SCM - Supply Chain Integration

Supply ChainIntegration

© 2003 Simchi-Levi, Kaminsky, Simchi-Levi

SUPPLY CHAIN INTEGRATION• A supply chain is a sequence of

processes that take place within different stages to fill a customer need for a product.

• There are two different ways to view the processes performed in a supply chain

1. Cycle View :- A series of cycles, each performed at the interface between two successive stages of a supply chain.




2. Push / Pull View:- With Pull Processes – execution is initiated

in response to a customer order (Customer demand is known with certainty – also called as reactive processes)

With Push Processes – execution is initiated in anticipation of customer orders. (Customer demand is not known and must be forecast – also referred to as speculative processes)

The Push – Pull boundary in a supply chain separates push processes from pull processes.


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


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


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?


A new Supply Chain Paradigm

A shift from a Push System...– Production decisions are based on forecast

…to a Push-Pull System


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.


Push-Pull Supply Chains

Push-Pull Boundary

PUSH STRATEGY PULL STRATEGY

Low Uncertainty High Uncertainty

The Supply Chain Time Line

CustomersSuppliers




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


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


What is the Best Strategy?

Pull Push

Pull

Push

I

Computer

II

IV III

Demand uncertainty

(C.V.)

Delivery costUnit price

L H

H

L

Economies of Scale


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.


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?


Characteristics and Skills

RawMaterial Customers

PullPush

Low Uncertainty

Long Lead Times

Cost Minimization

Resource Allocation

High Uncertainty

Short Cycle Times

Service Level

Responsiveness


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



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.



Classification of Industries

Classification of Industries

Based on Nature of work Production Industries

• Process Industries• Discrete Item Mfg. Industries

Project Industries• Workers / Tools / Equipments brought to the Site• Has to be completed within a stipulated duration of Time

Service Industries • Software Companies, Hospitality, Healthcare Sector etc

Based on volume of work

Classification based on the volume of Goods produced Job shop Production

• A limited number of goods produced• Low repetitive orders

Batch / Intermittent Production• Orders are taken in Batches• Volume of Production higher than in Jobshop production

Mass Production• Production done on a large / extensive scale• Goods for mass consumption

Cellular Production• Modular system of Production of Goods

Based on Manufacturing Environment

Manufacturing Environment is essentially a framework under which the Management strategies are developed and implemented

A Manufacturing Environment is influenced by External factors such as Corporate Strategy, Business Unit Strategy, Product Selection, Process / Batch Manufacturing etc

Customer Order Decoupling Point (CODP)

Customer order Decoupling Point(Order Penetration Point)

Order Penetration Point (OPP) is a point in the company Material Flow where an Item becomes earmarked to a particular, specific, known customer

OPP is the last point where unallocated Inventory is held-It is the last point of Inventory

OPP affects both capacity and Materials Management

Upstream OPP means less risk for the Manufacturer while downstream OPP means shorter delivery times

Order Penetration Point (OPP)Design Manufacturing Assembly Distribution Installation

Customer

(Example)

Home Appliances

Computers

Furniture

Special Purpose M/Cs

Oil Platforms

Standard products

Standard modules

Parts manufacturing

Make-to-order

Design-to-order

OPP

OPP

OPP

OPP

OPP

Engineer – to – order

• Products whose customer specification require unique Engineering Design & significant customisation

• Create Solutions in response to customer request

• Long Leadtimes

• Examples – Construction of Bridge, Oil Rig etc


(Engineer to order System)

Make – to – order

• It is a Production Environment where Goods are made and Services rendered after the receipt of a customer’s order

• Low sales volume

• Products are with Long Leadtimes

• High Price Items

• Customer Engineering in conjunction with Supplier’s Design

• Example – Aircraft, Special Purpose Machines


(Make to order System)

Assemble – to – order

• A Production Environment where Goods or Services are assembled / developed after the receipt of customers’ order

• Wide variety in high volume with short leadtimes

• Use market research, sales history to forecast sales

• Higher Product volumes with lower Inventory

• Example – Automobiles, Consumer Electronics etc


(Assemble to order System)

Make – to – stock

• Basically an environment where products are usually kept finished

• Standard Products

• Immediate Delivery from Stock

• All variations available from Stock

• Large finished Goods Inventories

• Examples – Consumer Goods like Clothes, Appliances, Food items etc


(Make to stock System)


Impact of the Internet – Expectations Were High

E-business strategies were supposed to:– Reduce cost– Increase service level– Increase flexibility– Increase Profit


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.


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

Direct-to-Consumer:Cost Trade-Off

Cost Trade-Off for BuyPC.com

$0$2$4$6$8

$10$12$14$16$18$20

0 5 10 15

Number of DC's

Co

st (

$ m

illio

n)

Total Cost

Inventory

Transportation

Fixed Cost


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 (or easy to ship express)- Inventory expensiverelative to transportation

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


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?


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


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


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


E-Fulfillment Requires a New Logistics Infrastructure

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


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


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


Distribution Strategies

Warehousing Direct Shipping

– No DC needed– Lead times reduced– “smaller trucks”– no risk pooling effects

Cross-Docking


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 ????


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.


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.


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


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.


StrategyAttribute

DirectShipment

CrossDocking

Inventory atWarehouses

RiskPooling

TakeAdvantage

TransportationCosts

ReducedInbound Costs

ReducedInbound Costs

HoldingCosts

No WarehouseCosts

No HoldingCosts

DemandVariability

DelayedAllocation

DelayedAllocation

Distribution Strategies

Documents

SCM - Supply Chain Integration