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Supply Chain Management

Dr. RAVI SHANKARAssociate Professor

SOM

SESSION 9: Supply Chain Integration

Dr. RAVI SHANKARProfessor

Department of Management Studies

Indian Institute of Technology DelhiHauz Khas, New Delhi 110 016, India

Phone: +91-11-26596421 (O); 2659-1991(H); (0)-+91-9811033937 (m)Fax: (+91)-(11) 26862620

Email: r.s.research@gmail.comhttp://web.iitd.ac.in/~ravi1

SESSION#9: Supply Chain Integration (CFVG: 2012)

SUPPLY CHAIN INTEGRATION

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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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Pull Systems

� Production is based on data from the

final customer (POS data is critical)

� Much more flexible system

� Much more efficient system

� JIT is a prime example of a pull system

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Benefits of Pull Systems

� Decreased lead times

� Lower inventory costs

� Decrease in variability in production

� Better service

� Less space

� More flexible system

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A Push/Pull View of Processes

�Pull Process - Initiated in response to a customer demand. Also known as make to order processes.

�Push Process - Initiated in anticipation of a customer demand. Also known as make to stock processes.

�Obvious difference - in pull processes demand is known; in push processes demand is forecasted

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A Push/Pull View of Processes

�In all supply chains, some stages operate as push processes and others as pull processes.

�The push/pull boundary separates push processes from pull processes.

�This distinction important in supply chain design issues. Goal is to increase number of pull processes.

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Comparison

�LL Bean

� Customer Order Cycle is

Pull

� Replenishment,

Manufacturing and

Procurement are Push

based in forecasts and

subject to long lead times

�Dell Computer

� Customer Order and

Manufacturing are Pull

Processes

� Procurement is a Push

Process based on forecasts

� Distributors and

replenishment eliminated from

this supply chain

� Dell’s suppliers operate in a

pull mode but their suppliers

(Tier 2) operate in a push

mode.

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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?

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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

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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 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.

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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

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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

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What is the Best Strategy?

Pull Push

Pull

Push

I: ComputerII: Furniture

IV: Books/CDs III: Grocery

Demand uncertainty

(C.V.)

Delivery cost

Unit price

L H

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 important such as the computer

industry implies pull

� Low uncertainty important such as groceries 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 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?

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Characteristics and Skills

Raw

Material 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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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.

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Benetton Manufacturing Process PostponementBenetton Manufacturing Process Postponement

Purchase Yarn

Dye Yarn

Finish Yarn

Knit Garment Parts

Join Parts

Old Sequence

Purchase Yarn

Knit Garment Parts

Join Parts

Dye Garment

Finish Garment

New Sequence

This process

is postponed

RM – 600 SKUs, 350 Suppliers75% Domestic, 25% ImportedPM-300 SKUs, 140 Suppliers

5 Plants, 18 PC

Dealer(15000)3000 SKUs

Depots (70 No)70% volume

6 Regional Distribution Centers

Export & Industrial Consumers (2000)

Made to stock Made to order

Supply Chain at Asian Paints

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Postponement in Practice

�Dealer Tinting System� In factory they make “Base/white" only

� Raw base sent to the dealers

� Customers choose their desired shades via computer systems at the dealer end

� Dealer mixes the desired base and the colorants with help of the DTS

� >2500 dealers have DTS

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Lean Agile

• Forecast at generic level

• Economic batch quantities

• Maximise efficiencies

• Demand driven

• Localised Configuration

• Maximise effectivenessStrategic

Inventory

The de-coupling point

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Two key de-coupling points

Forecast Driven Order Driven

Less uncertainty due to

enrichment of undistorted data

Push Pull

Factory Assembler Finished goods

Stock

Retailer

Market sales

Information

de-coupling

point

Direct market sales information

Material

de-coupling

point

Source: Mason-Jones & Towill

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Driven

ByDemand

Driven

By

Forecast

Plants Distribution

CentresWarehouses Depots

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Locating the Push-Pull

Boundary