Supply Chain Integration Designing & Managing The Supply Chain Chapter 5 Zhang Xiaohui

Case: Modern Book Distribution Seven regional warehouses, services major bookstore chains and smaller independent booksellers Bookselling industry change superstores: require MDB ship directly to stores online booksellers: establish their own DC Opportunities and challenges for MDB

Contents Introduction Push, pull, push-pull systems Demand-driven strategies Impact of the Internet on supply chain strategies Distribution strategies Central versus Decentralized Control Central versus local facilities Summary

Introduction Supply chain integration Purpose coordinate activities across the supply chain, including coordinating production, transportation, inventory decisions and more generally, integrating the front-end of the supply chain – customer demand, to the back-end of the supply chain – the production and manufacturing portion. Purpose reduce cost increase service level reduce the bullwhip effect better utilize resources effectively respond to changes in the market place

Push, pull, push-pull systems Push-based supply chain production and distribution decisions are based on long-term forecasts. React slow and large variability lead to: Inability to meet changing demand patterns Excessive inventories Larger and more variable production batches Unacceptable service levels Product obsolescence

Push, pull, push-pull systems. cont Pull-based supply chain production and distribution are demand driven. Effect: decrease lead times decrease inventory of retailers decrease variability in the system decrease inventory of manufacturer Lead times too long, difficult to implement pull-based systems Difficult to take advantage of economies of scale in manufacturing and transportation

Push, pull, push-pull systems. cont Push-pull supply chain some stages operated in a push-based manner, the remaining stages employ a pull-based strategy. (PC, delayed differentiation) The interface: push-pull boundary Push strategy Pull strategy Push-pull boundary Raw materials End customer Supply chain time line

Push, pull, push-pull systems. cont Aggregate forecasts PC manufacturer components: push-based assembly: pull-based Postpone/delay differentiation produce a generic or family product: push-based specific end-products: pull-based

Push, pull, push-pull systems. cont Identifying the appropriate supply chain strategy Ⅰ computer Ⅱ furniture Ⅳ Books & CDs Ⅲ grocery L H Economies of scale Demand uncertainty pull push

Push, pull, push-pull systems. cont Box Ⅱ high demand uncertainty: pull important economies of scale: push furniture industry: production-pull; delivery-push Box Ⅳ low demand uncertainty: push low economies of scale: pull books & CDs: push-pull strategy automobile: push-based strategy failure of GM’s push-pull strategy pull push Ⅰ Ⅱ Ⅳ Ⅲ L H Economies of scale Demand uncertainty

Push, pull, push-pull systems. cont Implementing a push-pull strategy in the supply chain: Portion Push Pull Portion of SCM Relatively small uncertainty High uncertainty Objective Minimize cost Maximize service level Complexity High Low Focus Resource allocation Responsiveness Lead time Long Short Processes Supply chain planning Order fulfillment Buffer inventory output input

Demand-driven strategies Demand forecast use historical demand to develop long-term estimates of expected demand Demand shaping determines the impact of various marketing plans (promotion, rebates) Accuracy – forecast error: standard deviation

Demand-driven strategies .cont Increase forecast accuracy push-pull boundary market analysis, demographic and economic trends optimal assortment incorporate collaborative planning and forecasting processes Supply and demand management allocate marketing budgets and associate resources impact of deviations from forecast demand impact of changes in supply chain lead times impact of competitors’ promotional activities

Impact of the Internet on supply chain strategies B2B increase from $43 billion in 1998 to $1.3 trillion in 2003 Living.com Furniture.com Peapod Amazon.com Dell computers Cisco

Impact of the Internet .cont E-business a collection of business models and processes motivated by Internet technology and focusing on improvement of extended enterprise performance E-commerce the ability to perform major commerce transactions electronically E-commerce is only part of e-bussiness Internet technology is the force behind the business change The focus in e-business is on the extended enterprise (B2B, B2C)

Impact of the Internet .cont Grocery industry Peapod change from a pure pull strategy to a push-pull strategy most on-line grocers have failed low level of demand uncertainty, high economies of scale a push-based strategy is more appropriate Book industry (Amazon.com) a pure pull system in the first few years(Ingram Book Group) a push-pull system (several warehouses) Retail industry (Wal-Mart, Kmart, Target) distribution and warehousing infrastructure in place high-volume, fast-moving products: push strategy low-volume, slow-moving products: push-pull strategy

Impact of the Internet .cont Transportation and Fulfillment Traditional E-fulfillment Supply chain strategy Push Push-pull Shipment Bulk Parcel Reverse logistics Small part of the business Important and highly complex Delivery destination Small number of stores Large number of geographically dispersed customers Lead times Relatively long Relatively short

Distribution strategies Direct shipment directly from the supplier to the retail stores without going through DCs Warehousing (classical strategy) warehouses keep stock and provide items to customers Cross-docking distribute continuously from the suppliers through warehouses to customers (keep items no more than 10 to 15 hours)

Direct shipment Advantages retailer avoids the expenses of operating a distribution center lead times are reduced Disadvantages risk-pooling effects are negated transportation costs increase Common when: Fully loaded trucks Lead time is critical (grocery industry)

Cross-docking Warehouses function as inventory coordination points Store often less than 12 hours Difficult to manage: advanced information systems fast and responsive transportation system forecasts are critical, sharing of information effective only for large distribution systems Wal-Mart

Distribution strategies .cont Factors influence distribution strategies: customer demand and demand variability service level transportation costs inventory costs Comparison Strategy Attribute Direct shipment Cross-docking Inventory at warehouses Risk pooling Take advantage Transportation costs Reduced inbound costs Holding costs No warehouse costs No holding costs Allocation Delayed

Distribution strategies .cont Transshipment shipment of items between different facilities at the same level in the SCM to meet some immediate need Retailer level ship the items either to the store where the customer originally tried to purchase or to the customer’s home Conditions appropriate information systems reasonable shipment costs same owner Take advantage of risk-pooling one can view inventory in different retail outlets

Centralized versus decentralized control Lead to Information access Decentralized control Local optimization Only its own information Centralized control Global optimization Sharing information

Central versus local facilities Safety stock Overhead Economies of scale Lead time Service Transportation costs Local High Unrealized Short Better Inbound Outbound central Low Realized Long

Summary Push-pull strategies Demand-driven strategies Internet revolutionize SCM Distribution strategy