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Transcript of CL2-RKS-SCM
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Strategy Development for Supply Chain Integration
Dr. R K Singh
Associate Professor
IIFT, Delhi
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Strategy Development for Supply Chain Integration
Outline
Concept of Supply Chain Integration Types of Products Push and Pull type of strategies Types of Supply chains
Competitive and supply chain strategies Achieving strategic fit Expanding strategic scope Drivers and Obstacles of Supply chains
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Introduction Effective SCM
Efficient integration of suppliers, manufacturers, warehouses, and stores.
Coordinate activities across the supply chain
Various supply chain integration strategies: Push, pull, push–pull strategy. Matching products and industries with supply chain
strategies. Demand-driven supply chain strategies. The impact of the Internet on supply chain integration.
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Supply Chain Performance MeasuresC
ost
of s
ervi
ce
Service LevelLow High
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Impact of Service Level on Revenue Costs and Profits
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Types of Products and Supply Chains (Hau Lee’s Framework)
Supply Uncertainty
Demand Uncertainty
Low
(Functional Products)
High
(Innovative Products)
Low
(Stable Process)
Grocery, Basic apparel, food, Oil and Gas
Efficient Supply Chain
Fashion apparel, popular music
Responsive Supply chain
High
(Evolving Process)
Hydroelectric power, Some food products
Risk-Hedging Supply Chain
Telecom, High end computers,
semiconductor
Agile Supply Chain
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Aspects of demand Functional (predictable Demand)
Innovative (Unpredictable Demand)
Product Life cycle More than 2 years 3 months to 1 year
Contribution margin ( % of sales price)
5% to 20% 20% to 60%
Product variety Low ( 10 to 20 variants per category)
High ( often thousands of variants per category)
Likely forecast error 5% to 20% 40% to 100%
Average stock-out rate 1% to 2% 10% to 40%
End-of-season mark markdown
0% 10% to 30%
Functional Versus Innovative Products: Differences in Demand
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Push-Based Supply Chains
Production and distribution decisions based on long-term forecasts.
Longer reaction time to changing marketplace
Causes Bullwhip Effect
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Bullwhip EffectOccurs when slight demand variability is magnified as information
moves back upstream
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Bullwhip Effect in Push-Based Supply Chains
Leads to inefficient resource utilization Planning and managing are much more difficult. Not clear how a manufacturer should determine
production capacity? Transportation capacity? Peak demand? Average demand?
Results: Inability to meet changing demand patterns. Higher inventory levels and/or higher manufacturing
costs Larger and more variable production batches
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Pull-Based Supply Chains Production and distribution demand driven
Coordinated with true customer demand rather than forecast demand
firm does not hold any inventory and only responds to specific orders.
Enabled by fast information flow.
It leads to Reduced lead times Reduced inventory
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Push-Pull Strategy New supply chain strategy that takes the best of
both.
Some stages of the supply chain operated in a push-based manner
typically the initial stages
Remaining stages employ a pull-based strategy.
Interface is the push–pull boundary.
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Push-Pull Supply Chains
Low
Uncertainty High
Uncertainty
CustomersSuppliers
PUSH STRATEGY PULL STRATEGY
Push-Pull Boundary
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Traditional computer industry•High level of demand uncertainty•Low delivery cost (% to the unit price)
Demand forecast made on long term forecast
Ma
nu
fact
uri
ng
Inventory of finished products
Inventory of finished products
Inventory of finished products
Ra
w M
ate
ria
ls
En
d C
ust
om
er
Production Assembly Manufacturer DC
Distributor DC
Store
Push
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PC SUPPLY CHAINS
Typical PC Supply Chain(Compaq, HP, IBM, etc.)
Customer
DistributionChannels
Manufacturer
Suppliers
PUSH
PULL
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Identifying the Appropriate Supply Chain Strategy
FIGURE : Push-pull supply chains
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Impact of Lead Time
FIGURE Matching supply chain strategies with products: the impact of lead time and demand uncertainty
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Implementing a Push–Pull Strategy Achieving the appropriate design depends
on many factors:product complexitymanufacturing lead timessupplier–manufacturer relationships.
Many ways to implement a push–pull strategylocation of the push–pull boundary.
Dell locates the boundary at the assembly pointFurniture manufacturers locate the boundary at the
production point
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Characteristics of the Push and Pull Portions of the Supply Chain
Portion Push Pull
Objective Minimize cost Maximize service level
Complexity High Low
Focus Resource allocation Responsiveness
Lead time Long Short
Processes Supply chain planning Order fulfillment
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Dell - the Pull-Push boundary
• High level of demand uncertainty• Low delivery cost (% to the unit price)
Demand forecast made at assembly
Parts inventory made on forecast
Pull from customer demand
No inventoryof
finished products
Production Assembly Manufacturer DC
Distributor DC
Store
Ra
w M
ate
ria
ls
En
d C
ust
om
erPush
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The furniture industry
• High level of demand uncertainty• High delivery cost (% to the unit price)
Many different type of fabrics, colorsdecided on order.
Made on order
Inve
nto
ry
Consolidation of bulky shipments Inventory
Production Assembly Manufacturer Store
DC DC
Distributor
Ra
w M
ate
ria
ls
En
d C
ust
om
er
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Car industry•High level of demand uncertainty• High delivery cost (% to the unit price)
Demand forecast made on long term forecast
Ma
nu
fact
uri
ngInventory of finished cars
Inventory of finished cars
Ra
w M
ate
ria
ls
En
d C
ust
om
er
Production Assembly Manufacturer
Push
Factorystorage
Automobiledealers
Inventory of finished cars
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The Grocery Pull-Push boundary
•Low level of demand uncertainty• High delivery cost (% to the unit price)
Pasta Soup Drinks
Very predictable distribution patterns.Because high level of predictability,orders can be made on long-term forecast
DemandforecastmadeatDistributorDC
Ra
w M
ate
ria
ls
En
d C
ust
om
er
Push
Pull fromcustomerdemand
Production AssemblyManufacturer DC
Distributor DC Store
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Demand-Driven Strategies Requires integrating demand information
into the supply chain planning process
Demand forecast: Use historical demand data to develop long-term
estimates of expected demand
Demand shaping: Firm determines the impact of various marketing
plans such as promotion, pricing discounts, rebates, new product introduction, and product withdrawal on demand forecasts.
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Grocery Industry Products have low demand uncertainty
high economies of scale in transportation cost push-based strategy is more appropriate.
Peapod (Online Grocery) was built on pure pull strategy with no inventory and no facilities. Significant service problems with high stockout rates Changed to a push–pull strategy by setting up a number of
warehouses Warehouse covers a large geographical area
Aggregated demand
Challenges in Online Grocery Industry Reducing transportation costs Short response time Low customer density
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Book Industry Initial model of Amazon.com a pure pull system with no
warehouses and no stock. Ingram Book Group supplied most of Amazon’s customer
demand. As volume and demand increased:
Amazon.com’s service level was affected by Ingram Book’s distribution capacity
Using Ingram Book in the first few years allowed Amazon.com to avoid inventory costs but significantly reduced profit margins.
As demand increased distributor no longer required. Current Amazon.com:
Several warehouses around the country where most of the titles are stocked.
Inventory at the warehouses is managed using a push strategy Demand satisfied based on individual requests, a pull strategy.
Slow moving low volume books and CDs are not stocked at Amazon distribution centers Amazon orders those when demand arrives.
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Locating the Push-Pull Boundary
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Procurement Planning
ManufacturingPlanning
DistributionPlanning
DemandPlanning
Sequential Optimization
Supply Contracts/Collaboration/Integration/DSS
Procurement Planning
ManufacturingPlanning
DistributionPlanning
DemandPlanning
Global Optimization
From Sequential Optimization to Global Optimization
Source: Duncan McFarlane
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Competitive and Supply Chain Strategies
Competitive strategy: defines the set of customer needs a firm seeks to satisfy through its products and services
Product development strategy Marketing and sales strategy Supply chain strategy:
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The Value Chain: Linking Supply Chain and Business Strategy
NewProduct
Development
Marketingand
Sales Distribution Service
Finance, Accounting, Information Technology, Human Resources
Business Strategy
New ProductStrategy
MarketingStrategy Supply Chain Strategy
Operations
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Achieving Strategic Fit
Strategic fit: Consistency between customer priorities of
competitive strategy and supply chain capabilities specified by the supply chain strategy
Competitive and supply chain strategies have the same goals
Example of strategic fit -- Dell
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How is Strategic Fit Achieved?
Step 1: Understanding the customer and supply chain uncertainty
Step 2: Understanding the supply chain
Step 3: Achieving strategic fit
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Achieving Strategic Fit
Understanding the CustomerLot sizeResponse timeService levelProduct varietyPriceInnovation
ImpliedDemand
Uncertainty
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Impact of Customer Needs on Implied Demand Uncertainty
Customer Need Causes implied demand uncertainty to increase because …
Range of quantity increases Wider range of quantity implies greater variance in demand
Lead time decreases Less time to react to orders
Variety of products required increases
Demand per product becomes more disaggregated
Number of channels increases Total customer demand is now disaggregated over more channels
Rate of innovation increases New products tend to have more uncertain demand
Required service level increases
Firm now has to handle unusual surges in demand
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Levels of Implied Demand Uncertainty
Low High
Price Responsiveness
Customer Need
Implied Demand Uncertainty
DetergentLong lead time steelPurely functional products
High FashionPalm top computer
Entirely new products
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Correlation Between Implied Demand Uncertainty and Other Attributes
Attribute Low Implied Uncertainty
High Implied Uncertainty
Product margin Low High
Avg. forecast error 10% 40%-100%
Avg. stockout rate 1%-2% 10%-40%
Avg. forced season-end markdown
0% 10%-25%
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Step 2: Understanding the Supply Chain
How does the firm best meet demand?Supply chain responsiveness -- ability to
respond to wide ranges of quantities demanded
meet short lead timeshandle a large variety of productsbuild highly innovative productsmeet a very high service levelHandle supply uncertainty
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Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier
High Low
Low
High
Responsiveness
Cost
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Step 3: Achieving Strategic Fit
Step is to ensure that what the supply chain does well is consistent with target customer’s needs
Examples: Dell, Wallmart, Amul
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Responsiveness Spectrum
Integratedsteel mill
Dell
Highlyefficient
Highlyresponsive
Somewhatefficient
Somewhatresponsive
Hanesapparel
Mostautomotiveproduction
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Step 3: Achieving Strategic FitAll functions in the value chain must support
the competitive strategy
Two extremes: Efficient supply chains (Salt) and responsive supply chains (Dell)
There is no right supply chain strategy
independent of competitive strategy
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Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map
Implied uncertainty spectrum
Responsive supply chain
Efficient supply chain
Certain demand
Uncertain demand
Responsiveness spectrum Zone of
Strategic Fit
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Comparison of Efficient and Responsive Supply ChainsEfficient Responsive
Primary goal Lowest cost Quick response
Product design strategy
Min product cost Modularity to allow postponement
Pricing strategy Lower margins Higher margins
Mfg strategy High utilization Capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Lead time strategy Reduce but not at expense of greater cost
Aggressively reduce even if costs are significant
Supplier selection strategy
Cost and low quality Speed, flexibility, quality
Transportation strategy
Greater reliance on low cost modes
Greater reliance on responsive (fast) modes
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Other Issues Affecting Strategic Fit
Multiple products and customer segmentsProduct life cycleCompetitive changes over time
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Multiple Products and Customer Segments
Firms sell different products to different customer segments (with different implied demand uncertainty)
The supply chain has to be able to balance efficiency and responsiveness
Two approaches:Different supply chainsTailor supply chain to best meet the needs of
each product’s demand
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Product’s Life Cycle
Introduction Growth Maturity Decline
Time
Sales
• Best period to increase market share
•R&D engineering critical
•Practical to change price or quality image•Strengthen niche
•Poor time to change image, price or quality•Competitive costs become critical•Defend market position
•Cost control critical
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SC Strategy during Product Life cycleThe demand characteristics of a product
change as a product goes through its life cycle
Early: uncertain demand, high margins (time is important), product availability is most important, cost is secondary
Late: predictable demand, lower margins, price is important
Examples: pharmaceutical firms, Intel
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Changes in Supply Chain strategy over a Product life cycle
Implied uncertainty spectrum
Responsive supply chain
Efficient supply chain
Product Maturity
Product introduction
Responsiveness spectrum Zone of
Strategic Fit
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Competitive Changes Over Time
Competitive pressures can change over time
Increased emphasis on variety at a reasonable price
The Internet makes it easier to offer a wide variety of products
The supply chain strategy must change for strategic fit.
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Expanding Strategic Scope Scope of strategic fit
The functions and stages within a supply chain that devise an integrated stategy with a shared objective
Five categories: Intracompany intraoperation scope Intracompany intrafunctional scope Intracompany interfunctional scope Intercompany interfunctional scope Flexible interfunctional scope
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Strategic Scope
Suppliers Manufacturer Distributor Retailer Customer
Competitive Strategy
Product Dev. Strategy
Supply Chain Strategy
Marketing Strategy
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Strategic Scope: Intracompany Intraoperation Scope
Suppliers Manufacturer Distributor Retailer Customer
Competitive Strategy
Product Dev. Strategy
Supply Chain Strategy
Marketing Strategy
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Strategic Scope:Intracompany Intrafunctional
ScopeSuppliers Manufacturer Distributor Retailer Customer
Competitive Strategy
Product Dev. Strategy
Supply Chain Strategy
Marketing Strategy
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Strategic Scope: Intracompany Interfunctional
ScopeSuppliers Manufacturer Distributor Retailer Customer
Competitive Strategy
Product Dev. Strategy
Supply Chain Strategy
Marketing Strategy
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Intercompany Interfunctional Scope
All stages coordinate strategy across all functions
Each company must evaluate its actions in the context of the entire supply chain
Increasing supply chain surplus or profit
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Strategic Scope: Intercompany Interfunctional
ScopeSuppliers Manufacturer Distributor Retailer Customer
Competitive Strategy
Product Dev. Strategy
Supply Chain Strategy
Marketing Strategy
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Flexible Intercompany Interfunctional Scope
Ability to achieve strategic fit when partnering with stages that change over time in the supply chain
Customer needs and members of the supply chain change over time
A firm may have to partner with many different firms over time
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Drivers of Supply Chain Performance
Facilities places where inventory is stored, assembled, or fabricated production sites and storage sites
Inventory raw materials, WIP, finished goods within a supply chain inventory policies
Transportation moving inventory from point to point in a supply chain combinations of transportation modes and routes
Information data and analysis regarding inventory, transportation, facilities
throughout the supply chain potentially the biggest driver of supply chain performance
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A Framework for Structuring Drivers
Efficiency Responsiveness
Facilities Transportation Inventory Information
Supply chain structure
Drivers
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Obstacles to Achieving Strategic Fit
Increasing variety of productsDecreasing product life cycles Increasingly demanding customersFragmentation of supply chain ownershipGlobalizationDifficulty executing new strategies
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Major Obstacles to Achieving Fit
Multiple owners / incentives in a supply chain
Increasing product variety / shrinking life cycles / customer fragmentation
Increasing implied uncertainty
Local optimization and lack of global fit
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Type of industry
• Chemicals• Food
Length of product life
cycle
Level of customization
Type of product• Functional• Innovative
Supply Chain Strategy
Selection of SCM practices
Supply chain capabilities and Resources
• Logistics•Supplier relations•Process capability•Customer service•Information sharing•Organizational structure•E-business readiness
Review of Supply chain Performance
Model for Selection of SCM Practices
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