BUSINESS STRATEGY
AND
SUPPLY CHAIN STRATEGY
Cases: Dell and HP
by
Deniz Gündüz, MSc
Thesis
Presented to the Faculty of Management and Organization
of the University of Groningen
in Partial Fulfillment
of the Requirements
for the Degree of
MSc Business Administration specialization in
Operations and Supply Chain
The University of Groningen
June, 2007
Preface
I carried out a research to observe the link between business strategy and supply chain strategy and apply it on two companies; Dell and HP, as my final year’s Master Thesis for the University of Groningen, faculty of Business Administration.
I am grateful to my supervisor of the Faculty of Management and Organization of the University of Groningen Dr. ir. S. Brinkman and my co-assessor Prof. Dr. J. Wijngaard. And finally I would like to apologize to the reader for any remaining linguistic and grammatical errors in this thesis.
Deniz Gündüz
Executive Summary
This study contains the results of the Master thesis produced in order to see the connection between business strategy and supply chain strategy.
All markets are consolidating, to stay competitive in the market companies must perform on all the aspects within the supply chain. Companies build up their business strategies which have to build up the core of all other functional strategies. Supply chain strategy is one of those functional strategies playing an important role in achieving the targets of the companies.
The purpose of this research is to identify the relationship between business strategy and supply chain strategy. In order to apply the knowledge which is studied in the theoretical part, Dell and HP will be analyzed. The research was carried out on the basis of the following question:
What is the relationship between business strategy and supply chain strategy? Do the supply chain strategies of Dell and HP support their business strategies?
Three goals are stated to answer the research question, which are answered in different chapters: To explain the link between business strategy and supply chain strategy. To identify business strategies and make assumptions of supply chain strategies of Dell’s and HP’s consumer market products by using theoretical concepts. To compare assumed supply chain strategies of both companies and if possible, make suggestions of developing a more suitable strategy.
This research starts with an introduction, where a short opening to the study is made. This is followed by business elements and strategy. This chapter explains what business and functional strategies actually are. Porter’s generic strategies are also clarified in this chapter. Third chapter deals with supply chains and concepts that have affect on it. These are: demand management strategies and customer order decoupling point, integration, and the role of information technologies. In the final chapter, Dell and HP are analyzed. After watching their business functions and business strategies, some assumptions about their probable supply chain designs are made. After all, by comparing those assumed strategies with their business strategies, some results are gotten, which contribute to an answer on the research question. The research ends with some recommendations for further studies.
PREFACE
EXECUTIVE SUMMARY
Chapter 1 Introduction...6
Chapter 2 Elements of business and strategy ...7
2.1 Introduction...7
2.2 Elements of Business ...7
2.2 Strategy ...8
2.2.1 Business strategy...9
2.2.2 Functional strategies ...12
2.3 Michael Porter’s Generic Strategies ...15
2.3.1 Cost Leadership ...16
2.3.2 Differentiation...17
2.3.3 Focus strategy ...18
2.3.4 Stuck in the middle or integrated strategies...19
Chapter 3 Elements of supply chain...20
3.1 Introduction...20
3.2 Supply chain design ...20
3.3 Demand Management Strategies and CODP...22
3.4 Postponement...26
3.5 From Vertical to Virtual Integration ...28
3.5.1 Vertical Integration ...28
3.5.2 Virtual Integration...29
3.6 The role of IT in supply chains ...30
3.6.1 EDI (Electronic Data Interchange) ...30
3.6.2 E-Business...31
3.7 Conclusion ...33
Chapter 4 Company analyzes ...35
4.1 Introduction...35
4.2 Company backgrounds...36
4.3 Organization of business activities ...38
4.3.1 Traditional PC Supply Chain ...39
4.3.2 Dell...40
4.3.3 HP ...42
4.4 Assumptions of supply chain ...43
4.4.1 Dell supply chain ...43
4.4.2 HP supply chain ...45
4.4.3 Conclusions in relation to the research question...47
Chapter 1 Introduction
Strategic thinking in an industrial context has been developed from the 1950s onwards and concern understanding in the 21st century business environment, where products can be out-of-date within months and corporate market share could be at risk on a daily basis. Therefore supply chain choices are having an increasingly critical influence on strategic business outcomes. In the past, supply chain practice was primarily tactical, but nowadays organizations need more innovative approaches to create better supply chains. As a result, the role of supply chain in business strategy and the link between those two concepts became very crucial in order to carry on the business strategy in the desired way.
Chapter 2 Elements of business and strategy
2.1
Introduction
Discussing business without mentioning the word strategy is almost impossible. But what does that term really mean? In this chapter, I will start by introducing some key concepts of strategy and then will describe how businesses actually create strategies.
All companies need a business strategy. This is the way how they want to do business. However before building a business strategy, companies need to know the capacity of the organization. This can be done by analyzing the elements of the business. Following, business strategy can be built. Besides the business strategy, companies have to take into account of other functions of the organization. All functions have its own strategy, which are related with each other and with the business strategy.
2.2
Elements of Business
Before jumping into the main discussion, let’s take a short moment to think about some business elements those make up classic organizations in the business world nowadays. Basically, these elements consist of business processes, resources, policies and procedures, and information systems.
Business processes mean how an organization is organized and managed across the organization. Thus it consists of related, structured activities that produce a specific service or product for customers. Resources may vary from company to company, but main resources include people, capital, which may mean buildings, equipment and cash, intellectual property (copyrights), and sometimes intangible know-how.
Information Systems provide data, which is needed to plan, coordinate and control all processes that find place in the organization. Those processes can be internal and external. Nowadays information systems build the most crucial part of the supply chains by fastening the data flow between organizations, which may result in less inventory and decrease in costs. The last element of a business is the policies and procedures. Those make the rules and steps, which the organizations follow in order to carry out their business processes.
One of the best examples around us is a university. To make these elements and their explanations clearer in our minds, I would like to make you think about a typical university. First of all, there are plenty of business processes at a university. Those business processes could be: housing students, assigning parking spaces, making research, building and keeping facilities, and teaching as well.
success of an organization. This is also applicable to the universities. The most essential information system a university need is the system that allows students to register for classes, follow their grades, exams, projects, and access web-based educational material. As a second information system, I can present a system which may be used by the personnel of the university to follow payrolls, accounts, and other financial information as an example. As the final element, policies and procedures of a university are guide admissions, assignment of grades, administration of scholarships, enrollments, and graduations, re-sits and hiring decisions [BOZARTH AND HANDFIELD, 2].
As it can be expected, it is not easy to manage all of these elements simultaneously. It is very important that all of them work together. Some of them need big investments and years to be developed. Because of that, organizations need to ensure that their decisions are appropriate and dependable with on another. At that moment, strategy comes into mind. To be able to make these elements work properly, a superior, suitable strategy is needed. So, ‘‘what is strategy?’’ and ‘‘what decisions should managers take in order to define a workable business strategy which will guide functional managers in formulating their own strategies in line with the business strategy?’’[NOY, 21]. In next chapter, the answers of those questions will be given by detailing the strategy concept.
2.2
Strategy
This chapter presents introductory material on the nature of strategy. Some basic definitions of strategy will be given and then reasons and key concepts of strategy will be explained in order to talk deeply about business and functional strategies.
Strategy is like glue, which covers all business elements and holds them together. Without a suitable strategy, an organization can not see and organize its long term plans. Organizations take into account the requirements of the market when they build their strategies. They try to link the requirements of the market with the capabilities of business elements by setting their strategies. Figure 2.1 shows the link between them.
Business Elements Market Requirements
STRATEGY
[NOY, 21], in his paper, presents Michael Porter’s ideas. Michael Porter defines the followings as the elements of a firm success, where he uses business elements and strategy as the most important.
1. The company must develop and implement internally consistent set of goals and functional policies that collectively define its position in the market.
2. This internally consistent set of goals and policies aligns the firm’s strengths and weaknesses with the external opportunities and threats.
3. The firm’s strategy must be centrally concerned with the creation and exploitation of its so-called ‘unique competences’.
As Michael Porter says, strategy is crucial for the success of an organization. There are two main reasons, why a strategy is important. First of all, daily efforts by all members of the organization must be consistent with the mission, goals, objectives, and strategy of the firm. If there is not any built strategy, members can not work to achieve it. Secondly, the functional managers have to create and put into practice their own strategy (marketing strategy, supply chain strategy…) to support the company strategy. As long as the strategy of a firm is known, functional strategies can be aligned with it, otherwise some misaims will be seen. Functional managers should understand what is needed, in terms of both concepts and tools, to get it done [LASSERRE, 17]. Thus, it is crucial to build the strategies for all functions of the organization in line with the business strategy and in conformity on with the other. Functional strategies should also be reviewed every year and adjusted within the boundaries of the business strategy. [LASSERRE, 17] explains strategy as the determination of goals or objectives and the general means to reach them. So, it can be argued that a strategy can be thought of as a long-term plan. What is considered long-term may differ from one industry to another, from one organization to another, but generally this expression covers several years. Thus, when an organization wants to state its strategy, the managers have to think not only about today, but also about the future. Therefore Strategy is more about the targets and the mission of a company. Following this short introduction to strategy, in next section business strategy and functional strategies will be explained in detail.
2.2.1 Business strategy
• Where is the organization trying to get to in the long-term? (direction)
• Which markets should an organization compete in and what kinds of activities are involved in such markets? (markets, scope)
• How can the organization perform better than the competitors in those markets? (advantage)
• What resources (skills, assets, finance, relationships, technical competence, and facilities) are required in order to be able to compete? (resources)
• What external, environmental factors affect the organization’s ability to compete? (environment)
• What are the values and expectations of those who have power in and around the organization? (stakeholders) [JOHNSON, 14].
The meanings of these questions are used by [Internet Source, 53] to define strategy as follows: ‘‘Business strategy is the direction and scope of an organization over the long-term, which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations’’. I believe that this definition makes the concept clear in minds. But how can an organization build up its business strategy? Is it just a couple of sentences, that some managers come together and decide or is it a long process, which has to be done very carefully in order to get success? Since the answer is apparent to everyone, some processes of formulating a business strategy should be executed by the managers of strategy developers. Some organizations are facing bad experiences due to the lack in developing stages of their business strategies. When they analyze their organization, some of them are not able to answer the questions above. They do not know what their company does better than its rivals, how to reach their customers and how to increase the value it has next year. Of course, being able to answer these simple questions does not guarantee a success in the business. However, answering them is an imperative step in developing a strategy. Basically, competitive strategy has never been more important for being successful in the business environment so far. Type of the business area, size of the organization or the experience of the organization does not make any difference in the surviving chance of the organization unless it has an adequate and focused strategy. Following the answering phase of those basic questions, organizations have to follow some steps in order to lay out a suitable competitive business strategy. There are different methods the organization can follow, which are pointed out by authors. Here we are going to follow some most basic steps.
purchase, has to be known. The bargaining power of the customers is another factor. This may work as forcing down prices, demanding better quality and services, or starting doing business with a competitor of the company. Evaluating all these factors is vital in order to figure out the situation of the market at the moment and in the future. 2. Understanding the Customer Perspective: Second step is assessing the customer and
setting the value disciplines. This is one of the most crucial steps. It is sometimes not easy to recover whole process if this step is done in a wrong way. The main question, which should be asked by the managers to themselves, is who the target customers are, those will create growth and are willing to get the products or services. To attract the target customers and deepen relationships with them, organizations should define which value discipline will best fit to the company. Those value disciplines are Michael Porter’s generic strategies.
3. Understanding the Organization: In this step the organization has to build up a picture of the organization. Managers have to be realistic about the organization. After this step, it is easier to comprehend the capabilities of the company and each functional department.
4. Relating Functional Capabilities: This step is more related with the functional capabilities of organizations. Organizations have to work through the total value chain in order to decide which value discipline to follow. First of all, they have to determine customer priorities. Afterwards, the channels which are needed to satisfy those priorities have to be determined. Then the offerings, products or services, which are best suited to flow through those channels and the inputs to create them, should be determined. Each functional department has to join this step which helps to find out if the aims are achievable or not. And finally the processes of all functions, which are used to satisfy customers, have to be decided.
5. Finishing the Business Model: The business model shows how all the elements and activities of a business work together as a whole. Drawing a flow chart that shows how all activities in the organization are linked together, will make it uncomplicated for everyone to understand how the business activities flow to generate projected profit, which is mainly determined in the previous steps. This step also helps to see any possible mislaid in the analysis.
Supply chain strategy is one of these functional strategies. This strategy is related with almost all departments. Sales department can not work without knowing the delivery date and means, purchasing department can not accomplish their tasks without being aware of the transportation means. And it is not necessary to mention the link between manufacturing and supply chain strategy. Seeing that many departments are associated with the supply chain strategy, it is also very important to develop a perfect supply chain strategy. It is almost half of the business strategy in adding value to the customer since sales, purchasing, and manufacturing is highly related with supply chains. So, there must be an excellent fit between business strategy and supply chain strategy. Next section explains the functional strategies in a macro level, which will build a better tie between chapters two and three.
2.2.2 Functional strategies
Most organizations have more than one level of strategy: From upper-level business strategies to more detailed lower-level functional strategies. This can be suggested by the figure 2.3. Functional strategies are more like a translation of the business strategy into specific functions. Thus, functional strategies should always be linked to business strategy. For example, supply chain strategy should specify how suppliers will be selected and how the products will be distributed in order to support the specific business strategy.
Mission Statement Business Strategy
It is crucial that all functional strategies are reviewed periodically by the organization. This can be done annually or as a part of medium term planning. The main reason of doing this is to keep the fit between functional strategies and business strategy. But this fit should not only be with the business strategy but also within other functional strategies. Each should support the business strategy and other functional strategies. They should make use of the organization’s strengths and lead to the desired effectiveness by the organization. And finally they should stay within the constraints of the organization. In describing those functional strategies, several characteristic capabilities relevant with the functional area have to be identified. I would like to give the definitions of those strategies. Research and Development strategy aims to improve operational performance through the use of competitive comparisons, product improvement, new product development, substitute product analysis, and product enhancements. Marketing strategy aims to improve operational performance through the use of sub-strategies such as after-sales service improvement, specialized delivery arrangements, development of new market segments and/or customers, marketing forecasting, and market share analysis. Human Resources strategy aims to improve operational performance through the use of sub-strategies such as staff motivation programs, multi-skilled staff career path planning, education and skills upgrading, and increased employee participation. Financial strategy aims to improve operational performance through
Mission Statement
• Reason for existence • Core Values
• Main Business field
Business Strategy
• Targeted customers / markets
• Areas of sustainable competitive advantage • Performance objectives
Supply Chain Strategy
• Translate business strategy into supply chain strategy
• Provide value to targeted customers / markets
• Develop supporting core competencies in supply chain practices
Other Functional Strategies
• Research & Development • Marketing
• Human Resources • Finance
• Information Systems (Technology)
the use of sub-strategies such as specialized billing arrangements, capital restructuring, and activity-based costing. Technology strategy aims to improve operational performance through the use of sub-strategies such as in-house development technology, acquisition of new technology, use of computer numerical control (CNC) machines, use of computer-integrated manufacturing (CIM), use of Internet, and use of electronic data interchange (EDI) system [SHARMA AND FISHER, 27]. Those are some basic examples of what each functional strategy may deal in organizations. In this study, the most central functional strategy is supply chain strategy. I am going to make a very short doorway to this subject. Later in the third chapter, it is going to be clarified in a comprehensive way.
The need for a well designed supply chain strategy is very obvious. In order to have an efficient supply chain, the following resources are needed; Materials including purchased goods, work in progress, and sometimes finished items that are ready to be sold. As every department needs people; supply chain activities also need people. The last resources are the equipment and facilities, such as machinery, retail stores, distribution centers, and manufacturing plants. It can be argued that, in a simple way supply chain strategy deals with business elements those make the linkage between the supply chain partners and the organization, which means that it is more externally focused [BOZARTH AND HANDFIELD, 2]. To be able to make this external link, supply chain strategy has to be developed very well. As I mentioned before, all functional strategies are related with business strategy. That’s why; the main step of developing a supply chain strategy is to understand the business strategy. Organizations choose different ways to compete. This is what the developers of supply chain strategy have to understand. The value disciplines are the core of an organization, which makes an organization to choose to be low cost provider, which means that the supply chain strategy has to support this idea. This can be done for instance by finding best possible suppliers for the products or services, or skipping some tiers in the supply chain, so that the product or service is served in a cheaper way. Since supply chain has a crucial position in organization, the need to think strategically about the supply chain has never been so important. But the success of a strategy is totally up to the organization’s ability to fully execute it. A supply chain has to be linked with operational quality in order to provide success for the organization and its partners.
Before this study details supply chains, next chapter discusses Michael Porter’s generic strategies. Michael Porter presented different strategies, which can be followed by organizations in order to get competitive advantage. Firms have to make trade-offs to get success in business they do. Since these strategies are discussed in the literature, there have been many researchers, who had not stayed exactly in the borders of these strategies. The applicability of these ideas is discussed and new ideas have been presented. Following section aims to clarify Porter’s generic strategies and its applicability in our time.
2.3
Michael Porter’s Generic Strategies
Strategy, we have described in the study so far has two dimensions. Organizations have to answer two basic issues. First of all, the organization has to decide what it wants to achieve and secondly how to get there.
Michael Porter, who was originally an engineer, then an economist, and finally a specialist in strategy, has written many books about the topic strategy. Porter developed three generic strategies that can be used one at a time to create a defendable position and to outperform competitors. Porter states that the strategies are general because they are applicable to a large variety of situations and contexts. These strategies are (1) cost leadership, (2) differentiation, and (3) focus. He describes the word strategy mostly focusing on competitive advantage types.
‘‘Competitive advantage grows out of value a firm is able to create for its buyers that exceeds the firm’s cost of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more offset a higher price. There are two basic types of competitive advantage: cost leadership and differentiation’’ [PORTER, 23].
Michael Porter has offered a scheme consisting of strategy types. This scheme is presented by figure 2.4. Cost Leadership Focus Differentiation C om pe ti ti ve sc o pe
Low Cost Differentiation
Broad
Narrow
He uses two dimensions in the scheme. Those are the scope of the market the organization wants to enter and the strength of the organization. The scope of the market is a demand-side dimension and deals with the size and the composition of the market the organization wants to target. The other dimension is more supply oriented. The organization has to place its strengths, business strategy and functional strategies, which generate the strategic strength part of the scheme. Strength of the organization is a supply-side dimension and looks at the strength or core competency of the organization. [KIM, NAM, AND STIMPERT,15] state that Porter’s framework proposes that organizations must choose whether to serve broad or narrow market segments and whether to seek advantage through low costs or recognized uniqueness. Organizations deciding to serve broad markets and to derive advantage through low costs are termed ‘‘low cost leaders’’, while those that seek to derive advantage through uniqueness are termed ‘‘differentiators’’. The last strategy is the ‘‘focus’’ strategy, which targets narrow market segments and give emphasis to either low costs or uniqueness. As it is seen, each strategy has to be analyzed separately. In the following sections, examples will enlighten each strategy.
2.3.1 Cost Leadership
First strategy is the overall cost leadership. This strategy requires developing policies aimed at becoming and remaining the lowest cost producer. It aims to control costs including efficient facilities, minimization of operating expenses, reduction of input costs, and lower distribution costs. The focus is not given to the price of the product, but to the production costs. Being a low-cost leader lets the organization gain competitive advantage by getting its total cost of production and distribution lower than the other firms in its market [Internet Source, 52]. [PORTER, 23] explains the first strategy as follows: ‘‘the first strategy is to achieve overall cost leadership in an industry through a set of functional policies aimed at this basic objective. Cost leadership aggressive construction of efficient-scale facilities, and cost minimization in areas like research and development, services, sales force, advertising, and so on. A great deal of managerial attention to cost control is necessary to achieve these aims.’’
Low-cost leader organization is able to produce and distribute products at lower costs. In order to realize this position, organizations must control some resources that provide cost advantage. [KELLY, 55] presents these resources as following:
• Economies of scale: By producing on a larger scale than its rivals do, an organization will be able to recognize reduced average costs per unit.
• Access to better production resources: The organization gains access to better resources than competitors. These resources might be getting better raw material, cheaper labour, updated information technology or better suppliers.
Organizations have to be able to maintain these practices in order to have competitive advantage. They might strive to continually reduce costs. For example, an organization that bases its advantage on access to cheap labour has to keep in mind that this is a transient advantage, because it can not prevent competitors from using the same labour force at the same price. On the other hand, an organization which gets its advantage on superior management and succeeds in hiring the best managers and trains new recruits may be able to keep the advantage in a long-term [KELLY, 55]. As a result, they accomplish the cost reduction, and have to make the decision in which way they will show this cost reduction to its customer. An organization can take advantage of lower unit costs in two ways.
1. If the company leave the selling price as it used to be (the original price), it will obtain a higher profit margin than it received before the reduction in costs. Since the competitors do not have the same ability to lower their production and distribution costs, they will receive the original, smaller profit margin. The cost-leader gets competitive advantage in the competition by earning more profit for each unit sold and get extra profit through greater sales volume. This kind of strategy does not make the firm a cost leader on the view point of the customers.
2. Some firms are likely to decrease its prices. They pass the savings from the lower costs on to customers in the form of lower prices. Although they set the prices lower than their competitors, they get the same profit margin as their competitors do. This allows them to be accepted as a discount store while they maintain the same profit margin [Internet Source, 52]. This strategy results in a low cost leader in the viewpoint of the customers.
Example: One of the best low-cost leaders is the Aldi supermarkets chain, which serves worldwide. Its strategy is entirely based on low prices. It passes the savings on to customers. It does not have any loyalty cards, or nicely prepared shelves, or shopping charts, but they serve the cheapest prices to the customers. Another example is Dell. It has the ability to build and sell cheap computers. The company is known for its ‘‘build to order’’ strategy which reduces inventory costs with support of other approaches.
Conclusion: Organizations build up their business strategies according to their strengths, and then formulize their functional strategies. If an organization aims to be a low-cost leader, the organization needs to have a supply chain, which is parallel with this goal, which means waste of time and material are unacceptable, communication is improved and the supply chain is designed in the simplest way that skips the unnecessary tiers.
2.3.2 Differentiation
non-differentiated product. Therefore, the customers, who perceive the product as having a desirable feature not commonly, has to be relatively price-insensitive, meaning willing to pay more [Internet Source, 52]. By following this strategy, organizations are trying to serve a different product or service than their rivals do. [PORTER, 23] explains this strategy as follows: ‘‘The second generic strategy is one of differentiating the product or service offering of the firm, creating something that is perceived industry wide as being unique. …differentiation strategy does not allow the firm to ignore costs, but rather they are not the primary strategic target.’’
Differentiation can be based on many factors, including design, brand image, reputation, technology, product features, networks and customer service. An organization can differentiate in any of those elements. To be successful, organization should state its strategy on a factor or factors, which are difficult for competitors to imitate [KIM, NAM, AND STIMPERT, 15]. A critical risk of this strategy is the changing customer tastes. The feature that customers like and find attractive about a product or service this year may not make the product or service popular next year. Thus, firms have to predict changing tastes in a better way than their rivals do.
Example: The best case is the Apple Computers. It follows a strategy of technical differentiation of its products. Its products have different CPUs, operating systems than the rest of the personal computer market [KELLY, 55].
Conclusion: Differentiation strategy can be achieved as long as research and development functions, creativity, and product engineering skills are highly supported and strong marketing skills can be built.
2.3.3 Focus strategy
In this strategy, organization concentrates on a selected market. It is also called niche strategy. It is assumed and hoped that by focusing the marketing efforts on a special narrow market segments, the organization can better meet the needs of the target market. The organization may focus on a particular customer, product line, geographical area, channel of distribution or a stage in the production process [Internet Source, 52]. By following this strategy, organizations are simply also applying one of the previous strategies. The only, but central issue is the range of the customers. Thus, it can be said that focus strategies are most effective when customers have distinctive preferences or specialized needs, which need particular concentration during the service or manufacturing.
The aim is thus to serve a certain group of potential customers who are poorly served by broadly based firms. While those customers have some specific needs that may be met by more specialized products or services, their needs are served by typical products.
Example: [KELLY, 55] presents Fly Be, which is a UK based budget airline, as an organization following focus strategy. It has focused on a certain regional cities, where it competes with British Airways on price and with Ryan Air on geography.
2.3.4 Stuck in the middle or integrated strategies
[PORTER, 23] argues that cost leadership and differentiation strategies are completely apart from each other and need different resources. When an organization tries to combine them, it would find itself stuck in the middle and fail to get a high performance. But it is sometimes hard for organizations to follow only one strategy. They want to attract customers of both groups. So they try to differentiate the products and offer a low price to customers. The price of the offered product may not be the lowest in the market and the product may not be the most differentiated but the combination may also offer customers a valuable suggestion [KELLY, 55]. [KIM, NAM, AND STIMPERT, 15] have created the figure below, which they argue as the most suitable strategic option.
They mention that the derived position may not be kept in the long term. They offered an example of an UK based supermarket group, Sainbury’s, which followed the integrated strategy. The strategy was allowing the group to use the slogan ‘‘Good food costs less at Sainbury’s.’’ After the entry of Wal-Mart and the rise of Tesco, the prices of Sainbury’s no longer looked low, which shows the risk of the strategy in the long term.
In short, Porter has suggested some strategies for organizations. But there are some questions: Are these strategies completely apart from each other? Can they not be used in an integrated way nowadays? Does the model of [KIM, NAM, AND STIMPERT, 15] make more sense by updating it according to the market?
Following, the study will continue with supply chains. The basics of supply chains, manufacturing strategies and the positioning of customer order decoupling point, integration and the role of information systems in supply chains will be described, and will be used further in the study to make assumptions about possible supply chain designs of Dell and HP.
Cost Leadership Integrated Differentiation
Strategy
Chapter 3
Elements of supply chain
In this chapter we are going to analyze supply chain. First I will give some definitions of supply chain. Then the importance of supply chains for the success of a business will be described. In the sub chapters, supply chain strategies related with the manufacturing strategies, integration, and the role of information systems in supply chains will be explained.
3.1
Introduction
In a world, where all markets are dominated by global economies, best running organizations are those, which developed world-class supply chains, extending from their customers’ customers to their suppliers’ suppliers, and all points in between [BLANCHARD, 1]. In such a competitive environment, organizations try to increase their profitability, growth, and return on investment targets. External factors, such as increases in the wages, rise of the employee healthcare costs and increases in the price of oil can not be controlled by organizations. So, what the organization has to do is to try to increase the profitability. They do it, by applying this approach on existing products or services and by revenue growth through new product or service introductions [WALKER, 32]. Another way of managing those changes is to rethink some critical processes in the organization. For instance, organizations have to think more carefully about their business elements. One of the most important issues is their supply chain practices. They have to reorganize the layout of their supply chain, the management of their logistic systems and the development of partnership relations with their suppliers and customers in order to compete in the changing markets.
3.2
Supply chain design
Nowadays it is unfeasible to think that an organization is completely an isolated entity. All organizations are a component of a wide supply network [MESKENS AND RIANE, 19] and in those networks; the location of an organization may vary from the first tier supplier, till the last tier before the last customer. Thus, it can be said that, a supply chain starts from the first supplier and ends with the end customer.
[HWARNG, CHONG, XIE, AND BURGESS, 13] make use of the definition of [CHRISTOPHER, 5] in their article. He defines supply chain more from a logistical point of view. He defines supply chain as: ‘‘a network of organizations that are involved, through upstream and downstream linkages, in different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer’’.
be suppliers, intermediaries, third-party service providers, and customers’’ [AUSTIN, 44]. Another definition of Supply Chain Management is given by [STADTLER, 29]. He defines supply chain management as ‘‘the task of integrating organizational units along a supply chain and coordinating materials, information, and financial flows in order to fulfill customer demands with the aim of improving competitiveness of the supply chain as a whole’’.
All of the definitions are primarily concentrated on the coordination and integration of the network. Therefore, we can say that the aim of managing the supply chain is to increase the effectiveness of the supply chain through improved coordination between the upstream part of an organization and the downstream part of an organization to serve customers. Since the customer is the focus of the supply chain, all activities along a supply chain have to be designed according to the needs of the customer. Below in figure 3.1 we see a drawing of a supply chain with its members and their connections in a very simple, but practical way.
Most of the supply chains look like the one above although it does not show the supply chain members as tiers. Some may have more tiers, some less, but in general they are similar. As the definitions explain, the most crucial point is the coordination in the network. Therefore, the communication between the tiers determines the success of coordination. As mentioned before, while building a business strategy, an organization has to take its business elements and functional capabilities into account. Managers have to develop the best designed supply chain supported with the most suitable supply chain partners. In order to do that, the supply chain strategy has to support organizations business strategy.
As mentioned before, all functional strategies have to support the business strategy. Supply chain strategy is one of them. Supply chain strategy has to be interrelated with all other functional strategies too. That’s why; it can be declared that, developing a supply chain is a very crucial phase in an organization.
In the following sections, supporting issues of supply chains will be presented. First of all, I want to explain different demand management strategies, which are the core of supply chain design by locating the customer order decoupling point in different positions. Then the developments in integration of the supply chains will be explained. Finally, the role of information technology in supply chains will be discussed.
3.3
Demand Management Strategies and CODP
It is well known that the way of fulfilling the demands of customers varies from organization to organization. Order fulfillment is a significant determinant of customer satisfaction. Fulfillment of an order is taking the right product, putting it in the right box, shipping it, and gaining the customer’s approval. As a result, order fulfillment is a total of many processes. And these processes are executed by different functional departments. That’s why; order fulfillment is a complex concern to be done. Main activities of order fulfillment are as follows:
1. Order management, which receives orders from customers and commits order requests 2. Manufacturing; the purchase of raw material, production scheduling, material planning,
capacity planning, and shop floor control.
3. Distribution, which considers the logistics activities such as, inventory management, and transportation of goods to the end customers.
Order management and manufacturing activities together make demand management, which is highly related with customer order decoupling point (CODP). Different authors use different names for these concepts. Instead of using the term ‘‘demand management strategies’’, some use manufacturing strategy or environment, some use supply chain design, and some use product delivery strategy. In the rest of this study, I will use demand management strategy. And instead of the term customer order decoupling point, some authors use the term order penetration point in their studies.
one or more ways of demand management strategies. Parallel to their business strategies, organizations follow their own way to serve to its customers. At this point, order winners and market qualifiers take crucial role. Thus, it can be argued that, product type and life cycles have a big impact on the way the organization chooses.
Each demand management strategy has a different positioning of the customer order decoupling point. Figure 3.2 presents the location of customer order decoupling point, and some other factors related with the demand management strategy.
Figure 3.2 presents characteristics of different manufacturing situations. [RUDBERG AND WIKNER, 26] explain customer order decoupling point as a point which separates decisions made under certainty from decisions made under uncertainty concerning customer demand. Thus, CODP is the time when orders from customers are received. In different demand management strategies, the position of CODP differs. There are some factors affecting the positioning of CODP. Before talking about these factors, some mostly mentioned manufacturing systems in the literature should be explained briefly.
ETO strategy supported with a suitable supply chain would be appropriate if all products are unique and do not necessarily contain the same raw materials. When customers put an order at such a system, which consists of highly customized products, they should be ready to accept long lead times. In this strategy, speculation is almost zero and most of the activities
Assemble-to-Order Manufacturing Strategy Make-to-Stock Build-to-Order Make-to-Order Engineer-to-Order Stock Point Lead Time D E L IV E R Y T IM E P R IC E R E S P O N S E T O P R O D U C T R E Q U E S T S Lead Time Lead Time Parts
Half finished Products
Lead Time Lead Time
Half finished Products-Final Assembly Final Product
Raw Material
Supplier Manufacturers Retailers End-Users
Hard Expensive Long Easy Cheap Short
are based on order commitment which means certain information. One of the biggest competitive factors in this strategy is the delivery performance, which can be accomplished by shortening the duration of each process and applying the improvements in technology. As a result, the biggest risk of this strategy is not being able to take the advantage of new markets as quickly as other strategies.
As the second strategy, MTO strategy has a shorter lead time than of ETO, but still the customer has to accept a considerable waiting time to get the product they desire. Customization level is still high both in terms of numbers of different combinations and the amount of the basic model that needs to be customized [NAYLOR, NAIM, AND BERRY, 20]. In brief, following factors have to be considered before applying one of these strategies: • Value of a customized product,
• Customer patience,
• Cost of stock outs [Internet Source, 51]
Build-to-Order strategy can be defined as the configuration of capabilities that creates degree of flexibility and responsiveness to changing market requirements in a cost effective way. Lead time has shortened and the price is decreased but customization level is not as high as in the previous strategies. However, in many industries, some generic products and some available customization level is more valid. One of the first and best successful implementation of Build-to-Order strategy can be seen at Dell. It gained market share by building customized computers using the Internet as an order fulfillment vehicle [GUNASEKARAN, 9]. There has been confusion between MTO and BTO in the literature. The biggest difference is, as I mentioned above, the lead time lengthens. With this strategy, customers do not have to pay as high as they do in the ETO or MTO strategy and they are able to make customization more than they can do in a MTS or ATO strategy. New competitive environment requires both of those features. Therefore, this strategy has been getting more and more attention from researchers and managers. Assemble-to-Order finds a place between MTS and BTO. ATO strategy supports cost reduction but does not allow customization as high as BTO does. Almost finished goods are waiting for the customers. Some little changes are allowed. As the last strategy, we see Make-to-Stock strategy. This strategy represents situations where a standard product is provided. It needs a steady overall demand of a standard product. Forecasting activities are very important, because all the production schedules are prepared according to them. Since customers expect the product ready, accurate forecast have to be done and stock outs and overstocks should be eliminated [NAYLOR, NAIM, AND BERRY, 20].
As I mentioned above, there are some factors affecting the positioning of CODP. [OLHAGER, 22] introduces those factors in his article. Here, some of them will be presented. Product customization opportunities are natural impact on the positioning of CODP. A wide set of customization required by the customers will not let the organization to follow an MTS approach. In that case, an organization has to position its CODP as far as from its customers. In some industries such as food, CODP is very close to the customer. Because the products and even the packaging are standard, organizations do not get any different customer demands. On the other hand, in some industries, where the products can be configured by the customers, such as luxury cars, CODP has to be positioned as far as from the customer, so that, required customization can be achieved. In figure 3.2, this factor has been shown on the right side, with an arrow. So, the more customers oriented designed demand management strategy, the easier response to new product requests.
Another factor is the flexibility of the manufacturing process. With a flexible system, wider range of products and customization can be provided. When we talk about manufacturing in a supply chain, we can not dismiss suppliers of an organization. Therefore, if an organization wishes for high customization, it must have strong connections with suppliers, which was also stated in the supply chain management definitions. Applying a manufacturing approach without getting support from the suppliers, would cause some problems. If the organization wants to be agile, its suppliers should also be following the same strategy, in order to be in coordination with its customer.
Next factor is the delivery lead time. As it can be assumed, if an organization is following an Engineer-to-Order strategy, the lead time will be longer than of a Make-to-Stock strategy. Because of purchasing raw material and manufacturing after receiving customer orders, the lead time is beyond doubt long. Since this manufacturing strategy is not applied to all industries, the customers already know that the customized product they need, will get ready in a longer time then standard products.
experienced by organizations made researchers argue this concept. Afterwards, by the developments in the information technology and the increase of usage of IT in supply chain management, another strategy is discovered. Virtual integration was a newer approach, which followed vertical integration supported with information technology that enabled organizations employ vertical integration without having to share assets.
3.4
Postponement
In figure 3.3 different demand management strategies and postponement are linked together. Two other concepts, lean and agile are also used in the figure. Agile manufacturing was first introduced in 1991 with the publication of a group of scholars at Iacocca Institute of Lehigh University in USA as a key to future competition. One of the clearest definitions of the terms is presented by [ELKINS, HUANG, AND ALDEN, 6]. They use the definition of [GUNASEKARAN, 8]. They define agile manufacturing as ‘‘the capability to survive and prosper in a competitive environment of continuous and unexpected change by reacting quickly and effectively to changing market, driven by customer-designed products and services.’’ On the other hand, lean manufacturing develops a value stream to eliminate all waste, including time and to ensure a level schedule [NAYLOR, NAIM, AND BERRY, 20]. Customer order decoupling point separates those concepts from each other. Upstream activities are mostly done by following lean strategy and downstream activities are supported by an agile strategy. Agility supports flexible manufacturing, which ends with customized products. Thus, by following a pure lean strategy, organizations can produce standardized products and by following an agile manufacturing, customized products can be produced. In the middle of those concepts, leagile finds a place. [YANG, BURNS, AND BACKHOUSE, 35] present this as the best combination of both paradigms. Strategies fitting this paradigm are Assemble-to-Order and Build-to-Order, which need the flexibility, response speed of agility and the speed, no wasting strategy of lean thinking.
To sum up, postponement offers a more flexible supply chain for the organizations. In order to perform the standard processes in the most effective way, which needs lean application, and to be able to response to changing customer demands in the most flexible way, which needs agility in the system, postponement places the decoupling point in the most suitable place so that organizations can reduce the risk of being out of stock for long periods and of holding too much stock of products that are not required [NAYLOR, NAIM, AND BERRY, 20].
In order to make the usage and benefits of postponement likely, the supply chain has to be modified in some manners. One of them is coordination between supply chain members. Not only should the suppliers of an organization but also the customers be involved in this coordination. In the past, organizations found out a strategy to overcome this problem. Instead of outsourcing, organizations went for integration. Advantages and disadvantages experienced by organizations made researchers argue this concept. Afterwards, by the developments in the information technology and the increase of usage of IT in supply chain management, another strategy is discovered. Virtual integration was a newer approach, which followed vertical integration supported with information technology that enabled organizations employ vertical integration without having to share assets.
3.5
From Vertical to Virtual Integration
Organizations found out that, in some industries some actions has to be done in order to reduce the costs. Therefore, some mergers happened. But these mergers were not with another organization that produced the same product. Organizations made these mergers with their suppliers or customers they share the supply chain with. Vertical integration has been an important managerial innovation and a necessary step in developing some industries. As [HARRIGAN, 10] presents, steel industry needed this strategy. They owned core mines, ships, foundries, rolling mills and fabricating plants to lower costs and improve productivity in the last century. Vertical integration was a popular strategy for many decades. But the decrease in the flexibility made many organizations stay away from vertical integration and the advantages of outsourcing attracted them. That’s why vertical integration has always been discussed. Afterwards virtual integration was exposed, which became a more suitable story in the age of information.
3.5.1 Vertical Integration
organizations made researcher and managers rethink about the strategy. [HARRIGAN, 11] describes vertical integration as ‘‘a variety of decisions concerning whether corporations, through their business units, should provide certain goods or services in-house or purchase them from outsiders instead’’.
Vertical integration in supply chains can be done in both ways of the strategic business unit. Supply chain has two flows; products flow and information flow. Products, normally, have a forward flow, and information, which is named as demand requirements, flows backwardly. The strategic business unit may integrate vertically in both sides; forward vertical integration and backward vertical integration. Each way of integration has different advantages and disadvantages. There is a common belief that backward vertical integration offers an organization to get a low-cost advantage and forward vertical integration provides customization advantage [FRONMUELLER AND REED, 7]. Backward vertical integration is the union of the strategic unit with its suppliers that produce inputs for its production. By forward vertical integration, the organization joins with its customer. A simple example will be a movie company that owns a chain of theaters.
Since Porter’s generic strategies are known by the researchers in the field, vertical integration has been perceived as a concept which supports his ideas. He suggested that competitive advantage can be ensured when an organization is able to produce a product or service cheaper than its rivals or lets its customer high levels of customization [FRONMUELLER AND REED, 7]. As described above, vertical integration strategy supports Porter’s ideas and has different advantages. Some general advantages of vertical integration are: economies of scale, economies of scope, cost reduction, reduce threat from powerful suppliers or customers, and higher degree of control over the entire value chain. On the other hand, [ROTHAERMEL, HITT, AND JOBE, 25] underline the disadvantages of vertical integration. They say that the managerial costs of coordinating integration over multiple stages of the value chain will increase. They also add the potential of either excess capacity or underutilization of resources because of possible technological obsolescence and strategic inflexibility. Their conclusion is that the greater the extent of vertical integration, the lower degrees of freedom and the greater the bureaucratic costs. Thus, when organizations experience the loss in strategic flexibility and the increase in bureaucratic costs outweighing the benefits gained through vertical integration, the result will be the same of the organizations presented above; turning back from integration and starting disintegrations. Given that extensive improvements and use of information and telecommunications technologies, organizations started being able to lower transaction costs between its supply chain members. As this can be achieved without having to get vertically integrated, organizations began to disintegrate. This effect does not mean that organizations separated completely from each other. They get connected with each other in a virtual manner.
3.5.2 Virtual Integration
sharing agreements, so that they can act as an individual company but also integrated. Virtual integration converts the old supply chain, which is vertically integrated into a flexible network which is a vital success factoring the new millennium.
Since the developments in information systems have been applied into the supply chains, organizations are able to build better networks. These developments not only helped out organizations but also created some pressures on them. For instance, customers started demanding more and more. This is not only about the costs and shorter lead times but also about more customization. Thus, organizations have to be more successful about efficient management of physical flow of products and information flows in order to serve customers what they want. [POWER, 24] presents Michael Dell’s virtual integration definition in his paper. Michael Dell defines virtual integration as ‘‘Virtual integration means you basically stitch together a business with partners that are treated as if they are inside the company’’. By employing virtual integration, organizations have built virtual supply chains. These systems are designed for flexibility and speed in managing networks of suppliers, manufacturers, distributors and warehouses virtually. One crucial benefit, virtual supply chains provide is the ability to decrease the time of placing the product to the market. Short production schedules due to on time transportation, just-in-time inventories, and high speed goods and information flow between organizations allow the product be ready within the shortest time possible.
Nowadays many organizations are trying to integrate virtually. The use of e-commerce is an incredible supporter of virtual integration. By the use of e-commerce organization skips the use of retailers and is able to pass the orders to the suppliers, which can reorganize its production schedule. As it can be observed, information technology is the core of the success of virtual integration.
3.6
The role of IT in supply chains
Throughout the years, following the improvements in the information technology, the possibility of organizations to have more flexible and profitable supply chains has increased. Since the communication and information links between units have improved, businesses got closer with its suppliers and customers. There are some ways to strengthen the communication and enable virtual supply chains. One of them is getting closer with the supplier and the other is with the customer. In order to get closer to the supplier, strategic business units have to share their data. EDI (Electronic Data Interchange) enables this. On the other side, the relationship with the customers can be improved by the use of e-business. This chapter deals with these concepts in two sections.
3.6.1 EDI (Electronic Data Interchange)
ordering and data exchange. Therefore, EDI is mostly established for B2B transactions. [Internet Source, 37] describes EDI as a direct electronic data transmission system that enables exchange of data in the form of business documents, between application systems. For example, a computer transmits a purchase order in a standard data format that is recognizable by another computer. Because companies often use different software and databases, message are generally sent to a central clearinghouse first - known as a value-added network (VAN). There, the message is translated so that it can be read by the computers of other trading partners [Internet Source, 47]. Thus, EDI supports the communication of different organizations, which make use of different formats in their data storage and communication systems.
Last decades, many large organizations have used EDI to improve their relationships and communication with suppliers by exchanging and securing crucial business documents on value-added networks [Internet Source, 37]. However, despite the benefits of EDI, implementation phase of EDI is not simple and it needs great investment both in computers and software. That’s why small firms avoid the usage of EDI. They might not get the results in a short term which may cause financial problems within the company. For big organizations, implementation phase and the investment on EDI may not be seen enormous. They are mostly concentrated on the result, benefits of it. Once implemented, the value of EDI appears since it is applicable to many functional areas, from management to logistics, which means getting competitive advantage in many functions.
Another way of bettering communication is getting closer to the customer. In order to get the most crucial benefit of EDI, which is transferring the information much more quickly than traditional systems; the transfer of information from the customers should also be fast, which can be done by E-business.
3.6.2 E-Business
EDI was the first tool, which was used by organizations to enable better communication between firms and reduce costs of coordinating economic transactions. More recently, Internet-based applications have been more popular in the market. The efficiency of information transfer, the timeliness of information availability, and increased customer service are only a few of the benefits provided by internet to support supply chain. Here, the main focus will be given to the business to consumer e-business concept.
sales channels with online channel to consumer. E-business provides some basic benefits mentioned above. Below, more detailed benefits are listed.
• On-line catalogs from which customers can buy.
• The ability to provide 7-day/24-hours worldwide customer service. • The ability to receive orders from international customers.
• The ability to check the status of the order online.
• The ability to notify vendors about changes in configurations of products that are produced to order [LANCIONI, SMITH, AND OLIVA, 16].
• The ability to pay and receive payments [CHOPRA AND MIEGHEM, 4].
• The ability to apply the manufacturing strategy Build-to-Order, and even Make-to-Order and Engineer-to-Make-to-Order.
• The ability to postpone the processes those customize the products, which means postponing the CODP in the supply chain.
• The ability to ship the products directly to customers by avoiding retailers.
E-business has relations with main strategies of organizations. Main relations of e-business strategy are with supply chain strategy, information systems strategy, and marketing strategy. In the study of [LANCIONI, SMITH, AND OLIVA, 16], the case of General Electric is presented. General Electric uses the Internet to schedule shipments out of centrally located warehouses. The aim of this was to increase the efficiency of delivery of the products and the results have shown that it helped to increase the numbers of deliveries per hour, while the transportation costs per order have dropped dramatically. In another case, in the study of [CHOPRA AND MIEGHEM, 4], we see that different organizations have used the Internet in a variety of ways to improve supply chain performance. UPS and Federal Express have used Internet to allow customers to track their packages. On the other hand, organizations like Solectron and Ford have used the Internet to increase partnership in product design. According to a study done by [LANCIONI, SMITH, AND OLIVA, 16], there are many uses of Internet in an organization. They made a survey, and asked companies the areas where they Internet. The most used area of Internet is transportation. Customer service area, which includes direct sales to customers, is ranked as the fourth in the list. Almost half of the companies, which joined the survey, make use of the Internet to sell its products to customers. As a result, customer-company relationships get better and the companies get to know their customers needs directly. Providing technical service and receiving customer complaints via internet make differ in the relationships between customers and companies. The survey shows that, customers, whose service issues are dealt quickly and satisfy the customer, are more likely to follow and purchase the products of the company.
