Supply Chain Integration

1. Supply Chain Integration Phil Kaminskykaminsky@ieor.berkeley.edu David Simchi-Levi Philip Kaminsky Edith Simchi-Levi

2. 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

3. 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

4. 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?

5. A new Supply Chain Paradigm • A shift from a Push System... • Production decisions are based on forecast • …to a Push-Pull System

6. PUSH STRATEGY PULL STRATEGY High Uncertainty Low Uncertainty Push-Pull Boundary Push-Pull Supply Chains The Supply Chain Time Line Customers Suppliers

7. 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.

8. 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:

9. 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

10. 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?

11. 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.

12. 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?

13. 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

14. 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

15. 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.

16. Locating the Push-Pull Boundary

17. Impact of the Internet – Expectations Were High • E-business strategies were supposed to: • Reduce cost • Increase service level • Increase flexibility • Increase Profit

18. 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

19. 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

20. 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)

21. 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.

22. 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

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

24. 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

25. 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%

26. 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?

27. Less than 300,000 shoppers Source: D. Ratliff

28. 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

29. 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

30. 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

31. E-Fulfillment Requires a New Logistics Infrastructure

32. 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

33. 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

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

35. 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 ????

36. 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.

37. 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.

38. 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

39. 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.

40. Distribution Strategies

41. Transshipment • What is the value of this? • What tools are needed? • What if the system is decentralized?