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Supply Chain Strategies & e-Business Supply Chain

Supply Chain Strategies & e-Business Supply Chain

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Page 1: Supply Chain Strategies & e-Business Supply Chain

Supply Chain Strategies &e-Business Supply Chain

Page 2: Supply Chain Strategies & e-Business Supply Chain

Supply Chain Strategies

Push-Based Supply Chain Pull-Based Supply Chain Push-Pull Supply Chain

Page 3: Supply Chain Strategies & e-Business Supply Chain

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

Page 4: Supply Chain Strategies & e-Business Supply Chain

Information Coordination: The Bullwhip Effect

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Page 5: Supply Chain Strategies & e-Business Supply Chain

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

Page 6: Supply Chain Strategies & e-Business Supply Chain

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?

Page 7: Supply Chain Strategies & e-Business Supply Chain

A new Supply Chain Paradigm

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

forecast …to a Push-Pull System

Page 8: Supply Chain Strategies & e-Business Supply Chain

Push-Pull Supply Chains

Push-Pull Boundary

PUSH STRATEGY PULL STRATEGY

Low Uncertainty High Uncertainty

The Supply Chain Time Line

CustomersSuppliers

Page 9: Supply Chain Strategies & e-Business Supply Chain

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.

Page 10: Supply Chain Strategies & e-Business Supply Chain

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

Page 11: Supply Chain Strategies & e-Business Supply Chain

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

Page 12: Supply Chain Strategies & e-Business Supply Chain

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

Page 13: Supply Chain Strategies & e-Business Supply Chain

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.

Page 14: Supply Chain Strategies & e-Business Supply Chain

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?

Page 15: Supply Chain Strategies & e-Business Supply Chain

Characteristics and Skills

RawMaterial Customers

PullPush

Low Uncertainty

Long Lead Times

Cost Minimization

Resource Allocation

High Uncertainty

Short Cycle Times

Service Level

Responsiveness

Page 16: Supply Chain Strategies & e-Business Supply Chain

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

Page 17: Supply Chain Strategies & e-Business Supply Chain

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.

Page 18: Supply Chain Strategies & e-Business Supply Chain

Locating the Push-Pull Boundary

Page 19: Supply Chain Strategies & e-Business Supply Chain

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.

Page 20: Supply Chain Strategies & e-Business Supply Chain

Impact of the Internet – Expectations Were High

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

Page 21: Supply Chain Strategies & e-Business Supply Chain

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

Page 22: Supply Chain Strategies & e-Business Supply Chain

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

Page 23: Supply Chain Strategies & e-Business Supply Chain

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)

Page 24: Supply Chain Strategies & e-Business Supply Chain

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

Page 25: Supply Chain Strategies & e-Business Supply Chain

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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Page 26: Supply Chain Strategies & e-Business Supply Chain

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

Page 27: Supply Chain Strategies & e-Business Supply Chain

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%

Page 28: Supply Chain Strategies & e-Business Supply Chain

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?

Page 29: Supply Chain Strategies & e-Business Supply Chain

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

Page 30: Supply Chain Strategies & e-Business Supply Chain

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

Page 31: Supply Chain Strategies & e-Business Supply Chain

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

Page 32: Supply Chain Strategies & e-Business Supply Chain

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

Page 33: Supply Chain Strategies & e-Business Supply Chain

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

Page 34: Supply Chain Strategies & e-Business Supply Chain

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

Page 35: Supply Chain Strategies & e-Business Supply Chain

Distribution Strategies

Warehousing Direct Shipping

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

Cross-Docking

Page 36: Supply Chain Strategies & e-Business Supply Chain

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 ????

Page 37: Supply Chain Strategies & e-Business Supply Chain

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.

Page 38: Supply Chain Strategies & e-Business Supply Chain

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.

Page 39: Supply Chain Strategies & e-Business Supply Chain

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

Page 40: Supply Chain Strategies & e-Business Supply Chain

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.

Page 41: Supply Chain Strategies & e-Business Supply Chain

StrategyAttribute

DirectShipment

CrossDocking

Inventory atWarehouses

RiskPooling

TakeAdvantage

TransportationCosts

ReducedInbound Costs

ReducedInbound Costs

HoldingCosts

No WarehouseCosts

No HoldingCosts

DemandVariability

DelayedAllocation

DelayedAllocation

Distribution Strategies

Page 42: Supply Chain Strategies & e-Business Supply Chain

Transshipment

What is the value of this?What tools are needed?What if the system is

decentralized?