Simchi-Levi Ch05

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Transcript of Simchi-Levi Ch05

OPER3208-001 Supply Chain ManagementFall 2006 Instructor: Prof. Setzler

Simchi-Levi, Chapters 5

Chapter 5: Supply Chain Integration (Simchi-Levi) Introduction The challenge in SC integration is to coordinate activities across the SC so that the enterprise can improve performance Reduce cost Increase service level Reduce the bullwhip effect Better utilize resources Effectively respond to changes in the marketplace

These challenges are only met by coordination of Production Transportation Inventory decisions Integrating the front-end of the SC (i.e., customer demand), and the back-end of the SC (i.e., production and manufacturing)

Chapter 5: Supply Chain Integration (Simchi-Levi) Push-Based Supply Chain Production and distribution decisions are based on long-term forecasts Demand forecast for manufacturer is based on orders received from the retailers warehouse As discussed in Ch 4, the variability of orders received from retailers and warehouses is much larger than the variability of customer demandBullwhip Effect Increases in variability leads to Excessive inventories (safety stock) Larger and more variable production batches Unacceptable service levels Product obsolescence

It takes longer for a push-based SC to react to changes in the marketplace, which can lead to The inability to meet changing demand patterns The obsolescence of SC inventory

Chapter 5: Supply Chain Integration (Simchi-Levi)

Push-Based Supply Chain Due to the need for emergency production changeovers, we often find increased transportation costs, high inventory levels, and/or high manufacturing costs

Chapter 5: Supply Chain Integration (Simchi-Levi) Pull-Based Supply Chain Production and distribution are demand driven so that they are coordinated with true customer demand rather than forecast demand In a pure pull system, the firm does not hold any inventory and only responds to specific orders Pull systems are attractive since they lead to A decrease in lead times through the ability to better anticipate incoming orders from the retailers A decrease in inventory at the retailers since inventory levels at these facilities increase with lead times A decrease in variability in the system and variability faced by manufacturers due to lead-time reduction Decreased inventory at the manufacturer due to the reduction in variability

Chapter 5: Supply Chain Integration (Simchi-Levi) Pull-Based Supply Chain These systems typically have A significant reduction in system inventory level Enhanced ability to manage resources A reduction in system costs (when compared to an equivalent push-based system)

Pull systems are difficult to implement when lead times are too long Unable to react to demand

Pull systems are more difficult to take advantage of economies of scale in manufacturing and transportation since systems are not planned far ahead in time

Chapter 5: Supply Chain Integration (Simchi-Levi) Push-Pull Supply Chain A new SC strategy that takes advantage of the best of the push strategy and the pull strategy Some stages of the SC (usually the initial stages) operate as a push-based system, the remaining stages operate as a pull-based system The interface (boundary) between the push-based stages and the pull-based stages is called the pushpull boundary

Chapter 5: Supply Chain Integration (Simchi-Levi)

Push-Pull Supply Chain

Chapter 5: Supply Chain Integration (Simchi-Levi) Push-Pull Supply Chain Example 1: Dell Computers uses the push-pull strategy Manufacturer builds to order Component inventory is managed based on forecast (push) Demand for component is an aggregation of demand for all finished goods that use that component Since aggregate forecasts are more accurate, uncertainty in component demand is much smaller than uncertainty in finished goods This leads to a reduction in safety stock

Final assembly is in response to specific orders (pull) The push-pull boundary is at the beginning of the assembly process

Chapter 5: Supply Chain Integration (Simchi-Levi) Push-Pull Supply Chain Example 2: Postponement, or delayed differentiation The firm designs the product and the manufacturing process so that decision can be delayed as long as possible The manufacturing process starts by producing a generic or family product The portion of the SC prior to product differentiation is usually operated using a push-based strategy Since demand for the generic product is an aggregation of demand for all its corresponding end-products, forecasts are more accurate and inventory levels are reduced The portion of the SC starting from the time of differentiation is pull-based

Chapter 5: Supply Chain Integration (Simchi-Levi)

Identifying the Appropriate Supply Chain Strategy Figure 5.2 provides a framework for matching SC strategies with products and industries

Chapter 5: Supply Chain Integration (Simchi-Levi) Identifying the Appropriate Supply Chain Strategy Everything else being equal, higher demand uncertainty leads to a preference for managing the SC based on realized demand: a pull strategy Smaller demand uncertainty leads to an interest in managing the SC based on a long-term forecast: a push strategy Everything else being equal, the higher the importance of economies of scale in reducing cost, the greater the value of aggregating demand, and the greater the importance of managing the SC based on long-term forecast, a push-based strategy If economies of scale are not important aggregation does not reduce cost, so a pull-based strategy makes more sense

Chapter 5: Supply Chain Integration (Simchi-Levi) Identifying the Appropriate Supply Chain Strategy Box 1 represents industries (i.e., products) such as computer industry (e.g., Dell uses the pull-based strategy) Box 3 represents product in the grocery industry such as beer, pasta, and soup (a push-based retail strategy is appropriate) Demand is stable

Boxes 1 & 3 represent situations in which it is relatively easy to identify an efficient SC strategy

Chapter 5: Supply Chain Integration (Simchi-Levi) Identifying the Appropriate Supply Chain Strategy Boxes 2 & 4: There is a mismatch between the strategies suggested by the two attributes Uncertainty pulls the SC towards one strategy, while economies of scale push the SC in a different direction Box 4 represents products such as high-volume/fast-moving books and CDs. Both traditional push strategies and innovative push-pull strategies may be appropriate Depends on specific costs and uncertainties Discussed further in Section 5.4

Chapter 5: Supply Chain Integration (Simchi-Levi) Identifying the Appropriate Supply Chain Strategy Boxes 2 & 4: There is a mismatch between the strategies suggested by the two attributes Box 2 represents products and industries such as the furniture industry Offers a large number of similar products distinguished by shape, color, fabric, etc Need to distinguish between the production and the distribution strategies Production strategy has to follow a pull-based strategy since it is impossible to make production decisions based on long-term forecasts On the other hand, the distribution strategy needs to take advantage of economies of scale in order to reduce transportation cost The SC strategy followed by furniture manufacturers is a pull-push strategy

Chapter 5: Supply Chain Integration (Simchi-Levi)

Implementing a Push-Pull Strategy There are many ways to implement a pushpull strategy, depending on the location of the push-pull boundary Dell locates the push-pull boundary at the assembly point Furniture manufacturers locate the boundary at the production point

Chapter 5: Supply Chain Integration (Simchi-Levi) Implementing a Push-Pull Strategy Push strategy Demand uncertainty is relatively small and managing this portion based on long-term forecast is appropriate Service level is not an issue, so the focus can be on cost minimization Low demand uncertainty and economies of scale in production and/or transportation Long lead times and complex SC structures, including product assembly at various levels Cost minimization is achieved by better utilizing resources such as production and distribution capacity while minimizing inventory, transportation, and production costs

Pull strategy Uncertainty is high, and it is important to manage this portion based on realized demand High uncertainty, and a short cycle time Focus is on service level High service level is achieved by deploying a flexible and responsive SC A SC that can adapt quickly to changes in customer demand

Chapter 5: Supply Chain Integration (Simchi-Levi)

Implementing a Push-Pull Strategy Different processes need to be used in different portions of the SC The focus in the pull part of the SC is on service level, order fulfillment processes are typically applied The focus of the push part of the SC is on cost and resource utilization, SC planning processes are used to develop effective strategies for a given planning horizon (e.g., a few weeks, or months)

Chapter 5: Supply Chain Integration (Simchi-Levi)

Implementing a Push-Pull Strategy Table 5-1 summarizes the characteristics of the push and pull portions of the SC

Chapter 5: Supply Chain Integration (Simchi-Levi) Implementing a Push-Pull Strategy Notice that the push portion and the pull portion of the SC interact only at the push-pull boundary This is the point along the SC time line where there is a need to coordinate the two SC strategies Typically through buffer inventory This inventory takes a different role in each portion In the push portion, buffer inventory at the boundary is part of the output generated by the tactical planning process In the pull portion, buffer inventory represents t