Business Management

Introduction to Supply Chain management(Lesson 7)

Edited By JQuek

State the Supply Chain Management Paradigm old and new strategies : Push & PullDescribe the new SCM ParadigmBe able to describe important terms and definitions in supply chain management integrationLocating the Boundaries of a Push or Pull strategy

Objectives for todays lesson

Understanding 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?

SCM : The Old Paradigm: Push Strategies

Production decisions are based on long-term forecasts;Ordering decisions are based on inventory forecasts;What are the problems with push strategies?Inability to meet changing demand patternsObsolescenceThe bullwhip effect:Excessive inventoryExcessive production variabilityPoor service levels

Understanding the Bull Whip Effect

The Variability in the size and timing of orders increases at each stage up the supply chain, from customer to supplierNatural dynamic of multistage nature of supply chainUnrelated to erratic customer demandLarge fluctuations force distributors, manufacturers, and suppliers to carry larger inventoriesReduces overall profitability of supply chainEliminate bullwhip by giving participants access to consumer-demand informationInter-organizational information systems needed to share data

What Is the Bullwhip Effect?

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Figure CE13-4

The Graph of the Bullwhip Effect

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A Newer Paradigm: Pull Strategies

Production is demand drivenProduction and distribution coordinated with true customer demandFirms respond to specific ordersPull Strategies result in:Decreased inventory levels at retailers and manufacturersDecreased system variabilityBetter response to changing marketsBut: Harder to leverage economies of scaleDoesnt work in all cases

Push-Pull Boundary

PUSH STRATEGY

PULL STRATEGY

Low Uncertainty

High Uncertainty

The Supply Chain Time Line

Customers

Suppliers

Combine: A new Supply Chain Paradigm

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

The Push-Pull System

Initial portion of the supply chain is replenished based on long-term forecastsFor example, parts inventory may be replenished based on forecastsFinal supply chain stages based on actual customer demand.For example, assembly may based on actual orders.

Example: Two PC Manufacturers

Build to StockForecast demandBuys componentsAssembles computersObserves demand and meets demand if possible.A traditional push system

Build to orderForecast demandBuys componentsObserves demandAssembles computersMeets demandA push-pull system

Push-Pull Strategies

The push-pull system takes advantage of the rules of forecasting:Forecasts are always wrongThe longer the forecast horizon the worst is the forecast Aggregate forecasts are more accurate

The risk pooling concept

Risk pooling is an important concept in supply chain management. Risk pooling suggests that demand variability is reduced if one aggregates demand across locations because as demand is aggregated across different locations, it becomes more likely that high demand from one customer will be offset by low demand from another. This reduction in variability allows a decrease in safety stock and therefore reduces average inventory.

The delayed differentiation concept

Delayed differentiation or Postponement is a concept in supply chain management where the manufacturing process starts by making a generic or family product that is later differentiated into a specific end-product. This is a widely used method, especially in industries with high demand uncertainty, and can be effectively used to address the final demand even if forecasts cannot be improved.

Benetton and their knitted sweaters are initially all white, and then dyed into different colors only when the season/customer color preference/demand is known. It is usually necessary to redesign the product specifically for delayed differentiation, and re-sequence to modify the order of production manufacturing steps.

Benetton sweaters

What is the Best Strategy?

Pull Push

Pull

Push

IComputer

II

IV

III

Demand uncertainty(C.V.)

Delivery costUnit price

L H

H

L

Economies of Scale

Selecting the Best SC Strategy

Higher demand uncertainty suggests pushHigher importance of economies of scale suggests pushHigh uncertainty/ EOS (End of stock) that is not important such as the computer industry implies pullLow uncertainty/ EOS important such as groceries implies pushDemand is stableTransportation cost reduction is criticalPull would not be appropriate here.

Low uncertainty but low value of economies of scale (high volume books and cds)Either push strategies or push/pull strategies might be most appropriateHigh uncertainty and high value of economies of scaleFor example, the furniture industryHow can production be pull but delivery push?Is this a pull-push system?

Characteristics and Skills

Low Uncertainty

Long Lead Times

Cost Minimization

Resource Allocation

High Uncertainty

Short Cycle Times

Service Level

Responsiveness

RawMaterial

Customers

Pull

Push

Locating the Push-Pull Boundary

The push section:Uncertainty is relatively lowEconomies of scale importantLong lead timesComplex supply chain structures:ThusManagement based on forecasts is appropriateFocus is on cost minimizationAchieved by effective resource utilization supply chain optimization

The push section requires:Supply chain planningLong term strategiesThe pull section requires:Order fulfillment processesCustomer relationship managementBuffer inventory at the boundaries:The output of the tactical planning processThe 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.