Sc Strategy&e Scm

8/7/2019 Sc Strategy&e Scm

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Supply Chain Strategies &e-Business Supply Chain


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Supply Chain Strategies

Push-Based Supply Chain

Pull-Based Supply Chain

Push-Pull Supply Chain


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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


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Information Coordination: TheBullwhip Effect

Consumer Sales at Retailer

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nsumerdemand

Retailer's Orders to Wholesaler

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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 Doesnt work in all cases


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Push and Pull Systems

What are the advantages ofpush systems?

What are the advantages of pullsystems?

Is there a system that has the

advantages of both systems?


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Push-Pull Supply Chains

Push-Pull Boundary

PUSH STRATEGY PULL STRATEGY

Low Uncertainty High Uncertainty

The Supply Chain Time Line

CustomersSuppliers


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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 isreplenished 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.


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Consider Two PC Manufacturers:

Build to Stock Forecast demand

Buys components

Assemblescomputers

Observes demandand meets demandif possible.

A traditional pushsystem

Build to order Forecast demand

Buys components

Observes demand Assembles

computers

Meets demand

A push-pull system


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Push-Pull Strategies

The push-pull system takes advantage ofthe rules of forecasting: Forecasts are always wrong

The longer the forecast horizon the worst is theforecast

Aggregate forecasts are more accurate The Risk Pooling Concept

Delayed differentiation is another exampleConsider Benetton sweater production


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What is the Best Strategy?

Pull Push

Pull

Push

I

Computer

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IV III

Demanduncertainty

(C.V.)

Delivery cost

Unit price

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H

L

Economies of

Scale


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Selecting the Best SC Strategy

Higher demand uncertainty suggests pull Higher importance of economies of scale

suggests push

High uncertainty/ EOS not important suchas the computer industry implies pull

Low uncertainty/ EOS important such asgroceries implies push

Demand is stable Transportation cost reduction is critical Pull would not be appropriate here.


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Selecting the Best SC Strategy

Low uncertainty but low value ofeconomies of scale (high volume booksand cds)

Either push strategies or push/pullstrategies might be most appropriate

High uncertainty and high value ofeconomies of scale For example, the furniture industryHow can production be pull but delivery

push? Is this a pull-push system?


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Characteristics and Skills

RawMaterial Customers

PullPush

Low Uncertainty

Long Lead Times

Cost Minimization

Resource Allocation

High Uncertainty

Short Cycle Times

Service Level

Responsiveness


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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


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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.


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What is E-Business?

E-business is a collection of business models andprocesses motivated by Internet technology, andfocusing on improving the extended enterpriseperformance

E-commerce is the ability to perform major commercetransactions 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 chainperformance.


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Impact of the Internet ExpectationsWere High

E-business strategies weresupposed to:Reduce cost

Increase service level

Increase flexibility

Increase Profit


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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


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Reality is Different.

Furniture.com launched in1999, with thousands of products

$22 Million in sales the first ninemonths

Over 1,000,000 visitors per month

Died November 6, 2000 Logistics costs too high


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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 andLee, 1999)


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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


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Direct-to-Consumer:Cost Trade-Off

Cost Trade-Off for BuyPC.com

$0$2$4

$6$8

$10$12$14$16

$18$20

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Number of DC's

Cost($million

Total Cost

Inventory

Transportation

Fixed Cost


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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 (oreasy to ship express)- Inventory expensiverelative to transportation

- Low margin product- Service very important- Outbound transportationexpensive relative to inbound


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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%


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Challenges for On-line GroceryStores

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 asconvenience

Is a push-pull strategy appropriate? What might be a better strategy?


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A New Type of Home Grocer

grocerystreet.comOn-line window for retailers

The on-line grocer picks products at thestore

Customer can pick products at thestore or pay for delivery


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The Retail Industry

Brick-and-mortar companies establish virtualretail stores Wal-Mart, K-Mart, Barnes & Noble, Circuit City

An effective approach - hybrid stockingstrategy High volume/fast moving products for local storage

Low volume/slow moving products for browsingand purchase on line (risk pooling)

Danger of channel conflict


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E-Fulfillment

How have strategies changed? From shipping cases to single items

From shipping to a relatively smallnumber of stores to individual end users

What is the difference between on-line and catalogue selling?

Consider for instance Lands Endwhich has both channels


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E-Fulfillment Requires a New LogisticsInfrastructure

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


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E-business Opportunities:

Reduce Facility Costs Eliminate retail/distributor sites

Reduce Inventory CostsApply the risk-pooling concept

Centralized stocking

Postponement of product differentiation

Use Dynamic Pricing Strategies toImprove Supply Chain Performance


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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


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Distribution Strategies

Warehousing

Direct Shipping

No DC needed Lead times reduced

smaller trucks

no risk pooling effects

Cross-Docking


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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 ????


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What accounts for Wal-Marts 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 ininventory.

This strategy reduced Wal-Marts cost of salessignificantly and made it possible to offer everydaylow prices to their customers.


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Characteristics of Cross-Docking:

Goods spend at most 48 hours in thewarehouse

Cross Docking avoids inventory and

handling costs, Wal-Mart delivers about 85% of its goods

through its warehouse system, comparedto about 50% for Kmart

Stores trigger orders for products.


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System Characteristics:

Very difficult to manage Requires advanced information technology. Why?

What kind of technology? All of Wal-Marts distribution centers, suppliers and

stores are electronically linked to guarantee that anyorder is processed and executed in a matter of hours

Wal-Mart operates a private satellite-communications system that sends point-of-saledata to all its vendors allowing them to have a clear

vision of sales at the stores


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System Characteristics:

Needs a fast and responsive transportationsystem. Why?

Wal-Mart has a dedicated fleet of 2000 truckthat 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.


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Strategy

Attribute

Direct

Shipment

Cross

Docking

Inventory at

Warehouses

Risk

Pooling

Take

Advantage

Transportation

Costs

Reduced

Inbound Costs

Reduced

Inbound Costs

Holding

Costs

No Warehouse

Costs

No Holding

Costs

Demand

Variability

Delayed

Allocation

Delayed

Allocation

Distribution Strategies


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Transshipment

What is the value of this?

What tools are needed?

What if the system isdecentralized?

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