Chapter 5 Supply Chain Integration

1. Chapter 5 Supply Chain Integration Qi Xu Professor of Donghua University Tel: 021-62378860 E-mail: xuqi@dhu.edu.cn

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 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

5. High Uncertainty Short lead times Low Uncertainty Long lead times Push-Pull Supply Chains The Supply Chain Time Line Suppliers Customers PULL STRATEGY PUSH 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 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.

7. 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 Consider Two PC Manufacturers:

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 accurate • The Risk Pooling Concept • Delayed differentiation is another example • Consider Benetton sweater production

9. Demand uncertainty (C.V.) Pull Push H L I Computer II IV III Delivery cost Unit price L H Economies of Scale Pull Push What is the Best Strategy

10. 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.

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 Raw Material Customers Push Pull High Uncertainty Short Cycle Times Service Level Responsiveness Low Uncertainty Long Lead Times Cost Minimization Resource Allocation

13. 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.

14. Locating the Push-Pull Boundary the location of the push-pull boundary for various companies and industries reduce inventory holding cost

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 Systems • Amazon.com, 1996-1999 • No inventory, used Ingram Book Group 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

17. Direct-to-Consumer:Cost Trade-Off

18. Industry Benchmarks:Number of Distribution Centers Food Companies Chemicals Pharmaceuticals Avg. # of WH 3 14 25 - 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 Sources: CLM 1999, Herbert W. Davis & Co; LogicTools

19. 5.6.2 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%

20. 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?

21. Less than 300,000 shoppers 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

25. 5.6.5 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

26. 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

27. 5.7 Distribution Strategies • Warehousing • Direct Shipping • No DC needed • Lead times reduced • “smaller trucks” • no risk pooling effects • Cross-Docking

28. 3.7.1 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 ????

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 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.

31. 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

32. 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.

33. 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

36. The Enterprise Fulfillment and Development Supply Chains • Product Architecture • Make/Buy • Early Supplier Involvement Plan/Design • Strategic Partnerships • Suppliers Selection • Supply Contracts Development Supply Chain Source Distribute Supply Produce Sell Fulfillment Supply Chain

37. H L L H Demand Uncertainty What is the Right Supply Chain Strategy for your Product? Product Architecture Product Introduction Frequency Products Characteristic Modular Innovative • PC/Fashion • Responsiveness • Pull Systems • Dynamic Pricing • Cell Phone engines • Push Systems • Efficiency C B • Pasta/Diapers • Efficiency • Push System • Furniture/Tires • Push-Pull • Lead Time Reduction A D Integral Functional Supply Chain Strategy Push Pull

38. The Development Supply Chain • Industry clock speed • Innovative vs Functional products • Core competencies • Make vs. Buy • Product Design • Postponement, Standardization, Packaging