Supply Chain Strategy: Further Development on how to Match Product Type with Supply Chain Design

Abstract

An effective competitive supply chain strategy is supposed to create maximum value to the customer. A key element of success in designing such a strategy is to align all supply chain decisions (that add cost) with demand attributes (that describe the value). Achieving and maintaining the alignment, despite being studied and practised for a long time, has never been as crucially important as it is in today's extremely competitive business environment. This research explores the alignment as well as its influencing factors and aims to provide a constructive guide on how to achieve it by making the right decisions on strategy design. We analyse how a set of major product and demand characteristics, i.e., demand variability, profit margin, and product life cycle, impact strategic decisions on inventory and sourcing. The objective is to demonstrate the extent to which it is beneficial, in terms of the expected profitability, for the firms to effectively adjust their decisions with the product characteristics when designing their supply chain strategy. The analyses are conducted through mathematical optimization of a two-echelon supply chain that comprises a manufacturer and a retailer. While doing the analyses, a further contribution is made to the fundamental inventory management system, i.e., continuous review, by developing a bi-objective optimization model based on order quantity and lead time. As a special case of supply strategy and demand alignment, we study the dual serving problem, where a supplier should make a choice between a group of (routine) customers whose demand is small but stable and another group of (random) buyers whose demand is large but sporadic, or a combination of both. This problem has recently become a challenge in the retail industry especially with the growth of online daily deals platforms. We address the challenge from an inventory management perspective to investigate the optimal choice and settings of the dual serving strategy. Particularly, we formulate and analyze two different alternative choices of serving strategy, namely, aggregation and protection. Our comparative analysis identifies the winning strategy under different settings of demand and economic parameters.