Supply Chain Strategies & e-Business Supply Chain

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

Information Coordination: The Bullwhip Effect Consumer Sales at Retailer Retailer's Orders to Wholesaler 1000 1000 900 900 800 800 700 700 600 600 Consumer demand Retailer Order 500 500 400 400 300 300 200 200 100 100 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 Wholesaler's Orders to Manufacturer Manufacturer's Orders with Supplier 1000 1000 900 900 800 800 700 700 Wholesaler Order 600 Manufacturer Order 600 500 500 400 400 300 300 200 200 100 100 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 1 4 7 10 13 16 19 22 25 28 31 34 37 40

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

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

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.

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? Demand uncertainty (C.V.) Delivery cost Unit price L H H L Economies of Scale Pull Push Pull Push I Computer II IV III

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 Raw Material Customers Push Pull High Uncertainty Short Cycle Times Service Level Responsiveness Low Uncertainty Long Lead Times Cost Minimization Resource Allocation

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 Reacting to realized demand is important Focus on service level Flexible and responsive approaches

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.

Locating the Push-Pull Boundary The figure provides examples of the location of the push-pull boundary for various companies and industries What is the impact of pushing the push-pull boundary from right to left? Clearly as items move along the supply chain time line (from left to right) their value increase. Thus, locating the boundary as far to the left as possible will reduce inventory holding cost. However this is appropriate for products with short assembly and transportation lead times.

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.

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

Reality is Different….. Peapod Example Founded 1989 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

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

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) This example is important in this discussion since in the PC industry competition is not on technology (all PC manufacturers use the same technology; Microsoft and Intel). Competition in this industry is on price and service level; the two dimension that are important in any definition of SCM. So here is a company that has been very successful competing on SCM What did Dell do and can we learn anything from Dell and perhaps apply to other industry.

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

Industry Benchmarks: Number of Distribution Centers Pharmaceuticals Food Companies Chemicals 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

The Grocery Industry From Push Systems... ...To Pull 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%

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 It is appropriate at this point to refer to the framework developed in slide 10. While other on-line grocers fit box III in that framework and face high distribution cost, grocerystreet.com solves the problem by moving to box iv.

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 The point here is that e-fulfillment is not so different than catalogue selling. Indeed, Land’s End uses the same fulfillment systems for both channels.

E-Fulfillment Requires a New Logistics Infrastructure

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 Two Summary Slides: opportunities provided by e-business

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 10 Years later 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.

Distribution Strategies

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