ch 05 supply chain integration

8/8/2019 Ch 05 Supply Chain Integration

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Supply Chain

Integration

Phil [email protected]

David Simchi-Levi

Philip Kaminsky

Edith Simchi-Levi


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2003 Simchi-Levi, Kaminsky, Simchi-Levi

The Old Paradigm:

Push Strategies Production decisions based on long-term

forecasts

Ordering decisions based on inventory &forecasts

What are the problems with push strategies? Inability to meet changing demand patterns

Obsolescence The bullwhip effect:

Excessive inventory

Excessive production variability

Poor service levels


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A Newer Paradigm:

Pull Strategies Production is demand driven

Production and distribution coordinated with true customerdemand

Firms respond to specific orders

Pull Strategies result in: Reduced lead times (better anticipation)

Decreased inventory levels at retailers and manufacturers

Decreased system variability

Better response to changing markets

But: Harder to leverage economies of scale

Doesnt work in all cases


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Push and Pull Systems

What are the advantages of push

systems? What are the advantages of pull

systems?

Is there a system that has theadvantages of both systems?


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A new Supply Chain

Paradigm A shift from a Push System...

Production decisions are based on forecast

to a Push-Pull System


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Push-Pull Supply Chains

Push-Pull Boundary

PUSH STRATEGY PULL STRATEGY

Low Uncertainty High Uncertainty

The Supply Chain Time Line

CustomersSuppliers


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A new Supply Chain

Paradigm A shift from a Push System... Production decisions are based on forecast

to a Push-Pull System Initial portion of the supply chain is replenished

based on long-term forecasts For example, parts inventory may be replenished

based on forecasts

Final supply chain stages based on actualcustomer demand. For example, assembly may based on actual orders.


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ConsiderTwo PC

Manufacturers: Build to Stock

Forecast demand

Buys components Assembles computers

Observes demand andmeets demand if

possible. A traditional push

system

Build to order

Forecast demand

Buys components Observes demand

Assembles computers

Meets demand

A push-pull system


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Push-Pull Strategies

The push-pull system takes advantage ofthe rules of forecasting:

Forecasts are always wrong The longer the forecast horizon the worst is the

forecast

Aggregate forecasts are more accurate The Risk Pooling Concept

Delayed differentiation is another example ConsiderBenetton sweater production


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What is the Best

Strategy?

Pull Push

Pull

Push

I

Computer

II

IV III

Demanduncertainty

(C.V.)

Delivery cost

Unit price

L H

H

L

Economies of

Scale


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Selecting the Best SC

Strategy Higher demand uncertainty suggests push

Higher importance of economies of scale suggests

push High uncertainty/ EOS not important such as the

computer industry implies pull

Low uncertainty/ EOS important such as groceries

implies push Demand is stable

Transportation cost reduction is critical

Pull would not be appropriate here.


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Selecting the Best SC

Strategy Low uncertainty but low value of economies

of scale (high volume books and cds)

Either push strategies or push/pull strategiesmight be most appropriate

High uncertainty and high value ofeconomies of scale For example, the furniture industry

How can production be pull but delivery push?

Is this a pull-push system?


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Characteristics and Skills

RawMaterial Customers

PullPush

Low Uncertainty

Long Lead Times

Cost Minimization

ResourceA

llocation

High Uncertainty

Short Cycle Times

Service Level

Responsiveness


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Locating the Push-Pull

Boundary The push section:

Uncertainty is relatively low Economies of scale important Long lead times

Complex supply chain structures: Thus

Management based on forecasts is appropriate Focus is on cost minimization Achieved by effective resource utilization supply chain optimization

The pull section: High uncertainty Simple supply chain structure Short lead times

Thus Reacting to realized demand is important Focus on service level Flexible and responsive approaches


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Boundary The push section requires: Supply chain planning

Long term strategies

The pull section requires: Order fulfillment processes

Customer relationship management Buffer inventory at the boundaries: The output of the tactical planning process

The input to the order fulfillment process.


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Boundary


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Impact of the Internet

Expectations Were High

E-business strategies were supposed to:

Reduce cost

Increase service level

Increase flexibility

Increase Profit


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Reality is Different..

Amazon.com Example

Founded in 1995; 1st Internet purchase for most people

1996: $16M Sales, $6M Loss

1999: $1.6B Sales, $720M Loss 2000: $2.7B Sales, $1.4B Loss

Last quarter of 2001: $50M Profit

Total debt: $2.2B

Peapod Example

Founded 1989 140,000 members, largest on-line grocer

Revenue tripled to $73 million in 1999

1st Quarter of 2000: $25M Sales, Loss: $8M


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Reality is Different.

Furniture.com launched in 1999, withthousands of products

$22 Million in sales the first nine months

Over 1,000,000 visitors per month

Died November 6, 2000

Logistics costs too high


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Reality is Different.

Dell Example: Dell Computer has outperformed the competition in

terms of shareholder value growth over the eight yearsperiod, 1988-1996, by over 3,000% (see Anderson andLee, 1999)


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What is E-Business?

E-business is a collection of business models andprocesses motivated by Internet technology, and focusingon improving the extended enterprise performance

E-commerce is the ability to perform major commercetransactions electronically e-commerce is part of e-Business

Internet technology is the driver of the business change

The focus is on the extended enterprise: Intra-organizational

Business to Consumer (B2C)

Business to Business (B2B)

The Internet can have a huge impact on supply chainperformance.


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The Book Selling Industry

From Push Systems... Barnes and Noble

...T

o Pull Systems Amazon.com, 1996-1999 No inventory, used Ingram to meet most demand Why?

And, finally to Push-Pull Systems Amazon.com, 1999-present

7 warehouses, 3M sq. ft.,

Why the switch? Margins, service, etc. Volume grew


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Direct-to-Consumer:Cost

Trade-Off

Cost r - ff f or C. om

$0

$2$4

$6

$8

$10

$12

$14

$16

$18

$20

0 5 10 15

Numberof C's

Cost($

million

Tot l ost

I tor

Tr s ort tion

Fi ost


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Challenges for On-line

Grocery Stores Transportation cost

Density of customers

Very short order cycle times Less than 12 hours

Difficult to compete on cost Must provide some added value such as convenience

Is a push-pull strategy appropriate? What might be a better strategy?


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Less than 300,000

shoppers NNuummbbeerr ooff

ccuussttoommeerrss

AAvveerraaggee

oorrddeerr

DDeelliivveerryy cchhaarrggeess

WWeebbvvaann 2211000000 $$7711 $$44..9955 ffoorr> $$5500PPeeaappoodd 114400000000 $$112200 $$77..9955 ppeerroorrddeerr

HHoommeeGGrroocceerr..ccoomm 5500000000 $$111100 $$99..9955 > $$7755

NNeettGGrroocceerr..ccoomm 6600000000 $$7700 $$22..9999 ffoorr> $$5500SShhooppLLiinnkk..ccoomm 33330000 $$9988 $$2255 mmoonntthhllyy

SSttrreeaammlliinnee..ccoomm 33440000 $$110000 $$3300

Source: D. Ratliff


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A New Type of Home

Grocer grocerystreet.com

On-line window for retailers

The on-line grocer picks products at the store

Customer can pick products at the store or payfor delivery


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The Retail Industry

Brick-and-mortar companies establish virtual retailstores

Wal-Mart, K-Mart, Barnes & Noble, Circuit City An effective approach - hybrid stocking strategy

High volume/fast moving products for local storage

Low volume/slow moving products for browsing and

purchase on line (risk pooling)

Danger of channel conflict


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E-Fulfillment

How have strategies changed?

From shipping cases to single items

From shipping to a relatively small number ofstores to individual end users

What is the difference between on-line and

catalogue selling? Consider for instance Lands End which has

both channels


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E-business Opportunities:

Reduce Facility Costs

Eliminate retail/distributor sites

Reduce Inventory Costs

Apply the risk-pooling concept

Centralized stocking

Postponement of product differentiation

Use Dynamic Pricing Strategies to ImproveSupply Chain Performance


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E-business Opportunities:

Supply Chain Visibility

Reduction in the Bullwhip Effect

Reduction in Inventory Improved service level

Better utilization of Resources

Improve supply chain performance Provide key performance measures

Identify and alert when violations occur

Allow planning based on global supply chain data


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Distribution Strategies

Warehousing

Direct Shipping

No DC needed

Lead times reduced

smaller trucks

no risk pooling effects

Cross-Docking


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Cross Docking

In 1979 Kmart had 1891 stores and average revenues per store of $7.25

million

Wal-Mart was a small niche retailer in the South with only 229stores and average revenues under $3.5 million

10 Years later Wal-Mart had

highest sales per square foot of any discount retailer

highest inventory turnover of any discount retailer Highest operating profit of any discount retailer.

Today Wal-Mart is the largest and highest profit retailer in the world

Kmart ????


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What accounts forWal-Marts

remarkable success A focus on satisfying customer needs

providing customers access to goods when and where they wantthem

cost structures that enable competitive pricing This was achieved by way the company replenished

inventory the centerpiece of its strategy. Wal-Mart employed a logistics technique known as cross-

docking goods are continuously delivered to warehouses where they are

dispatched to stores without ever sitting in inventory. This strategy reduced Wal-Marts cost of sales significantly

and made it possible to offer everyday low prices to theircustomers.


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Characteristics of Cross-

Docking:

Goods spend at most 48 hours in the warehouse

Cross Docking avoids inventory and handling

costs, Wal-Mart delivers about 85% of its goods through

its warehouse system, compared to about 50% forKmart

Stores trigger orders for products.


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System Characteristics:

Very difficult to manage Requires advanced information technology. Why? What

kind of technology? All ofWal-Marts distribution centers, suppliers and stores

are electronically linked to guarantee that any order isprocessed and executed in a matter of hours

Wal-Mart operates a private satellite-communications

system that sends point-of-sale data to all its vendorsallowing them to have a clear vision of sales at the stores


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System Characteristics:

Needs a fast and responsive transportationsystem. Why?

Wal-Mart has a dedicated fleet of 2000 truck thatserve their 19 warehouses

This allows them to ship goods from warehouses to stores in less

than 48 hours replenish stores twice a week on average.


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StrategyAttribute

irectShipment

rossocking

Inventory atWarehouses

Riskooling

TakeAdvantage

Transportationosts

ReducedInbound osts

ReducedInbound osts

olding

osts

o Warehouse

osts

o olding

ostsemand

ariabilityelayed

Allocationelayed

Allocation

Distribution Strategies


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2003 Simchi-Levi Kaminsky Simchi-Levi

Transshipment

What is the value of this?

What tools are needed? What if the system is

decentralized?

ch 05 supply chain integration

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