SUPPLY CHAIN INTEGRATION

Designing & Managing The Supply Chain Chapter 5 Zhang Xiaohui

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 integration

coordinate 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 chain

some stages operated in a push-based manner, the remaining stages employ a pull-based strategy. (PC, delayed differentiation)  The interface: push-pull boundary Push-pull boundary Raw materials Push strategy Pull strategy Supply chain time line End customer

Push, pull, push-pull systems. cont



Aggregate forecasts



PC manufacturer

components: push-based assembly: pull-based



Postpone/delay differentiation

produce a generic or family product: push-based specific end-products: pull-based

Push, pull, push-pull systems.

cont  Identifying the appropriate supply chain strategy pull Demand uncertainty H Ⅰ computer push L Ⅳ Books & CDs L pull Ⅱ furniture Ⅲ grocery H push Economies of scale

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 Demand uncertainty pull H Box Ⅱ automobile: push-based strategy failure of GM’s push-pull strategy push L L pull Ⅰ Ⅳ Ⅱ Ⅲ Economies of scale H push

Push, pull, push-pull systems.

cont  Implementing a push-pull strategy in the supply chain:

Portion

Portion of SCM Objective Complexity Focus Lead time Processes Buffer inventory

Push

Relatively small uncertainty Minimize cost High Resource allocation Long Supply chain planning output

Pull

High uncertainty Maximize service level Low Responsiveness Short Order fulfillment input

Demand-driven strategies

 Demand forecast use historical demand to develop long-term estimates of expected demand  Demand shaping determines 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 Supply chain strategy Shipment Reverse logistics Delivery destination

Traditional

Push Bulk Small part of the business Small number of stores Lead times Relatively long

E-fulfillment

Push-pull Parcel Important and highly complex Large number of geographically dispersed customers Relatively short

Distribution strategies

 Direct shipment directly from the supplier to the retail stores without going through DCs  Warehousing (classical strategy) warehouses keep stock and provide items to customers  Cross-docking distribute continuously from the suppliers through warehouses to customers (keep items no more than 10 to 15 hours)

Direct shipment

 Advantages retailer 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

Strategy Attribute

Risk pooling Transportation costs Holding costs Allocation

Direct shipment

No warehouse costs

Cross-docking

Reduced inbound costs No holding costs Delayed

Inventory at warehouses

Take advantage Reduced inbound costs Delayed

Distribution strategies .

cont

• • •     Transshipment shipment of items between different facilities at the same level in the SCM to meet some immediate need Retailer level ship 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

Decentralized control Centralized control

Lead to

Local optimization Global optimization

Information access

Only its own information Sharing information

Central versus local facilities

Local central

Safety stock

High

Overhead

High

Economies of scale

Unrealized

Lead time

Short

Service

Better Low Low Realized Long

Transportation costs

Inbound Outbound Inbound Outbound

Summary

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