SUPPLY CHAIN INTEGRATION

Zhang Xiaohui

Designing & Managing The Supply Chain

Chapter 5

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 integrationcoordinate 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 chainsome 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-pullboundary

Rawmaterials

Endcustomer

Supply chain time line

Push, pull, push-pull systems. cont

Aggregate forecasts PC manufacturer

components: push-basedassembly: pull-based

Postpone/delay differentiationproduce a generic or family product: push-basedspecific end-products: pull-based

Push, pull, push-pull systems. cont

Identifying the appropriate supply chain strategy

Ⅰcomputer

Ⅱfurniture

ⅣBooks & CDs

Ⅲgrocery

L H

L

H

Economiesof scale

Demand uncertainty

pull

push

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 Box Ⅱ• automobile: push-based strategy• failure of GM’s push-pull strategy

pull

push

Ⅰ Ⅱ

Ⅳ Ⅲ

L H

L

H

Economies of scale

Demand uncertainty

pull push

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 forecastuse historical demand to develop long-term estimates of expected demand

Demand shapingdetermines 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 shipmentdirectly from the supplier to the retail stores without going through DCs

Warehousing (classical strategy)warehouses keep stock and provide items to customers

Cross-dockingdistribute continuously from the suppliers through warehouses to customers (keep items no more than 10 to 15 hours)

Direct shipment

Advantagesretailer 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

StrategyAttribute

Direct shipment Cross-docking Inventory at warehouses

Risk pooling Take advantage

Transportation costs

Reduced inbound costs

Reduced inbound costs

Holding costs No warehouse costs

No holding costs

Allocation Delayed Delayed

Distribution strategies .cont

Transshipmentshipment of items between different facilities at the same level in the SCM to meet some immediate need

Retailer levelship 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 High Unrealized Short

Better InboundOutbound

central Low Low Realized Long InboundOutbound

Summary

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