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Transcript of 1 Chapter 5 Supply Chain Integration Qi Xu Professor of Donghua University Tel: 021-62378860 E-mail:...
1
Chapter 5 Supply Chain Integration
Chapter 5 Supply Chain Integration
Qi Xu
Professor of Donghua UniversityTel: 021-62378860
E-mail: [email protected]
2
A new Supply Chain Paradigm
A shift from a Push System...Production decisions are based on forecast
…to a Push-Pull System
3
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
4
A Newer Paradigm: Pull Strategies
Production is demand drivenProduction and distribution coordinated with true customer demandFirms respond to specific orders
Pull Strategies result in:Reduced lead times (better anticipation)Decreased inventory levels at retailers and manufacturersDecreased system variabilityBetter response to changing markets
But: Harder to leverage economies of scaleDoesn’t work in all cases
5
Push-Pull Supply Chains
The Supply Chain Time Line
Low Uncertainty
Long lead times
High Uncertainty
Short lead times
CustomersSuppliers
PUSH STRATEGY PULL STRATEGY
Push-Pull Boundary
6
A new Supply Chain Paradigm
A shift from a Push System...Production decisions are based on forecast
…to a Push-Pull SystemInitial 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.
7
Consider Two PC Manufacturers:
Build to StockForecast demand
Buys components
Assembles computers
Observes demand and meets demand if possible.
A traditional push system
Build to orderForecast demand
Buys components
Observes demand
Assembles computers
Meets demand
A push-pull system
8
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 accurateThe Risk Pooling Concept
Delayed differentiation is another exampleConsider Benetton sweater production
9
What is the Best Strategy
Pull Push
Pull
Push
I
Computer
II
IV III
Demand uncertainty
(C.V.)
Delivery costUnit price
L H
H
L
Economies of Scale
10
Selecting the Best SC Strategy
Higher demand uncertainty suggests pullHigher importance of economies of scale suggests pushHigh uncertainty/ EOS not important such as the computer industry implies pullLow uncertainty/ EOS important such as groceries implies push
Demand is stableTransportation cost reduction is criticalPull would not be appropriate here.
11
Selecting the Best SC Strategy
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?
12
Characteristics and Skills
RawMaterial Customers
PullPush
Low Uncertainty
Long Lead Times
Cost Minimization
Resource Allocation
High Uncertainty
Short Cycle Times
Service Level
Responsiveness
13
Locating the Push-Pull Boundary
The push section requires:Supply chain planningLong term strategies
The pull section requires:Order fulfillment processesCustomer relationship management
Buffer inventory at the boundaries:The output of the tactical planning processThe input to the order fulfillment process.
14
Locating the Push-Pull Boundary
reduce inventory holding cost
the location of the push-pull boundary for various companies and industries
15
5.6 Impact of the Internet – Expectations Were High
E-business strategies were supposed to:Reduce cost
Increase service level
Increase flexibility
Increase Profit
16
5.6.1 The Book Selling Industry
From Push Systems...Barnes and Noble
...To Pull SystemsAmazon.com, 1996-1999No inventory, used Ingram Book Group to meet most demandWhy?
And, finally to Push-Pull SystemsAmazon.com, 1999-present
7 warehouses, 3M sq. ft.,Why the switch?
Margins, service, etc.Volume grew
Direct-to-Consumer:Cost Trade-Off
Cost Trade-Off for BuyPC.com
$0$2$4$6$8
$10$12$14$16$18$20
0 5 10 15
Number of DC's
Co
st (
$ m
illio
n)
Total Cost
Inventory
Transportation
Fixed Cost
18
Industry Benchmarks:Number of Distribution Centers
Sources: CLM 1999, Herbert W. Davis & Co; LogicTools
Avg.# ofWH 3 14 25
Pharmaceuticals Food Companies Chemicals
- High margin product- Service not important (or easy to ship express)- Inventory expensiverelative to transportation
- Low margin product- Service very important- Outbound transportationexpensive relative to inbound
19
5.6.2 The Grocery Industry
From Push Systems...Supermarket supply chain
...To Pull SystemsPeapod, 1989-1999
Picks inventory from storesStock outs 8% to 10%
And, finally to Push-Pull SystemsPeapod, 1999-present
Dedicated warehouses allow risk poolingStock outs less than 2%
20
Challenges for On-line Grocery Stores
Transportation costDensity of customers
Very short order cycle times Less than 12 hours
Difficult to compete on costMust 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 << $$5500 ffrreeee ffoorr >> $$5500
PPeeaappoodd 114400000000 $$112200 $$77..9955 ppeerr oorrddeerr
HHoommeeGGrroocceerr..ccoomm 5500000000 $$111100 $$99..9955 << $$7755 ffrreeee ffoorr >> $$7755
NNeettGGrroocceerr..ccoomm 6600000000 $$7700 $$22..9999 ffoorr << $$5500 $$44..9999 ffoorr >> $$5500
SShhooppLLiinnkk..ccoomm 33330000 $$9988 $$2255 mmoonntthhllyy
SSttrreeaammlliinnee..ccoomm 33440000 $$110000 $$3300
Source: D. Ratliff
22
5.6.3 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 ( Push)
Low volume/slow moving products for browsing and purchase on line (risk pooling) (Push-Pull)
Danger of channel conflict
23
5.6.4 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?
24
E-Fulfillment Requires a New Logistics Infrastructure
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
25
5.6.5 E-business Opportunities:
Reduce Facility Costs
Eliminate retail/distributor sites
Reduce Inventory Costs
Apply the risk-pooling conceptCentralized stocking
Postponement of product differentiation
Use Dynamic Pricing Strategies to Improve Supply Chain Performance
26
E-business Opportunities:
Supply Chain VisibilityReduction in the Bullwhip Effect
Reduction in Inventory
Improved service level
Better utilization of Resources
Improve supply chain performanceProvide key performance measures
Identify and alert when violations occur
Allow planning based on global supply chain data
27
5.7 Distribution Strategies
Warehousing
Direct ShippingNo DC needed
Lead times reduced
“smaller trucks”
no risk pooling effects
Cross-Docking
28
3.7.1 Cross Docking
In 1979Kmart 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 laterWal-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 ????
29
What accounts for Wal-Mart’s remarkable success
This was achieved by way 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-Mart’s cost of sales significantly and made it possible to offer everyday low prices to their customers.
30
Characteristics of Cross-Docking:
Goods spend at most 48 hours in the warehouseCross Docking avoids inventory and handling costs,Wal-Mart delivers about 85% of its goods through its warehouse system, compared to about 50% for KmartStores trigger orders for products.
31
System Characteristics:
Very difficult to manageRequires advanced information technology. Why? What kind of technology?All of Wal-Mart’s distribution centers, suppliers and stores are electronically linked to guarantee that any order is processed and executed in a matter of hoursWal-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
32
System Characteristics:
Needs a fast and responsive transportation system. Why?Wal-Mart has a dedicated fleet of 2000 truck that serve their 19 warehousesThis allows them to
ship goods from warehouses to stores in less than 48 hoursreplenish stores twice a week on average.
33
StrategyAttribute
DirectShipment
CrossDocking
Inventory atWarehouses
RiskPooling
TakeAdvantage
TransportationCosts
ReducedInbound Costs
ReducedInbound Costs
HoldingCosts
No WarehouseCosts
No HoldingCosts
DemandVariability
DelayedAllocation
DelayedAllocation
Distribution Strategies
34
Transshipment
What is the value of this?
What tools are needed?
What if the system is decentralized?
35
Important Considerations
Level of Uncertainty
Economies of Scale
Lead Time
Product Architecture
Supply Produce Distribute Sell
Plan/Design
Source
•Product Architecture•Make/Buy•Early Supplier Involvement
•Strategic Partnerships•Suppliers Selection•Supply Contracts
Fulfillment Supply Chain
Develo
pm
en
t Su
pp
ly
Ch
ain
The Enterprise Fulfillment and Development Supply Chains
37
What is the Right Supply Chain Strategy for your Product?
L H
H
L
Demand Uncertainty
Innovative
Functional
•PC/Fashion•Responsiveness•Pull Systems•Dynamic Pricing
•Pasta/Diapers•Efficiency•Push System
•Cell Phone engines•Push Systems•Efficiency
•Furniture/Tires•Push-Pull•Lead Time Reduction
Push Pull
Modular
Integral
ProductsCharacteristic
Product Architecture
Supply ChainStrategy
Product IntroductionFrequency
C
DA
B
38
The Development Supply Chain
Industry clock speedInnovative vs Functional products
Core competenciesMake vs. Buy
Product Design Postponement, Standardization, Packaging