1. Integration Strategies1 Slides 5 Integration Strategies Global Supply Chain Management

2. Introduction  Aiming at a responsive and efficient SCM implies: – Increasing service level while reducing costs – Or: adequately responding to changes in the market place, while improving usage of resources  Such a challenge can e.g. be met by integration: – Integration internally, but also across: across suppliers, manufacturers, warehouses, stores – Meanwhile coordinating the activities across the chain  Particularly one has to integrate: – front-end, related to customer demand – back-end, including manufacturing portion of supply chain  Supply chain integration strategies: – Push, pull, and combined push–pull strategies – Matching those strategies to products and industries Slide 2Integration Strategies

3. Push, Pull, Push-Pull Systems  Push and Pull are traditional categories of manufacturing/assembly operations  One can adopt the concepts to entire SC  Push has been dominant for successful industries for most of the last century  More recently we see hybrid strategies of combining the two: Push-Pull systems Slide 3Integration Strategies

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5. Integration StrategiesSlide 5 Trend in SC Strategies From a push (produce and distribute a product cheaply) approach or, in some cases, a pull (deliver value) approach to a combined push/pull approach. From a focus on (usually) an efficiency oriented or (sometimes) a product and service quality strategy (responsiveness), to a combined strategy.

6. Push-Based Supply Chains  In Push, the production and distribution decisions are based on long-term forecasts. Manufacturers forecast demand based on orders received from retailers or wholesalers.  No adequate reaction to changes in marketplace: – Inability to quickly meet increases in demand levels, changes in demand patterns or product preferences – Obsolescence of supply chain inventory when demand for certain products or its versions disappears – Little market research, inadequate forecasting, long lead times (information and process), leading to bullwhip, this in turn leads to excessive inventories in order to meet service levels, and also to large and far too variable production batches. Slide 6Integration Strategies

7. Push-Based Supply Chains  With sudden, unexpected changes in demand, a push strategy implies inefficient resource utilization  Planning and managing are much more difficult.  It is not clear how a manufacturer should determine production capacity and transportation capacity. – Should they be based on peak demand? – Should they be based on average demand?  Results: – Emergency production changeovers – Higher inventory levels and higher manufacturing costs – Higher transportation costs Slide 7Integration Strategies

8. Pull-Based Supply Chains  Production and distribution are demand driven – Coordinated, info is delivered fast across the SC – Uses true customer demand rather than a forecast – Low stock level, firm responds to specific orders.  Intuitively attractive – Coordination can reduce information lead time – More flexible: ability to satisfy changing demand levels and patterns, firm can respond faster to higher than expected demand levels and can introduce new products or differentiated products – Lower (costs of) inventory holding – Lower costs of obsolescence (less items out of fashion or with old technology; less perished goods) Slide 8Integration Strategies

9. Slide 9 Former PC Value Chain Performance of Traditional PC Manufacturer

10. Integration StrategiesSlide 10 New PC Value Chain Performance of Dell Computers

11. Integration StrategiesSlide 11 Push or Pull Strategy ?  Pull also has its disadvantages: – Does not use economies of scale in manufacturing and transportation – Is hard to implement when lead times are long and when this cannot be improved/changed – Does not make sense if demand is stable or known long ahead (e.g. longer than lead time)  We usually consider a combination of push and pull strategies.

12. Impact of Demand Uncertainty and Economies of Scale  Demand Uncertainty: – Higher demand uncertainty leads to a preference for a pull strategy. Lower demand uncertainty leads to managing the SC based on a long-term forecast: push strategy.  Economies of scale: – The higher the importance of economies of scale (in production, transportation) to reduce costs, the greater the importance of aggregating demand (acrooss products, across locations, across time) greater the importance of managing the supply chain based on a long-term forecast, or a push-based strategy. – In the case that economies of scale are not important Aggregation will not reduce costs and a pull-based strategy makes more sense, especially when demand is uncertain. Slide 12

13. Integration StrategiesSlide 13 Appropriate SC Strategy.

14. Integration StrategiesSlide 14 Push or Pull Strategy ?  Varies depending on product, on industry  Some typical examples – Customized desktop PCs: use pull (high demand uncertainty and low economies of scale) – differentiation. – Groceries (and standard PCs): use push (low demand uncertainty, high economies of scale) – Books (college): use push-pull (low demand uncertainty, but low economies of scale) – Furniture: use pull-push (high economies of scale, but high demand uncertainty as well) – this is challenging, may lead to SC changes

15. Push-Pull Strategy (1)  Some stages of the supply chain are operated in a push-based manner – typically the initial stages (upper SC part)  The remaining stages employ a pull- based strategy.  Interface between the push-based stages and the pull-based stages is the push– pull boundary. Slide 15Integration Strategies

16. Slide 16 Push-Pull Strategy (2)  In beginning of supply chain aggregate forecasts are used (e.g. for standard components) - these are (relatively) more accurate than the forecasts of each of the different end-products – so push can be used to benefit from economies of scale. This part of the product is made to stock.  From the time of differentiation (= the boundary) we use pull, since demand may vary strongly and be hard to forecast for the end-products.

17. Integration StrategiesSlide 17 Push-Pull Strategy (3)

18. Push-Pull Strategy (4)  Location of the push–pull boundary. – Dell locates the boundary at the assembly point – Tradittional furniture manufacturers locate the boundary at production point (but not IKEA)  Boundary is not only different for different industries, but can also be different for the different products within an industry Integration StrategiesSlide 18

19. Push-Pull Strategy (5)  Push portion – Low uncertainty (e.g. in demand levels) – Service level not an issue (easy to achieve) – Long lead times – Complex supply chain structures, e.g. several stages of assembly in upstream – Focus on cost minimization. – Cost minimization achieved by: better utilizing resources such as production and distribution capacities minimizing inventory, transportation, and production costs. – Supply chain planning processes are applied Slide 19Integration Strategies

20.  Pull portion – High uncertainty – Simple supply chain structure – Short cycle time is to be deployed – Focus on service level. – Achieved by deploying a flexible and responsive supply chain – Order-fulfillment processes are applied Push-Pull Strategy (6) Slide 20Integration Strategies

21. Push–Pull Strategy (7)  Achieving the appropriate SC design, and the position of the Push-Pull Boundary, depends on factors like: – demand uncertainty, – manufacturing and delivery lead times – needs of usage of economies of scale, – innovation speed, product differentiation, – product complexity, standardization, communality of parts, – supplier–manufacturer relationships. Slide 21Integration Strategies

22. Push-Pull Strategy (8) PortionPushPull ObjectiveMinimize costMaximize service level ComplexityHigh (several stages of upstream assembly) Low FocusResource allocation (Efficiency) Responsiveness Lead timeLongShort ProcessesSupply chain planningOrder fulfillment Characteristics of Push and Pull

23. Push-Pull Strategy (9)  Interaction of Push and Pull occurs – Only at the push-pull boundary – Typically through a buffer inventory – Different role for inventory in each portion In the push portion, inventories are outputs generated by the tactical planning process, which are based on forecasts (that are in turn often based on the real historical inputs from the pull portion), In the pull system, inventories represent the input to the fulfillment process, and are based on true demands (true orders), Buffer inventory, is the interface, a mix of the two. Slide 23Integration Strategies

24. Slide 24 Total number of car parts before assembly for a certain car part Assembled number of different car models, that use the same part Expected demand Realized demand Unsold parts Expected demand Realized demand Unsold cars 80764 1082 12-2 1055 13-3 1012-2 1014-4 1064 64 Risk Pooling Aggregating demand across products by standardizing and sharing components

25. The Impact of Lead Time (1)  Longer the lead time, more important it is to implement a push based strategy.  Typically difficult to implement a pull strategy when lead times are so long that it is hard to react to demand information. Slide 25Integration Strategies

26. The Impact of Lead Time (2) The impact of lead time and demand uncertainty Slide 26Integration Strategies

27. The Impact of Lead Time (3)  Box A – Items with short lead time and high demand uncertainty. For example: a customized desktop PC – Pull strategy should be applied as much as possible.  Box B – Items with long lead time and low demand uncertainty. – Appropriate supply chain strategy is push. Common groceries.  Box C – Items with short supply lead time and highly predictable demand: relatively less of a problem. Vegetables, meat (fresh). – Continuous replenishment strategy. Suppliers receive POS data, they use these data to prepare shipments, often at previously agreed-upon intervals (can depend on inventory level): this means a pull strategy at the distribution stage (no stock at DCs), push at retail outlets (stocks in outlets).  Box D – Items with long lead times and unpredictable demand Inventory management is critical in this type of environment Requires positioning inventory strategically in the supply chain Structural changes are an option, as it is hard to manage (IKEA) Slide 27Integration Strategies

28. Demand-Driven Strategies  Requires integrating demand information into the supply chain planning process – Demand forecasting Uses historical demand data to develop long-term estimates of the expected demand – Demand shaping (advanced forecasting) Firm determines the impact of various marketing plans such as promotion, pricing discounts, rebates, new product introduction, and product withdrawal on demand forecasts. – Demand creating (e.g. branding) An input to demand shaping and forecasting Slide 28Integration Strategies

29. Forecasting Demand  Forecasting demand is important, forecasting errors will always be present though……  High demand forecast error has a detrimental impact on supply chain performance  Approaches to improve accuracy – Aggregate forecasts are more accurate: Select the push–pull boundary so that risk pooling can be adopted, in other words: that demand can be aggregated over one or more of the following dimensions: Across products Across locations Across time – Do not just use historical data, also use market analysis and demographic, social and economic trends to improve forecast accuracy, think of big data available – Study preferences through analyzing big data – Determine the optimal assortment of products by store, for instance reduce number of SKUs competing in same market. – Integrate: incorporate collaborative planning and forecasting processes with suppliers and customers Slide 29Integration Strategies

30. Summary  Implementation of push-pull strategies and demand-driven strategies have helped many companies to improve performance: reduce costs and increase overall service levels.  It has sustained innovation and hence competitive position  Companies need to: – Identify the appropriate supply chain strategy for product families and individual products. – Push–pull strategy (still) advocates holding inventory (like push), but it “moves” the inventory upstream in the supply chain. is more capable of tackling the efficiency issue combined with responsiveness. Slide 30Integration Strategies