The Impact of the Internet on Supply Chain Management Including some excerpts form David Simchi-Levi...

The Impact of the Internet onThe Impact of the Internet onSupply Chain ManagementSupply Chain Management

Including some excerpts form David Simchi-Levi Including some excerpts form David Simchi-Levi Professor of Engineering Systems Massachusetts Institute of TechnologyProfessor of Engineering Systems Massachusetts Institute of Technology

Move the push-pull boundary to reduce costs while improving cycle times. Move the push-pull boundary to reduce costs while improving cycle times.

HEC MONTRÉAL – MBA53-751-02 E-Commerce

Jacques Robert & Jean Talbot, HEC Montréal

Supply Chain ManagementSupply Chain Management

• • Definition:Definition:Supply Chain Management is primarily concerned with the efficient Supply Chain Management is primarily concerned with the efficient integration of suppliers, factories, warehouses and stores so that integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed in the right quantities, to the merchandise is produced and distributed in the right quantities, to the right locations and at the right time, and so as to minimize total system right locations and at the right time, and so as to minimize total system cost subject to satisfying service requirements.cost subject to satisfying service requirements.

• • Notice:Notice:– – Who is involvedWho is involved– – Cost and Service LevelCost and Service Level– – It is all about integrationIt is all about integration

Excerpt form David Simchi-Levi Excerpt form David Simchi-Levi Professor of Engineering Systems Massachusetts Institute of TechnologyProfessor of Engineering Systems Massachusetts Institute of Technology



The The Business Business Model Model e-e-

• • e-Business is the process of redefining old business models, using Internet e-Business is the process of redefining old business models, using Internet technology, so as to improve the extended enterprise performancetechnology, so as to improve the extended enterprise performance

• e-commerce is part of e-Businesse-commerce is part of e-Business• Internet technology is the driver of the business changeInternet technology is the driver of the business change• The focus is on the extended enterprise:The focus is on the extended enterprise:

• • Intra-organizationalIntra-organizational• • Business to Consumer (B2C)Business to Consumer (B2C)• • Business to Business (B2B)Business to Business (B2B)




Conflicting Objectives in the Supply ChainConflicting Objectives in the Supply Chain

1. 1. PurchasingPurchasing• • Stable volume requirementsStable volume requirements

• • Flexible delivery timeFlexible delivery time

• • Little variation in mixLittle variation in mix

• • Large quantitiesLarge quantities

2. 2. ManufacturingManufacturing• • Long run productionLong run production

• • High qualityHigh quality

• • High productivityHigh productivity

• • Low production costLow production cost

3. 3. WarehousingWarehousing

• • Low inventoryLow inventory

• • Reduced transportation costsReduced transportation costs

• • Quick replenishment Quick replenishment capabilitycapability

4. 4. CustomersCustomers

• • Short order lead timeShort order lead time

• • High in stockHigh in stock

• • Enormous variety of productsEnormous variety of products

• • Low pricesLow prices




A new Supply Chain ParadigmA new Supply Chain Paradigm

• A shift from a Push System...A shift from a Push System...– Production decisions (assembly) are based on forecastProduction decisions (assembly) are based on forecast

– Goods are produced, stored in retail inventoryGoods are produced, stored in retail inventory

– Shocks in demand lead to stock out or unsold productsShocks in demand lead to stock out or unsold products

• … …to a Push-Pull Systemto a Push-Pull System– Part of the production decisions (assembly) are performed on Part of the production decisions (assembly) are performed on

demanddemand

– Parts inventory is replenished based on forecastsParts inventory is replenished based on forecasts

– Customizing of productsCustomizing of products

• Example: DellExample: Dell




From Make-to-Stock Model….From Make-to-Stock Model….




…….to Assemble-to-Order Model.to Assemble-to-Order Model




Pickup sandwichesPickup sandwiches

Sandwiches made on Sandwiches made on demanddemand– More choice / More choice / – Longer preparation Longer preparation

timetime– Piecework Piecework – No unsold stockNo unsold stock

Sandwiches prepared in Sandwiches prepared in advanceadvance– More limited choiceMore limited choice– No delay of No delay of

preparation / faster preparation / faster serviceservice

– Cheaper production lineCheaper production line– unsold stockunsold stock



Choice criteriaChoice criteria

• Diversity of taste / willingness to Diversity of taste / willingness to satisfy heterogeneity of tastes satisfy heterogeneity of tastes and preferencesand preferences

• Added cost of piece productionAdded cost of piece production• Impatience of customersImpatience of customers• Incertitude in demand.Incertitude in demand.• Cost of unsold stocksCost of unsold stocks

On demandPrepared in advance



Demand ForecastDemand Forecast

The three principles of all forecastingThe three principles of all forecasting

techniques:techniques:

– – Forecasts are always wrongForecasts are always wrong

––The longer the forecast horizon the worst is theThe longer the forecast horizon the worst is the

forecastforecast

– – Aggregate forecasts are more accurate - The Risk Aggregate forecasts are more accurate - The Risk Pooling ConceptPooling Concept




Risk pooling: numerical exampleRisk pooling: numerical example

• Many stores selling a good, Many stores selling a good, – 2 consumers / store 2 consumers / store

• A consumer has a chance 50-50 to desire the good. A consumer has a chance 50-50 to desire the good.

• Value of a sale=30$, cost of inventory 10$/unity Value of a sale=30$, cost of inventory 10$/unity

• Examine of the possible inventory policiesExamine of the possible inventory policies



Profits under full informationProfits under full information(maximum possible profits)(maximum possible profits)Event Event ProbabilityProbability GainGain

No consumer wants the goodNo consumer wants the good 25%25% 0$0$

One consumer wants the goodOne consumer wants the good 50%50% +20$+20$

Two consumers want the goodTwo consumers want the good 25% 25% +40$+40$

Expected gain = 20 $Average gain per consumer: 10$



I- One unit per StoreI- One unit per Store

Event Event ProbabilityProbability GainGain

One unit unsoldOne unit unsold 25%25% -10$-10$

One unit soldOne unit sold 50%50% +20$+20$

One lost sale (stockout)One lost sale (stockout) 25% 25% +20$+20$

Expected gain = 12,5 $Average gain per consumer: 6,25$



II- Two units per storeII- Two units per storeEventEvent ProbabilityProbability GainGain

Two units unsoldTwo units unsold 25%25% -20$-20$

One unsold unit &One unsold unit &

One sold unitOne sold unit

50%50% +10$+10$

Two units soldTwo units sold 25% 25% +40$+40$

Expected gain = 10 $Average gain per consumer=5$



4 clients / store4 clients / store2 units in inventory 2 units in inventory

SaleSale ProbabilityProbability GainGain

0 unit0 unit 1/16 1/16 -20$-20$

1 unit1 unit ¼ ¼ +10$+10$

2 units2 units 3/8 + ¼ +1/16= 11/16 3/8 + ¼ +1/16= 11/16 +40$+40$

Expected gains=460/16 = 28,7$Average gain per consumer = 7,18$Higher average gain with 4 clients than with 2.



nn clients / store clients / storess units in inventory units in inventory

n

xxn

x

n

x

n

2

1

2

1

2

1

Probability that x consumers wants the good

sx

nsx

x

n n

sxn

s

xn

202

11030

2

1

10

Total expect profits

02

120

2

110

10

n

sxn

s

xn x

n

x

n

Optimal inventory s. Marginal benefit of adding one extra unit in inventory become nil.



Effect of pooling riskEffect of pooling risk

Number of Number of consumers consumers nn

Optimal inventory Optimal inventory ss

Profits per Profits per consumersconsumers

66 44 7,7087,708

1010 66 8,2858,285

3030 1616 9,0119,011

100100 5252 9,4569,456

10001000 506506 9,8279,827



Pooling riskPooling risk

0

0,05

0,1

0,15

0,2

0,25

0,3

1 2 3 4 5 6 7 8 9 10 11

Série1

0

0,02

0,04

0,06

0,08

0,1

1 12 23 34 45 56 67 78 89 100

Série1

0

0,005

0,01

0,015

0,02

0,025

0,03

1 134 267 400 533 666 799 932

Série1



How to pool riskHow to pool risk

• Pool consumers across time by having stocking for Pool consumers across time by having stocking for a longer perioda longer period

– Increase stocking time Increase stocking time

– Use stock as a bufferUse stock as a buffer

• Pool consumers geographically by having large Pool consumers geographically by having large stores serving more customersstores serving more customers

– Increase transportation costs if there are economies Increase transportation costs if there are economies of scale in transportationof scale in transportation

– Greater delays for consumersGreater delays for consumers

– Last mileLast mile



How to pool riskHow to pool risk

• Delaying assembly: pool consumers across products Delaying assembly: pool consumers across products by using the same resources for different productsby using the same resources for different products

– Requires manufacturing flexibilityRequires manufacturing flexibility

– Greater delays for consumersGreater delays for consumers



Matching Supply Chain StrategiesMatching Supply Chain Strategieswith Productswith Products




Locating the Push-Pull BoundaryLocating the Push-Pull Boundary




Business models in the BookBusiness models in the BookIndustryIndustry

• • From Push Systems...From Push Systems...– – Barnes and NobleBarnes and Noble

• • ...To Pull Systems...To Pull Systems– – Amazon.com, 1996-1999Amazon.com, 1996-1999

• • And, finally to Push-Pull SystemsAnd, finally to Push-Pull Systems– – Amazon.com, 1999-presentAmazon.com, 1999-present

– 7 warehouses, 3M sq. ft.,7 warehouses, 3M sq. ft.,




e-Business in the Retail Industrye-Business in the Retail Industry

Brick-&-Mortar companies establish Virtual retail stores Brick-&-Mortar companies establish Virtual retail stores • Wal-Mart, K-Mart, Barnes and Noble Wal-Mart, K-Mart, Barnes and Noble

Use a hybrid approach in stocking Use a hybrid approach in stocking • High volume/fast moving products for local storage High volume/fast moving products for local storage

• Low volume/slow moving products for browsing and purchase on line Low volume/slow moving products for browsing and purchase on line

Channel Conflict Issues Channel Conflict Issues




e-Business Opportunitiese-Business Opportunities

• Reduce Facility CostsReduce Facility Costs

– Eliminate retailEliminate retail

– distributor sitesdistributor sites

• Reduce Inventory Reduce Inventory CostsCosts

– Apply the risk-Apply the risk-pooling conceptpooling concept

• Centralized stockingCentralized stocking

• Postponement of Postponement of product differentiationproduct differentiation

e-Business Challenges e-Business Challenges

• Manage channel conflict Manage channel conflict issuesissues

• Automated fulfillment Automated fulfillment

• Use and share optimally Use and share optimally information as soon as information as soon as availableavailable

• Speed up assembly Speed up assembly

• Speed up deliverySpeed up delivery

• Manage the “last mile”.Manage the “last mile”.

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