Supply Chain Strategies & e-Business Supply Chain.
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Transcript of Supply Chain Strategies & e-Business Supply Chain.
Supply Chain Strategies &e-Business Supply Chain
Supply Chain Strategies
Push-Based Supply Chain Pull-Based Supply Chain Push-Pull Supply Chain
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
Information Coordination: The Bullwhip Effect
Consumer Sales at Retailer
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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
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?
A new Supply Chain Paradigm
A shift from a Push System... Production decisions are based on
forecast …to a Push-Pull System
Push-Pull Supply Chains
Push-Pull Boundary
PUSH STRATEGY PULL STRATEGY
Low Uncertainty High Uncertainty
The Supply Chain Time Line
CustomersSuppliers
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.
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
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
What is the Best Strategy?
Pull Push
Pull
Push
I
Computer
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 pull 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.
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?
Characteristics and Skills
RawMaterial Customers
PullPush
Low Uncertainty
Long Lead Times
Cost Minimization
Resource Allocation
High Uncertainty
Short Cycle Times
Service Level
Responsiveness
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
Thus Reacting to realized demand is important Focus on service level Flexible and responsive approaches
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.
Locating the Push-Pull Boundary
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.
Impact of the Internet – Expectations Were High
E-business strategies were supposed to: Reduce cost Increase service level Increase flexibility Increase Profit
Reality is Different…..
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
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
Reality is Different….
Dell Example: Dell Computer has outperformed the
competition in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% (see Anderson and Lee, 1999)
The Book Selling Industry
From Push Systems... Barnes and Noble
...To Pull Systems Amazon.com, 1996-1999 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
Direct-to-Consumer:Cost Trade-Off
Cost Trade-Off for BuyPC.com
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Number of DC's
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Total Cost
Inventory
Transportation
Fixed Cost
Industry Benchmarks:Number of Distribution Centers
Sources: CLM 1999, Herbert W. Davis & Co; LogicTools
Avg.# ofWH 3 14 25
Pharmaceuticals Food Companies Chemicals
- High margin product- Service not important (or easy to ship express)- Inventory expensiverelative to transportation
- Low margin product- Service very important- Outbound transportationexpensive relative to inbound
The Grocery Industry
From Push Systems... Supermarket supply chain
...To Pull Systems Peapod, 1989-1999
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%
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?
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
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
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
E-Fulfillment Requires a New Logistics Infrastructure
Traditional Supply Chain e-Supply Chain
Supply Chain Strategy Push Push-Pull
Shipment Type Bulk Parcel
Inventory Flow Unidirectional Bi-directional
Reverse Logistics Simple Highly Complex
Destination Small Number of Stores Highly Dispersed Customers
Lead Times Depends Short
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
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
Distribution Strategies
Warehousing Direct Shipping
No DC needed Lead times reduced “smaller trucks” no risk pooling effects
Cross-Docking
Cross Docking
In 1979 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 ????
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.
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.
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
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.
StrategyAttribute
DirectShipment
CrossDocking
Inventory atWarehouses
RiskPooling
TakeAdvantage
TransportationCosts
ReducedInbound Costs
ReducedInbound Costs
HoldingCosts
No WarehouseCosts
No HoldingCosts
DemandVariability
DelayedAllocation
DelayedAllocation
Distribution Strategies
Transshipment
What is the value of this?What tools are needed?What if the system is
decentralized?