Chapter 4

Supply Chain Integrations

Fajar Hidayat, ST, MsMM, CPIM

Outline

Push and Pull Strategy

Distributions Strategy

Push vs Pull

Push Strategy

Pull Strategy

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

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: 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

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?

A new Supply Chain Paradigm

A shift from a Push System...

Production decisions are based on forecast

to a Push-Pull System

Push-Pull Supply Chains

Push-Pull Boundary

PUSH STRATEGY PULL STRATEGY

Low Uncertainty High Uncertainty

The Supply Chain Time Line

Customers Suppliers

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 replenis

hed 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 orde

rs.

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

Delayed differentiation is another example

What is the Best Strategy?

Pull Push

Pull

Push

I

Computer II

IV

III

Demand uncertainty

(C.V.)

Delivery cost

Unit price

L H

H

L

Economies

of Scale

Selecting the Best SC Strategy

Higher demand uncertainty suggests pull

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.

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 strategies mi

ght 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

Raw

Material Customers

Pull Push

Low Uncertainty

Long Lead Times

Cost Minimization

Resource Allocation

High Uncertainty

Short Cycle Times

Service Level

Responsiveness

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

Locating the Push-Pull 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.

Locating the Push-Pull Boundary

Impact of the Internet Expectations Were High

E-business strategies were supposed to:

Reduce cost

Increase service level

Increase flexibility

Increase Profit

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

Reality is Different.

Furniture.com launched in 1999, with thousands 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

Reality is Different.

Dell Example: Dell Computer has outperformed the competition

in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% (see Anderson and Lee, 1999)

What is E-Business?

E-business is a collection of business models and processes motivated by Internet technology, and focusing on improving the extended enterprise performance

E-commerce is the ability to perform major commerce transactions 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 chain performance.

The Book Selling Industry

From Push Systems... Barnes and Noble

...To 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

Industry Benchmarks:

Number of Distribution Centers

Sources: CLM 1999, Herbert W. Davis & Co; LogicTools

Avg.

# of

WH 3 14 25

Pharmaceuticals Food Companies Chemicals

- High margin product

- Service not important (or

easy to ship express)

- Inventory expensive

relative to transportation

- Low margin product

- Service very important

- Outbound transportation

expensive relative to inbound

The Grocery Industry

From Push Systems... Supermarket supply chain

...To Pull Systems Peapod, 1989-1999

Picks inventory from stores

Stock outs 8% to 10%

And, finally to Push-Pull Systems Peapod, 1999-present

Dedicated warehouses allow risk pooling

Stock outs less than 2%

Challenges for On-line Grocery Store

s

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?

The Retail Industry

Brick-and-mortar companies establish virtual retail stores

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

E-Fulfillment

How have strategies changed?

From shipping cases to single items

From shipping to a relatively small number of stores to individual end users

What is the difference between on-line and catalogue selling?

Consider for instance Lands End which has both channels

E-Fulfillment Requires a New Logistics I

nfrastructure

Traditional Supply Chain e-Supply Chain

Supply Chain Strategy Push Push-Pull

Shipment Type Bulk Parcel

Inventory Flow Unidirectional Bi-directional

Reverse Logistics Simple Highly Complex

Destination Small Number of Stores Highly Dispersed Customers

Lead Times Depends Short

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 Improve Supply Chain Performance

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

Distribution Strategies

Warehousing

Direct Shipping

No DC needed

Lead times reduced

smaller trucks

no risk pooling effects

Cross-Docking

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 229 stores 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 ????

What accounts for Wal-Marts remarkable success

A focus on satisfying customer needs providing customers access to goods when and where they

want them 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 their customers.

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% for Kmart

Stores trigger orders for products.

System Characteristics:

Very difficult to manage Requires advanced information technology. Why?

What kind of technology? All of Wal-Marts distribution centers, suppliers and

stores are electronically linked to guarantee that any order is processed and executed in a matter of hours

Wal-Mart operates a private satellite-communications system that sends point-of-sale data to all its vendors allowing them to have a clear vision of sales at the stores

System Characteristics:

Needs a fast and responsive transportation system. Why?

Wal-Mart has a dedicated fleet of 2000 truck that serve 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.

Strategy

Attribute

Direct

Shipment

Cross

Docking

Inventory at

Warehouses

Risk

Pooling

Take

Advantage

Transportation

Costs

Reduced

Inbound Costs

Reduced

Inbound Costs

Holding

Costs

No Warehouse

Costs

No Holding

Costs

Demand

Variability

Delayed

Allocation

Delayed

Allocation

Distribution Strategies

Thank You