Introduction to Supply Chain management(Lesson 7)

Edited By JQuek

State the Supply Chain Management Paradigm – old and new strategies : Push & Pull

Describe the new SCM Paradigm Be able to describe important terms and

definitions in supply chain management integration

Locating the Boundaries of a Push or Pull strategy

Objectives for today’s lesson

Understanding Push and Pull Systems

What are the advantages of push systems? What are the advantages of pull systems? Is there a system that has the advantages of

both systems?

SCM : The Old Paradigm: Push Strategies

Production decisions are based on long-term forecasts;

Ordering decisions are 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

Understanding the Bull Whip Effect

The Variability in the size and timing of orders increases at each stage up the supply chain, from customer to supplier

Natural dynamic of multistage nature of supply chain◦ Unrelated to erratic customer demand◦ Large fluctuations force distributors, manufacturers, and suppliers

to carry larger inventories◦ Reduces overall profitability of supply chain

Eliminate bullwhip by giving participants access to consumer-demand information◦ Inter-organizational information systems needed to share data

What Is the Bullwhip Effect?

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

CE13-

6

Figure CE13-4

The Graph of the Bullwhip Effect

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

CE13-

7

A Newer Paradigm: Pull Strategies Production is demand driven

◦ Production and distribution coordinated with true customer demand

◦ Firms respond to specific orders Pull Strategies result in:

◦ Decreased inventory levels at retailers and manufacturers

◦ Decreased system variability◦ Better response to changing markets

But: ◦ Harder to leverage economies of scale◦ Doesn’t work in all cases

Push-Pull Boundary

PUSH STRATEGY PULL STRATEGY

Low Uncertainty High Uncertainty

The Supply Chain Time Line

CustomersSuppliers

Combine: A new Supply Chain Paradigm A shift from a Push System...

◦Production decisions are based on forecast …to a Push-Pull System

The 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 actual

customer demand. For example, assembly may based on actual

orders.

Example: Two PC Manufacturers

Build to Stock◦ Forecast demand◦ Buys components◦ Assembles computers◦ Observes demand and

meets demand if possible.

A traditional push system

Build to order◦ Forecast demand◦ Buys components◦ Observes demand◦ Assembles computers◦ Meets demand

A push-pull system

Push-Pull Strategies

The push-pull system takes advantage of the 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 Risk pooling is an important concept in supply

chain management. Risk pooling suggests that demand variability is reduced if one aggregates demand across locations because as demand is aggregated across different locations, it becomes more likely that high demand from one customer will be offset by low demand from another. This reduction in variability allows a decrease in safety stock and therefore reduces average inventory.

The delayed differentiation concept

Delayed differentiation or Postponement is a concept in supply chain management where the manufacturing process starts by making a generic or family product that is later differentiated into a specific end-product. This is a widely used method, especially in industries with high demand uncertainty, and can be effectively used to address the final demand even if forecasts cannot be improved.

Benetton and their knitted sweaters are initially all white, and then dyed into different colors only when the season/customer color preference/demand is known.

It is usually necessary to redesign the product specifically for delayed differentiation, and re-sequence to modify the order of production manufacturing steps.

Benetton sweaters

What is the Best Strategy?

Pull Push

Pull

Push

I

ComputerII

IV III

Demand uncertainty(C.V.)

Delivery costUnit price

L H

H

L

Economies of Scale

Selecting the Best SC Strategy

Higher demand uncertainty suggests push Higher importance of economies of scale suggests

push High uncertainty/ EOS (End of stock) that is 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.

Low uncertainty but low value of economies of scale (high volume books and cd’s)◦Either push strategies or

push/pull strategies might be most appropriate

High uncertainty and high value of economies of scale◦For example, the furniture

industry◦How can production be pull

but delivery push?◦Is this a “pull-push”

system?

Characteristics and Skills

Low Uncertainty

Long Lead Times

Cost Minimization

Resource Allocation

High Uncertainty

Short Cycle Times

Service Level

Responsiveness

RawMaterial Customers

PullPush

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 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.

Locating the Push-Pull Boundary