Supply Chain Strategies for Business Success

Strategy/Planning/Design 1
Schnetzler, M.; Sennheiser, A.; Weidemann, M.: Supply Chain Strategies for Business Success.
Proceedings of the International IMS Forum 2004 "Global Challenges in Manufacturing", Cernobbio (Italy), 17-19 May
2004, pp. 691-698
Supply Chain Strategies for Business Success
Matthias Schnetzler 1 , Andreas Sennheiser 1 , Martin Weidemann 2
1
Center for Enterprise Sciences (BWI), Swiss Federal Institute of Technology (ETH), 8092 Zürich,
Switzerland, matthias.schnetzler@ethz.ch, andreas.sennheiser@ethz.ch
2
Research Institute for Rationalization and Operations Management (FIR), RWTH Aachen,
Pontdriesch 14/16, 52062 Aachen, Germany, martin.weidemann@fir.rwth-aachen.de
Abstract
This paper describes the application of the axiomatic design methodology to supply chain management in order
to develop and implement comprehensive supply chain strategies. After an overview of supply chain management,
strategy and issues, a supply chain design decomposition is presented. It separates objectives and means
methodically regarding supply chain management. On this basis, supply chain strategies can be developed,
which make top-level objectives systematically operational. Hence, supply chain strategies are aligned with
business strategy ensuring that all measures contribute to value creation. Furthermore, the development and
implementation of supply chain strategies is framed into a decision-making process. An example illustrates the
application.
Keywords
Supply Chain Management, Supply Chain Strategy, Axiomatic Design Methodology
1 Introduction
How can strategies for supply chain management (SCM) be aligned with business strategy in
order to exploit improvement potentials in a systematic way? SCM is a successful business
concept for the cooperation of enterprises in the area of logistics by connecting, aligning and
coordinating processes in supply chains as well as flows of material and information. Using
SCM, enterprises pursue opportunities for better customer service, improved efficiency and
cost reduction. On the operational level of SCM, a wide set of concepts and best practices
exists as for example vendor managed inventory and continuous replenishment. However, on
a strategic level dealing with business objectives, the subject of supply chain strategies has
received little attention [Ross, 2000]. Furthermore, the interest of the top management in
SCM on a strategic level is increasing due to its impact on the success of enterprises
[ELA/Bearingpoint, 2002], [Nienhaus et al., 2003]. Consequently, there is a need to close the
gap between the strategic level dealt by top management and the application of operational
SCM concepts: the use of SCM concepts – and therefore supply chain strategies – should be
aligned with the corporate and business strategies in order to ensure the achievement of toplevel
business objectives. The goal of this paper is to provide a comprehensive concept for
the development of supply chain strategies, which are aligned with corporate and business
objectives. In the following, after a short look on SCM, strategies and issues, a decomposition
of supply chain design is discussed. It forms the basis for a concept for the development
and implementation of supply chain strategies.
2 Motivation: Supply Chain Management, Strategy and Issues
In literature, there are many definitions of SCM with different focus; e.g. [Schönsleben,
2003]: “Supply Chain Management is the coordination of strategic and long-term cooperation
among co-makers in the total logistics network for the development and production of
products, both in production and procurement and in product and process innovation.”

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Generally, in management a strategy guides managers of an enterprise in deciding how to set
up and use resources and establishes priorities. Concerning SCM, the terms “strategy” and
“strategic” are defined and used inconsistently in literature, see e.g. [Seuring, 2003], for
instance, e.g., strategic SCM, SCM strategy, supply chain strategy – in the following, supply
chain strategy will be used. Following a common perception of strategy, especially as “endsways-means”
[Hayes, 1985], supply chain strategy can be described as a balanced set of
appropriate measures (means) for the development and exploitation of logistic competitive
capabilities and improvement potentials (ways) of supply chain management in order to
achieve logistics and supply chain objectives (ends). The objectives usually cover the target
areas of costs, flexibility, quality, delivery (lead time), innovation, and, additionally for
supply chains, collaboration, coordination and transformability (see [Schönsleben, 2003],
[Hieber, 2002]).
In a management perspective (according to the generic St. Gallen management model, see
[Bleicher, 1994]), SCM can be understood as the design, control and development of supply
chains and value added networks:
N Design: Configuration, definition of collaboration and coordination.
N Control: Guidance towards the objectives by means of supply chain strategies.
N Development: Long-term adaptation to trends through flexibility in collaboration and
capabilities.
Furthermore, three management levels can be differentiated [Göpfert, 2002]:
N Normative SCM deals with a vision of the supply chain and generic objectives.
N Strategic SCM comprises supply chain strategies and priorities. The objective is to
develop logistic competitive capabilities for competitive advantage and is implemented
on the operational level.
N Operational SCM means planning, control and execution of processes (operations
management) as well as the implementation of appropriate measures.
Hence, we can position supply chain strategies as means for the control activities on the
strategic level.
On the basis of literature reviews and empirical surveys three main trends and corresponding
issues concerning SCM on a strategic level can be identified:
1. Strategy focus: Regardless of the importance of strategy in the area of SCM, the topic
of supply chain strategy is less present in literature and practice in comparison to operational
aspects like, e.g., inventory management, order processing and optimisation
[Ross, 2000]. A literature review of strategic SCM concepts shows their emphasis of
fundamental decisions and objectives. Especially, the alignment of strategies in the
context of SCM with corporate and business strategies is pointed out as crucial (see
[Gattorna, 1998], [Chopra, Meindl, 2001], [Evans, Danks, 1998]). Consequently, a
supply chain strategy should support the corporate and business strategies (at the corporate
level and level of business units, respectively) and enable to achieve corporate
and business objectives (“strategic fit”). [ELA/Bearingpoint, 2002] verified this issue
also in practice.
2. Value based focus: Value based management (VBM) aims to align all management
activities to the improvement of the value of a company and is widely accepted and
used (e.g., shareholder value, economic value added etc.). The adoption of VBM for
logistics and especially SCM is in an early stage, while logistics and SCM are identified
as important value drivers (see [Lambert, Burduroglu, 2000], [Christopher, Ryals,
1999], [Evans, Danks, 1998]). A value based SCM deals with the pivotal questions
“How to derive means and ways from objectives in order to create value?” and

Strategy/Planning/Design 693
“How do measures contribute to the value creation?”. Investigations on SCM as a
value driver do not go into the details of how objectives and means are related. Therefore,
the understanding of the effects of SCM and the systematic relation of operational
measures and objectives is impeded. For example, customer satisfaction influences
sales and can be influenced by SCM. Thus, the question of interest is “How
customer satisfaction can be influenced by SCM?” One possible answer may be “By
a high delivery quality, on which availability of materials, capacities and information
have impact.” Cause-and-effects relationships or driver trees can model such relations.
This way, means (i.e., drivers) on an operational level (e.g., availability) can be
connected with objectives on a strategic level (i.e., outcomes, e.g., sales, customer satisfaction).
3. Performance focus: The importance of supply chain performance is already high and
increasing [Nienhaus et al., 2003]. Many concepts in the area of performance management
exist: Supply chain controlling and monitoring, benchmarking and performance
measurement. Performance indicators are widely used for the measurement.
Balanced scorecards as a widely used tool for strategy communication, implementation
and performance management [Kaplan, Norton, 1996] are being adapted for
SCM specific requirements (see, e.g., [Brewer, Speh, 2001]). For a successful performance
management, a balance of financial and non-financial performance indicators
is essential as well as a causal model as a basis laying out the cause-and-effect relationships
between drivers and outcomes [Ittner, Larcker, 2003].
As a conclusion from these interrelating issues, a value based focus can ensure the alignment
of supply chain strategy with corporate and business strategy, while performance management
measuring the success can be connected.
In the following, the question will be examined, whether the axiomatic design methodology
(to be introduced in the next section) can be used for the development of aligned supply chain
strategies.
3 Methodology: Supply Chain Design Decomposition (SCDD)
Axiomatic design was developed at the Massachusetts Institute of Technology (MIT Boston)
as a scientific approach for the generation and selection of good design solution for products,
processes, and systems [Suh, 2001]. Axiomatic design focuses on the identification of
functional requirements (what to achieve) and the selection of means for achieving them
(how to achieve). Objectives are expressed as functional requirements (FRs) for a solution
and the possible means as design parameters (DPs) (cf. [Engelhardt, Nordlund, 2000]). The
design process can be characterized as the selection of the best set of means to satisfy the
objectives (furthermore, the methodology includes axioms as generic principles for good
design solutions). By decomposing the design into several levels of objectives-meanscombinations,
a causal model of the design is created showing the connections of an
objective and the corresponding solution. This is done in iteration, i.e., high-level objectives
and means are decomposed into lower level objectives and means, until a level of sufficient
detail is reached. This systematic approach has two main benefits (see [Duda, 2000]):
N The separation of objectives and solutions helps to clarify the logic and to focus on
what to be achieved prior to thinking about solutions.
N The systematic decomposition enables to concretise high-level goals systematically
on lower levels.
Axiomatic design has been successfully applied to the design of many products, systems, and
software [Suh, 2001] as well as to development of manufacturing systems [Cochran et al.,
2001].

In ProdChain, an international research project, axiomatic design was applied to supply chain
management in order to develop a toolbox for the measurement and improvement of logistics
performance in supply chains. The result of the application of axiomatic design to SCM is the
Supply Chain Design Decomposition (SCDD). During the elaboration of SCDD, all FRs and
DPs and their relations were identified and validated mainly by literature reviews and
research. SCDD as a whole was validated by several applications during the project.
The highest level of SCDD concerns strategic supply chain management and is set up
according to the methodology of economic value added (EVA) as an appropriate representative
of the success of the enterprise with the scope to SCM. EVA can be understood as net
operating profit after taxes minus a capital charge, which depends on the total invested capital
and the capital costs (see [Ehrbar, 1998]). The idea behind is, that a business is not successful
unless it earns more than the costs of capital. EVA is a widely used concept of value based
management (VBM). It can be transformed into other VBM concepts, e.g. economic profit,
as well.
FR-111
High Delivery
Quality
DP-111
Reduce Variation
from Quality
Targets
FR-11
High Sales
Revenue
DP-11
Increase
Customer
Satisfaction
FR-112
High Delivery
Reliability
DP-112
Reduce Time-
Variation of
Fulfilment Cycle
FR-1
High Economic
Value Added
(EVA)
DP-1
Optimize Value
Drivers
FR-113
Short Lead Times
DP-113
Speed Up
Fulfilment Cycle
... ...
...
Strategy/Planning/Design 694
FR-12
High Asset
Efficiency
DP-12
Reduce Non-
Value Adding
Assets
...
FR-114
High Delivery
Flexibility
DP-114
Establish Scalable
and Adaptable
Resources
...
FR-13
Low Operational
Logistics
Expenses
DP-13
Create Efficient
Structures and
Operations
...
FR: functional
requirement
(i.e., objective)
DP: design
parameter
(i.e., means)
Arrows: cross
influence
Figure 1: Excerpt from the Supply Chain Design Decomposition (SCDD)
In SCDD, starting with the main objective to increase the EVA, the optimisation of the value
drivers of SCM is chosen as mean. In the next step, the value drivers revenue, operating cost
reduction and asset efficiency are identified. Going further, e.g., revenue is decomposed via
the means of increasing customer satisfaction – this yields value drivers high delivery quality,
high delivery reliability, short lead times and high delivery flexibility. Finally, this procedure
results in a huge tree with more than 200 elements covering the target areas of delivery
quality, delivery reliability, flexibility, costs, and assets. At the bottom level, SCM concepts
and best practices are assigned (e.g., vendor managed inventory), which were identified and
classified. Figure 1 shows a small excerpt of the SCDD tree.
The sequence of functional requirements and design parameters from left to right is not
arbitrary – it reflects the logical sequence of decisions and implementation of measures
[Cochran et al., 2001] meaning, for instance, that first a certain quality has to be established

Strategy/Planning/Design 695
prior to optimise reliability and reducing lead times and so on. The level of quality depends
on the strategy. Compromising quality would lead to serious problems while optimising the
other means. This is in accordance with empirical findings and the “sand cone model” of
[Ferdows, De Meyer, 1999].
4 Development and Implementation of Supply Chain Strategies
The methodology of axiomatic design can be used for the development of supply chain
strategies because it systematically connects objectives and means. As discussed above, a
supply chain strategy consists of SCM objectives with appropriate means associated to them,
concretised systematically, and priorities. The tree can be passed top-down concretising
objectives and means step by step so they get more and more operational. In doing so, we
search for the essential driver for an objective, which leads to a corresponding mean. For
example, “DP-11 increase customer satisfaction” can be identified as a mean for “FR-11 high
sales revenue”, cf. Figure 1. The next step is to derive relevant sub-objectives for this mean
(e.g., “FR-111 high delivery quality”). These sub-objectives can be prioritised as well. This
procedure is repeated unless a level of detail is reached that allows the implementation of the
respective measures. Usually this is the level of common SCM concepts and best practices.
The result of this procedure is a stepwise-concretised supply chain strategy consisting of
prioritised objectives and a balanced set of appropriate measures.
Often, a mean influences the achievement of many objectives, thus conflicts of objectives
may arise. In SCDD, cross influences are visualised as dotted arrows (cf. Figure 1). When
selecting means and prioritising objectives, we have to take into account conflicts of
objectives and positive as well as negative side effects. Furthermore, available resources and
capabilities have to be considered.
This logic can be framed into a process of supply chain strategy formulation and implementation
using the common phases of a decision making process (based on [Simon, 1977]):
1. Intelligence: Problems or opportunities can be identified for instance by means of
benchmarking or performance measurement. Furthermore, by browsing through the
SCDD tree and analysing gaps between the actual state and “good SCM”, areas for
improvements can be identified.
2. Design: Possible alternative supply chain strategies can be formulated as concretised
objectives and means on several levels using the SCDD as described above. Input for
priorities comes from product and marketing strategies as well as from corporate
strategy.
3. Choice: Alternative strategies can be compared and selected using the criteria
achievement of objectives, accordance with priorities and minimum conflicts of objectives
etc. Furthermore, the feasibility has to be ensured in terms of capabilities and
resources as well as by analysing the prerequisites, risks etc. Therefore, objectives
and means have to scrutinised closely, and, if required, the strategy has to be modified
going back one step.
4. Implementation/Review: The implementation sequence of the measures is as aforementioned
from left to right, while the priorities for resource allocation and efforts are
set. During the implementation and review, possible conflicts of objectives and side
effects have to be monitored carefully. The assessment of the success of measures
and their contribution to high-level objectives can be supported by performance management
tools (e.g., performance indicators can by assigned to each objective or FR,
respectively) for continuous improvement and learning.
The development of a supply chain strategy, using the axiomatic design of SCDD and the
decision making process as described above, is a primary top-down approach. Nevertheless,

during all phases, feedback should be included by assessing the contribution of measures to
high-level objectives bottom-up in order to ensure feasibility of the measures as well as the
alignment with top-level objectives. Moreover, logistic competitive capabilities can be
developed and exploited by defining areas of operational excellence and setting priorities
where operational excellence is to be fostered in order to gain competitive advantages based
on SCM.
This way, a comprehensive and coherent supply chain strategy can be identified, which
N is systematically derived from strategic business objectives and thus coherent with
corporate and business strategies (“strategic fit”);
N distinguishes different levels of abstraction from the strategic level down to the
operational level and thus respective activities can be assigned to the different management
levels of an enterprise from top management down to a supply chain manager;
N ensures that all measures are aligned and contribute to the value creation (in the sense
of value based management) without confusing means and ends;
N shows the cause-and-effect relationships (i.e., cross influences and side effects) and
value drivers for a profound understanding of business and logistics logic.
The issues discussed in section 2 are being taken care of the following way: strategy focus by
ensuring the “strategic fit”, value based focus by aligning all measures with value creation
(e.g., economic value added EVA), performance focus in the intelligence phase as well as in
implementation and review phase by assigning performance indicators for measurement and
monitoring.
5 Example
Strategy/Planning/Design 696
This section presents an example order to illustrate the application of the procedure described
above. Dell Computer is a well-known, successful computer manufacturer, which has
established as one of the leading enterprises of its branch (see, e.g. [Park, Burrows 2003]).
Excellence in SCM played a decisive role in the success story. Dell’s strategy focuses
primarily on low costs and secondarily on a high growth of sales revenue as drivers for
business success, i.e. for example economic value added, cf. Figure 2. Following the
aforementioned implementation sequence, we take first a closer look to “FR-11 high sales
revenue”. This objective can be supported by SCM trough an increased customer satisfaction
(DP-11) that can be concretised by means of a high delivery quality (FR-111), a high
delivery reliability (FR-112), short lead times (FR-113) and high delivery flexibility (FR-
114). Dell’s priorities are short lead times and high flexibility of processes and resources.
These objectives are further concretised until best practices can be identified like e-procurement,
consignment inventory and supply chain event management etc. – here, strong logistic
competitive capabilities can be developed (e.g., efficient and fast SCM processes). Analogous,
the objective “FR-13 low operational logistics expenses” can be decomposed into subobjectives
and thus made operational (not shown in Figure 2). Considering side effects, for
instance DP-11 has a strong influence on FR-13 (depicted by an arrow). Therefore, especially
an appropriate level of quality has to be established first, since FR-111 is an important mean
for DP-11: The level of quality as perceived by the customer should neither be too high (too
costly) nor too low (putting customer satisfaction at risk). For that reason, the implementation
sequence of measures is from left to right as mentioned above. For the implementation, the
efforts and allocation resources follows the priorities. Concluding, prioritised “paths” in the
SCDD consisting of a balanced set of concretised objectives and appropriate measures
represent the supply chain strategy.

Example
FR-111
High Delivery
Quality
DP-111
Reduce Variation
from Quality
Targets
V
FR-11
High Sales
Revenue
DP-11
Increase
Customer
Satisfaction
FR-112
High Delivery
Reliability
DP-112
Reduce Time-
Variation of
Fulfilment Cycle
FR-1
High Economic
Value Added
(EVA)
DP-1
Optimize Value
Drivers
U
FR-113
Short Lead Times
DP-113
Speed Up
Fulfilment Cycle
... ...
...
Best Practices
Implementation
Sequence
e-Procurement,
Consignment
Inventory
FR-12
High Asset
Efficiency
DP-12
Reduce Non-
Value Adding
Assets
V
...
FR-114
High Delivery
Flexibility
DP-114
Establish Scalable
Implementation
and Adaptable
Sequence
Resources
...
Supply Chain
Event
Management
U
FR-13
Low Operational
Logistics
Expenses
DP-13
Create Efficient
Structures and
Operations
...
FR: functional
requirement
(i.e., objective)
DP: design
parameter
(i.e., means)
Arrows: cross
influence
Figure 2: Example for the Development and Implementation of a Supply Chain Strategy
6 Conclusion and Outlook
Strategy/Planning/Design 697
The methodology of axiomatic design framed into a decision making process can be used for
the development and implementation of coherent and comprehensive supply chain strategies
due to the hierarchical differentiation of objectives and means. A supply chain strategy
consists of prioritised objectives and a balanced set of appropriate measures. Thus, objectives
and measures are concretised and made operational in a systematic way. Furthermore, they
are all aligned with top-level objectives and corporate and business strategy. Cross influences
and side effects as well as available resources and capabilities have to be taken into account.
Preliminary experiences during the ProdChain project show, that the application of this
approach is quite intuitive and leads to meaningful results but requires some effort.
Further research will focus on the elaboration of the structured process and on the integration
into management concepts (e.g., balanced scorecard, integrative management) as well as
strategic SCM concepts. Additional case studies are being carried out in order to gain more
experiences and feedback from industrial application for improving the methodology.
Acknowledgement
ProdChain (www.prodchain.net) is an international research project with ten industrial and four academic
partners funded by the European Commission in the IST programme (IST-2000-61205) and IMS (IMS-99006).
The authors wish to acknowledge the European Commission, the Swiss Federal Office for Education and
Science, Prof. Dr. Paul Schönsleben and all partners of ProdChain for their support.

Strategy/Planning/Design 698
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