1. Supply Chain Integration
David Simchi-Levi
Philip Kaminsky
Edith Simchi-Levi
Phil Kaminsky

2. 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

3. 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

4. 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?

5. A new Supply Chain Paradigm
A shift from a Push System...
Production decisions are based on forecast
…to a Push-Pull System

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

7. 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.

8. 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

9. 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

10. 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

11. Selecting the Best SC Strategy
Higher demand uncertainty suggests push
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.

12. 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?

13. 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

14. 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

15. 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.

16. 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.

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

18. 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

19. 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

20. Reality is Different…. Dell Example:
Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, , 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.

21. 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.

22. The Book Selling Industry
From Push Systems...
Barnes and Noble
...To Pull Systems
Amazon.com,
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

23. Direct-to-Consumer:Cost Trade-Off

24. 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

25. The Grocery Industry From Push Systems... ...To Pull Systems
Supermarket supply chain
...To Pull Systems
Peapod,
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%

26. 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?

27. Less than 300,000 shoppers
Source: D. Ratliff

28. 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.

29. 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

30. 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.

31. E-Fulfillment Requires a New Logistics Infrastructure

32. 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

33. 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

34. Distribution Strategies
Warehousing
Direct Shipping
No DC needed
Lead times reduced
“smaller trucks”
no risk pooling effects
Cross-Docking

35. 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 ????

36. 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.

37. 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.

38. 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

39. 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.

40. Distribution Strategies

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