Download - Supply Chain Integration Phil Kaminsky [email protected] David Simchi-Levi Philip Kaminsky Edith Simchi-Levi.

Supply Chain Integration

Phil [email protected]

David Simchi-Levi

Philip Kaminsky

Edith Simchi-Levi

© 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


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


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

CustomersSuppliers


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.


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


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


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


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.


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?


Characteristics and Skills

RawMaterial Customers

PullPush

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



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.


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

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


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


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 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?


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


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


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 Land’s End which has

both channels


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


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-Mart’s 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-Mart’s 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-Mart’s 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.


StrategyAttribute

DirectShipment

CrossDocking

Inventory atWarehouses

RiskPooling

TakeAdvantage

TransportationCosts

ReducedInbound Costs

ReducedInbound Costs

HoldingCosts

No WarehouseCosts

No HoldingCosts

DemandVariability

DelayedAllocation

DelayedAllocation

Distribution Strategies


Transshipment

What is the value of this?What tools are needed?What if the system is

decentralized?