAL of SCM is to MAXIMIZE SUPPLY CHAIN
SURPLUS.

1.2 Competitive & Supply Chain Strategies

Strategy Definition Example

Competitive Strategy Defines the set of customer needs a Amazon: low price + wide variety +
firm seeks to satisfy through fast delivery
products/services
Product Development Specifies portfolio of new products the Apple launching new iPhone
Strategy company will develop annually
Marketing & Sales Specifies how market is segmented, Premium pricing for luxury
Strategy product positioned, priced, promoted segment
Supply Chain Determines nature of procurement, Dell: direct-to-customer model;
Strategy transportation, manufacturing, Toyota: local facilities in each
distribution market

💡 EXAM TIP: The VALUE CHAIN links supply chain strategy to business strategy through:
New Product Dev -> Marketing/Sales -> Operations -> Distribution -> Service (supported by
Finance, IT, HR).

SECTION 2: ACHIEVING STRATEGIC FIT

2.1 What is Strategic Fit?
Strategic Fit = Consistency between customer priorities of competitive strategy AND supply chain
capabilities specified by supply chain strategy.
• Both competitive strategy and supply chain strategy must have ALIGNED GOALS
• A company may FAIL due to lack of strategic fit OR when processes/resources cannot execute
the desired strategy
💡 EXAM TIP: Dell is the classic example of strategic fit — direct sales model matched with a
highly responsive, build-to-order supply chain.
2.2 Three Steps to Achieving Strategic Fit
Step What to Do Key Output

Step 1 Understand the Customer & Supply Chain Implied Demand Uncertainty
Uncertainty — identify customer needs (lot size, position on spectrum
response time, variety, service level, price,
innovation)
Step 2 Understand the Supply Chain — map supply chain Supply Chain position on
capabilities in terms of responsiveness vs. efficiency Responsiveness Spectrum
trade-off
Step 3 Achieve Strategic Fit — ensure supply chain Zone of Strategic Fit (uncertainty
responsiveness matches implied demand uncertainty & responsiveness aligned)

2.3 Step 1: Customer & Implied Demand Uncertainty

Customer Needs that INCREASE Implied Demand Uncertainty:
Customer Need Change Why Uncertainty Increases

Range of quantity INCREASES Wider range implies greater variance in demand

Lead time DECREASES Less time to react to orders
Variety of products INCREASES Demand per product becomes more disaggregated
Number of channels INCREASES Total demand disaggregated over more channels
Rate of innovation INCREASES New products have more uncertain demand
Required service level INCREASES Firm must handle unusual surges in demand

Implied Uncertainty Spectrum (Figure 2.2):

• LOW uncertainty: Salt at a supermarket (predictable supply & demand)
• MEDIUM uncertainty: An existing automobile model
• HIGH uncertainty: A new communication device

Correlation Between Implied Demand Uncertainty & Other Attributes (Table 2.2):
Attribute Low Implied Uncertainty High Implied Uncertainty

Product Margin Low High

Avg. Forecast Error ~10% 40%–100%
Avg. Stockout Rate 1%–2% 10%–40%
Avg. Forced Season-end 0% 10%–25%
Markdown
2.4 Step 2: Understanding Supply Chain Capabilities
Supply Chain Responsiveness: Ability to: respond to wide demand ranges, meet short lead times,
handle large product variety, build innovative products, meet high service levels.
Supply Chain Efficiency: Cost of making and delivering the product to the customer.
KEY TRADE-OFF: Increasing responsiveness results in HIGHER COSTS that LOWER efficiency.
💡 EXAM TIP: The Cost-Responsiveness Efficient Frontier (Figure 2.3) shows that for a given
level of cost, there is a maximum achievable responsiveness — companies should operate
ON this frontier.

Responsiveness Spectrum (Figure 2.4):

Highly Efficient Somewhat Efficient Somewhat Highly Responsive
Responsive

Integrated Steel Mill Hanes Apparel Most Automotive Dell

Production

2.5 Step 3: Matching Uncertainty with Responsiveness

• HIGH implied uncertainty -> target HIGH responsiveness
• LOW implied uncertainty -> target EFFICIENCY
• The ZONE OF STRATEGIC FIT (Figure 2.5): the diagonal band where uncertainty level and
responsiveness level are consistent

Two Classic Examples:

Company Strategy Type Why it Works

Barilla (Pasta) Efficient Supply Chain Pasta has stable, predictable demand & supply.
Custom pasta + rapid shipping would be too expensive.
Focus on cost reduction.
McMaster-Carr Responsive Supply Customers need wide variety of MRO products within
(MRO) Chain 24 hours. High implied uncertainty. Maintains high
inventory & picking/packing capacity despite higher
costs.

2.6 Efficient vs. Responsive Supply Chains (Table 2.4) — MUST KNOW
Dimension Efficient SC Responsive SC

Primary Goal Lowest cost Quick response

Product Design Minimize product cost Modularity for postponement
Pricing Strategy Lower margins Higher margins
Manufacturing Strategy High utilization Capacity flexibility
Inventory Strategy Minimize inventory Buffer inventory
 Lead Time Strategy Reduce (not at expense of cost) Aggressively reduce (even if
costly)
Supplier Selection Cost and quality Speed, flexibility, quality
Transportation Low cost modes Responsive (fast) modes

💡 EXAM TIP: This table is VERY LIKELY to appear in your exam. Know each row by heart!

SECTION 3: OTHER ISSUES AFFECTING STRATEGIC FIT

3.1 Multiple Products & Customer Segments
• Firms sell DIFFERENT products to DIFFERENT customer segments (different implied demand
uncertainty)
• Supply chain must BALANCE efficiency and responsiveness across its product/customer portfolio
• Two approaches: (1) Different supply chains for different products, OR (2) Tailor supply chain to
each product's needs

3.2 Product Life Cycle

Life Cycle Stage Demand Characteristics Supply Chain Priority

Early / Introduction Uncertain demand, high margins, time RESPONSIVE supply chain
critical, product availability most important
Late / Maturity Predictable demand, lower margins, price EFFICIENT supply chain
is important
• As product matures: supply chain shifts from RESPONSIVENESS to EFFICIENCY
• Examples: pharmaceutical firms, Intel

3.3 Competitive Changes Over Time

• More competitors -> increased emphasis on variety at reasonable price
• The Internet makes it easier to offer wide product variety
• Supply chain must EVOLVE to meet changing competitive conditions

SECTION 4: EXPANDING STRATEGIC SCOPE

4.1 Scope of Strategic Fit
Scope of Strategic Fit: The functions within the firm AND stages across the supply chain that develop
an integrated strategy with aligned objectives.
4.2 Evolution of Supply Chain Strategies
Scope Level Focus Example Result

Intraoperation Minimize individual Shipping full truckloads Inefficiencies, reduced

operation costs without considering SC surplus
inventory or sales impact
Intrafunctional Minimize total functional Higher-cost local sourcing Better alignment
costs (sourcing + mfg + justified by within functions but
warehouse + transport) inventory/transport savings still conflicts between
functions
Interfunctional Maximize company McMaster-Carr carrying Increased company
profit — align ALL high inventory for next-day profits, but can cause
functions within the firm delivery to boost profit conflict between SC
stages
Intercompany Maximize supply chain Supplier + manufacturer Increased SC surplus,
surplus — collaboration work together to reduce enhanced overall
between companies total inventory needed competitiveness
Agile Intercompany Maintain strategic fit Partnering with different Rapid adaptation in
with CHANGING supply suppliers/distributors as short product life cycle
chain partners product/customer needs environments
change

💡 EXAM TIP: Know the progression: Intraoperation -> Intrafunctional -> Interfunctional ->
Intercompany -> Agile Intercompany
SECTION 5: FINANCIAL MEASURES OF PERFORMANCE
5.1 Key Financial Ratios — Formulas
Metric Formula What It Measures

ROE (Return on Equity) Net Income / Avg Shareholder Equity How efficiently a company
generates income from equity
investments
ROA (Return on Assets) (Net Income + Interest Expense x (1- Return earned on each dollar
Tax Rate)) / Avg Total Assets invested in assets
ROFL (Return on ROE - ROA Impact of leverage on returns
Financial Leverage)
APT (Accounts Payable Cost of Goods Sold / Accounts Speed of paying suppliers
Turnover) Payable
ART (Accounts Sales Revenue / Accounts Speed of collecting cash from
Receivable Turnover) Receivable customers
INVT (Inventory Cost of Goods Sold / Inventories Speed at which inventory is sold
Turnover) and replenished
PPET (PP&E Turnover) Sales Revenue / PP&E Effectiveness of physical assets in
generating sales
C2C (Cash-to-Cash -(1/APT) + (1/INVT) + (1/ART) [in Average time from cash outflow
Cycle) weeks: -52/APT + 52/INVT + 52/ART] (paying suppliers) to cash inflow
(collecting from customers)

💡 EXAM TIP: A NEGATIVE C2C means the company collects from customers BEFORE
paying suppliers (like Amazon, C2C = -10.53 weeks). This is a sign of strong bargaining
power!

5.2 Solved Problem: Amazon vs. Nordstrom (Tax Rate = 0.35)

Problem 1: ROE, ROA, ROFL, APT
Metric Amazon Nordstrom

ROE 274 / 9,746 = 2.81% 613 / 1,913 = 32.04%

ROA [274 + 141×(1-0.35)] / 40,159 = [613 + 160×(1-0.35)] / 8,089 =
0.91% 8.86%
ROFL 2.81 - 0.91 = 1.90% 32.04 - 8.86 = 23.18%
APT 54,181 / 21,821 = 2.48 7,432 / 1,415 = 5.25

Problem 2: ART, INVT, PPET

Metric Amazon Nordstrom
 ART 74,452 / 4,767 = 15.62 12,148 / 2,356 = 5.16
INVT 54,181 / 7,411 = 7.31 7,432 / 1,360 = 5.46
PPET 74,452 / 10,949 = 6.80 12,148 / 2,579 = 4.71

Problem 3: Cash-to-Cash (C2C) in Weeks

Component Formula Amazon (Weeks) Nordstrom (Weeks)

Weeks Payable 52 / APT 52/2.48 = 20.97 52/5.25 = 9.90

Weeks Receivable 52 / ART 52/15.62 = 3.33 52/5.16 = 10.08
Weeks in Inventory 52 / INVT 52/7.31 = 7.11 52/5.46 = 9.52
C2C -Payable + Inventory -20.97 + 7.11 + 3.33 = - -9.90 + 9.52 + 10.08 =
+ Receivable 10.53 +9.70

Interpretation:
• Amazon's negative C2C (-10.53 weeks): Collects cash from sales 10+ weeks BEFORE paying
suppliers — supplier-financed operations
• Nordstrom's positive C2C (+9.70 weeks): Must pay suppliers about 10 weeks BEFORE collecting
from customers
💡 EXAM TIP: Amazon's supply chain prioritizes SCALE, SPEED & AVAILABILITY over short-
term efficiency. Nordstrom focuses on LEAN ASSETS, FAST INVENTORY TURNS &
FINANCIAL EFFICIENCY.
SECTION 6: DRIVERS OF SUPPLY CHAIN PERFORMANCE
Overview: The 6 Drivers
Driver Type Drivers

Logistical Drivers Facilities | Inventory | Transportation

Cross-Functional Drivers Information | Sourcing | Pricing

6.1 FACILITIES
Role in Supply Chain:
• The WHERE of the supply chain — manufacturing or storage (warehouses)

Role in Competitive Strategy:

• Economies of scale -> EFFICIENCY priority (fewer, larger facilities)
• Larger number of smaller facilities -> RESPONSIVENESS priority

Key Components:
Component Efficiency Approach Responsiveness Approach

Location Centralized (fewer locations) Decentralized (closer to

customers)
Capacity High utilization, efficient Flexible, excess capacity
available
Manufacturing Methodology Process-focused (dedicated lines) Product-focused (flexible lines)
Warehousing Methodology Cross-docking, SKU storage Job lot storage for variety
• Example: Toyota & Honda open facilities in each major market for responsiveness + protection
from currency risk
• Honda's flexible facilities assemble both SUVs and cars — kept high utilization during 2008
downturn
💡 EXAM TIP: Overall trade-off for Facilities: RESPONSIVENESS vs. EFFICIENCY

6.2 INVENTORY
Role in Supply Chain:
• Exists because of MISMATCH between supply and demand
• Source of cost AND influence on responsiveness
Little's Law: I = R x T (Inventory = Throughput x Flow Time)

Three Types of Inventory:

Type Definition Trade-off
 Cycle Inventory Avg inventory used to satisfy demand Larger lots -> lower ordering cost but
between shipments. Depends on lot higher holding cost
size.
Safety Inventory Held in case demand exceeds Cost of carrying too much vs. cost of
expectations lost sales
Seasonal Inventory Built up to counter predictable Cost of extra inventory vs. cost of
demand variability flexible production
• More inventory: GREATER responsiveness but GREATER cost
• Less inventory: LOWER cost but LOWER responsiveness
• Example: Amazon stocks best-sellers in many regional warehouses (responsive) but slow-movers
in fewer locations (efficient)
💡 EXAM TIP: Overall trade-off for Inventory: RESPONSIVENESS vs. EFFICIENCY

6.3 TRANSPORTATION
Role in Supply Chain:
• Moves product between stages in the supply chain
• Faster transportation = greater responsiveness but LOWER efficiency
• Also affects inventory levels and facility decisions

Modes of Transportation:
Mode Speed Cost Best For

Air Fastest Highest High-value, time-sensitive goods

Truck Fast Moderate-High Flexible, door-to-door delivery
Rail Moderate Moderate Bulk, long-distance land transport
Ship Slowest Lowest High-volume international trade
Pipeline Continuous Low (once built) Liquids, gases
Electronic Instant Very Low Digital products/information
• Example: Blue Nile centralizes diamond inventory and uses FedEx overnight delivery — high
transport cost offset by low facility + inventory costs
💡 EXAM TIP: Overall trade-off for Transportation: RESPONSIVENESS vs. EFFICIENCY

6.4 INFORMATION
Role in Supply Chain:
• The CONNECTION between various stages — allows coordination
• Crucial for daily operations: production scheduling, inventory levels
• POTENTIALLY THE BIGGEST DRIVER of supply chain performance
• Good information can SIMULTANEOUSLY improve responsiveness AND efficiency (reduces
need for trade-off!)

Key Information Decisions:

 • Push (MRP) vs. Pull (demand info transmitted quickly throughout SC)
• Coordination and information sharing between stages
• Forecasting and aggregate planning

Enabling Technologies:
- EDI (Electronic Data Interchange)
- Internet / E-commerce platforms
- ERP Systems (SAP, Oracle)
- Supply Chain Management Software
• Example: Seven-Eleven Japan uses information to improve product availability while
DECREASING inventories
• Example: DHL moved from 50 decentralized systems to 1 centralized system -> 40% reduction in
infrastructure costs
• Example: Walmart uses supplier shipment information to facilitate cross-docking -> lower
inventory + transport expense
💡 EXAM TIP: Information is UNIQUE — it can improve BOTH responsiveness and efficiency
simultaneously!

6.5 SOURCING
Role in Supply Chain:
• Set of business processes required to PURCHASE goods and services in a supply chain
• Includes: supplier selection, single vs. multiple suppliers, contract negotiation

Role in Competitive Strategy:

• In-house vs. outsource decisions — affect both efficiency AND responsiveness
• Example: Cisco outsources manufacturing to contract manufacturers -> responsive, capital-light
model

Key Sourcing Decision Components:

Decision Efficiency Focus Responsiveness Focus
In-house vs. Outsource Outsource non-core activities to Keep critical/flexible capacity in-
reduce cost house
Supplier Selection Select on cost + quality Select on speed, flexibility, quality
Number of Suppliers Single supplier (lower price) Multiple suppliers (flexibility, risk
hedge)

💡 EXAM TIP: Overall trade-off for Sourcing: Increase SUPPLY CHAIN PROFITS

6.6 PRICING
Role in Supply Chain:
• Determines the amount to charge customers in the supply chain
• Pricing strategies can be used to MATCH DEMAND AND SUPPLY
Key Pricing Decision Components:
Pricing Strategy Description Supply Chain Impact

Pricing & Economies of Offer lower prices for larger Encourages customers to buy in bulk ->
Scale orders lower SC cost per unit
Everyday Low Pricing Consistent low prices (e.g., Stable, predictable demand -> efficient
(EDLP) Walmart) SC
High-Low Pricing Regular price + frequent Creates demand spikes -> bullwhip effect
promotions/sales -> less efficient
Fixed Price vs. Menu Fixed = simple; Menu = price Menu pricing can be used to segment
Pricing varies by delivery speed, customers by service level
quantity, etc.
• Example: Amazon charges more for faster delivery -> uses pricing to manage demand across
different service levels
💡 EXAM TIP: Overall trade-off for Pricing: Increase FIRM PROFITS
SECTION 7: QUICK REVISION CHEAT SHEET
7.1 All 6 Drivers — Summary
Driver Type Key Role Trade-off

Facilities Logistical WHERE inventory is Responsiveness vs. Efficiency

stored/produced
Inventory Logistical WHAT is held & where Responsiveness vs. Efficiency
Transportation Logistical HOW product moves Responsiveness vs. Efficiency
between stages
Information Cross-Functional Connects all stages; Improves BOTH (unique!)
biggest potential driver
Sourcing Cross-Functional WHO does what in the Increase SC Profits
supply chain
Pricing Cross-Functional HOW MUCH charged to Increase Firm Profits
customers

7.2 Important Examples to Remember

Company Supply Chain Strategy Key Lesson

Dell Direct-to-customer; build-to-order Strategic fit: responsive SC for uncertain,

customized demand
Barilla Efficient SC for pasta Low uncertainty demand -> efficient SC is
the right fit
McMaster-Carr Responsive SC for MRO High uncertainty demand -> responsive SC
despite higher costs
Amazon Hybrid: responsive for best-sellers, Different products need different SC
efficient for slow movers strategies; negative C2C
Toyota & Honda Local production facilities in each Responsiveness + currency/trade protection
market
Seven-Eleven High density stores, high Information improves availability while
Japan responsiveness, excellent IT reducing inventory
Blue Nile Centralized inventory + fast Higher transport cost offset by low facility &
shipping (FedEx overnight) inventory costs
DHL Centralized IT from 50 systems to 1 Good information -> 40% infrastructure cost
reduction
Cisco Outsourced manufacturing via Sourcing decision for responsiveness
contract manufacturers without capital investment
7.3 Must-Know Formulas Summary
Formula Expression

ROE Net Income / Avg Shareholder Equity

ROA (Net Income + Interest Expense x (1 - Tax Rate)) / Avg Total Assets
ROFL ROE - ROA
APT COGS / Accounts Payable
ART Sales Revenue / Accounts Receivable
INVT COGS / Inventories
PPET Sales Revenue / PP&E
C2C (weeks) -(52/APT) + (52/INVT) + (52/ART)
Little's Law I = R x T (Inventory = Throughput x Flow Time)

7.4 Likely Exam Questions

• Define strategic fit and explain the 3 steps to achieve it.
• Compare efficient vs. responsive supply chains (Table 2.4 type question).
• Calculate ROE, ROA, ROFL, APT, ART, INVT, PPET, C2C from given financial data.
• Explain the 6 drivers of supply chain performance with examples.
• What is implied demand uncertainty? How do customer needs affect it?
• Explain the different scopes of strategic fit (intraoperation to agile intercompany).
• Why is information considered the biggest potential driver of SC performance?
• How does the product life cycle affect supply chain strategy?

GOOD LUCK FOR YOUR FINALS! YOU GOT THIS!

VIT Chennai | BMEE310L | Module 2: Strategic Fit & Drivers of Performance