Supply Chain Integration Phil Kaminsky kaminsky@ieor. David Simchi-Levi Philip Kaminsky Edith...

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Transcript of Supply Chain Integration Phil Kaminsky kaminsky@ieor. David Simchi-Levi Philip Kaminsky Edith...

  • Slide 1
  • Supply Chain Integration Phil Kaminsky kaminsky@ieor.berkeley.edu David Simchi-Levi Philip Kaminsky Edith Simchi-Levi
  • Slide 2
  • 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
  • Slide 3
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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 Doesn t work in all cases
  • Slide 4
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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?
  • Slide 5
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi A new Supply Chain Paradigm A shift from a Push System... Production decisions are based on forecast to a Push-Pull System
  • Slide 6
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi Push-Pull Supply Chains Push-Pull Boundary PUSH STRATEGYPULL STRATEGY Low Uncertainty High Uncertainty The Supply Chain Time Line Customers Suppliers
  • Slide 7
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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 actual customer demand. For example, assembly may based on actual orders.
  • Slide 8
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi Consider 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
  • Slide 9
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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 Consider Benetton sweater production
  • Slide 10
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi What is the Best Strategy? Pull Push Pull Push I Computer II IVIII Demand uncertainty (C.V.) Delivery cost Unit price L H HLHL Economies of Scale
  • Slide 11
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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.
  • Slide 12
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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 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?
  • Slide 13
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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
  • Slide 14
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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
  • Slide 15
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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.
  • Slide 16
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi Locating the Push-Pull Boundary
  • Slide 17
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi Impact of the Internet Expectations Were High E-business strategies were supposed to: Reduce cost Increase service level Increase flexibility Increase Profit
  • Slide 18
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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
  • Slide 19
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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
  • Slide 20
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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)
  • Slide 21
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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.
  • Slide 22
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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
  • Slide 23
  • Direct-to-Consumer:Cost Trade-Off
  • Slide 24
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi Industry Benchmarks: Number of Distribution Centers Sources: CLM 1999, Herbert W. Davis & Co; LogicTools Avg. # of WH 31425 Pharmaceuticals Food CompaniesChemicals - 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
  • Slide 25
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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%
  • Slide 26
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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?
  • Slide 27
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi Less than 300,000 shoppers Source: D. Ratliff
  • Slide 28
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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 pay for delivery
  • Slide 29
  • 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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
  • Slide 30
  • 2003 Simchi-Levi, Kamins