Grenoble Ecole de Management MEDFORIST

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MEDFORISTSupply Chain ManagementSC
integration Extended SCSession 6
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Session 6 topics

• The Bullwhip effect its consequences
• Distribution strategies
• Alliances in SC
• Integrated SC, SC trends SCM
• SCM overall conclusion

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Customers, demand centers sinks
Field warehouses stocking points
Regional warehouses stocking points
Sources plants vendors ports
Supply
Inventory warehousing costs
Production/ purchase costs
Transportation costs
Transportation costs
Inventory warehousing costs
Source Simchi-Levi al, 2000
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Increasing variability of orders up in the
Supply Chain
Lee, H, P. Padmanabhan and S. Wang (1997), Sloan
Management Review
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What are the causes?

• Promotional sales
• Volume and transportation discounts
• Inflated orders
• IBM Aptiva orders increased by 2-3 times when
  retailers thought that IBM would be out of stock
  over Christmas
• same with Motorolas cellular phones

Source Simchi-Levi al, 2000
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Conclusion .

• Order variability is amplified up the supply
  chain upstream echelons face higher variability.
• What you see is not what they face.

Source Simchi-Levi al, 2000
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Consequences

• Increased safety stock
• Reduced service level
• Inefficient allocation of resources
• Increased transportation costs

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Coping with the Bullwhip effect

• Reduce variability and uncertainty
• POS
• Sharing Information
• Year-round low pricing
• Reduce Lead Times
• EDI
• Cross Docking
• Alliance Arrangements
• Vendor managed inventory
• On-site vendor representatives

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Distribution strategies

• Warehousing
• Direct shipping
• No DC needed
• Lead times reduced
• smaller trucks
• no risk pooling effects
• Cross-Docking

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Cross Docking

• In 1979, Kmart was the king of the retail
  industry with 1891 stores and average revenues
  per store of 7.25 million
• At that time Wal-Mart was a small niche retailer
  in the South with only 229 stores and average
  revenues about half of those Kmart stores.
• Ten years later, Wal-Mart transformed itself it
  has the highest sales per square foot, inventory
  turnover and operating profit of any discount
  retailer. Today Wal-Mart is the largest and
  highest profit retailer in the world.

Source Simchi-Levi al, 2000
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What accounts for Wal-Marts remarkable success?

• Focus on satisfying customer needs
• provide customers access to goods when and where
  they want them and to develop cost structures
  that enable competitive pricing
• The key to achieving this goal was to make the
  way the company replenished inventory the
  centerpiece of its strategy

Source Simchi-Levi al, 2000
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What accounts for Wal-Marts remarkable success?

• This was obtained by using cross-docking. Goods
  are continuously delivered to Wal-Marts
  warehouses where they are dispatched to stores
  without ever sitting in inventory.
• This strategy reduced Wal-Marts cost of sales
  significantly and made it possible to offer
  everyday low prices to their customers

Source Simchi-Levi al, 2000
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Characteristics of Cross-Docking

• Goods spend at most 48 hours in the warehouse
• 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

Source Simchi-Levi al, 2000
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Cross-Docking - system characteristics

• Very difficult to manage
• Requires linking Wal-Marts distribution centers,
  suppliers and stores to guarantee that any order
  is processed and executed in a matter of hours
• Wal-Mart operates a private satellite-communicatio
  ns system that sends point-of-sale data to all
  its vendors allowing them to have a clear vision
  of sales at the stores

Source Simchi-Levi al, 2000
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Cross-Docking - system characteristics

• Need a fast and responsive transportation system
• 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

Source Simchi-Levi al, 2000
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Distribution strategies options trade-offs
Source Simchi-Levi al, 2000
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Strategic alliances

• The 3 most important types of SC alliances are
• Third-party logistics (3PL)
• Retailer-supplier partnerships (RSP)
• Distributor integration (DI)

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Downsides of strategic alliances

• Core strengths must not be weakened by the
  alliance
• The internal capabilities that contribute to
  differentiating it from its competition
• Key differences with competitors must not be
  diminished
• Key technology must not be shared and entry
  barriers for the competition must not be reduced.

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Third-Party Logistics - 3PL

• 3PL is the use of an outside company to perform
  all or part of the firms materials management
  and product distribution function
• Latest 3PL arrangements involve long-term
  commitments and often multiple function or
  process management

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Advantages of 3PL

• Focus on core strengths
• Using 3PL providers allows company to focus on
  its core competencies
• Provides technological flexibility
• A good 3PL provider constantly updates its
  information technology and equipment
• Provides other flexibilities
• geographic locations (regional warehousing)
• service offerings
• resources and workforce size

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Main disadvantages of 3PL

• Loss of control
• Especially true for outbound logistics where 3PL
  company employees themselves might interact with
  a firms customers
• Potential loss of logistics practices that are
  specifically adapted to the companys situation

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3PL issues and requirements

• Know your own costs
• Customer orientation of the 3PL provider
• Ability to understand the needs of the hiring
  firm and to adapt its services to the special
  requirements of that firm
• Reliability
• Flexibility or ability to react to the changing
  needs of the hiring firm and the needs of that
  firms customers

Source Simchi-Levi al, 2000
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3PL issues and requirements

• Specialization of the 3PL
• the company should consider 3PL firms whose roots
  lie in the particular area of logistics that is
  most relevant to the logistics requirements in
  question
• Asset-owning versus non-asset-owning 3PL
• Asset-owning companies have significant size,
  access to human resources, a large customer base,
  economies of scope and scale, an systems in
  place.
• Non-asset-owning companies may be more flexible,
  able to tailor services and have the freedom to
  mix and match providers. They may also have low
  overhead costs and specialized industry expertise.

Source Simchi-Levi al, 2000
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3PL implementation issues

• Devote enough time to start-up considerations
• The hiring company must know key success factors
  and define specific performance measures.
• The 3PL provider must discuss it honestly and
  completely.
• Risks and rewards must be shared
• Effective communication must be implemented
• Communication between the partners information
  systems must be enabled.

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Retailer-Supplier Partnerships RSP

• The types of retailer-supplier partnership can be
  viewed as a continuum
• at one end is information sharing - efficient
  planning
• at the other end is consignment scheme -the
  vendor manages and owns the inventory until the
  retailer sells it

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Retailer-Supplier Partnerships

• Quick response strategy
• The suppliers receive POS (point-of-sale) data
  from retailers and use this information to
  synchronize their production and inventory
  activities with actual sales at the retailers

POS data is used by the supplier to improve
forecasting scheduling
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Example Benetton

• Benetton, the Italian sportswear manufacturer,
  was founded in 1964. In 1975 Benetton had 200
  stores across Italy.
• Ten years later, the company expanded to the
  U.S., Japan and Eastern Europe. Sales in 1991
  reached 2 trillion.
• Many attribute Benettons success to successful
  use of communication and information technologies.

Source Simchi-Levi al, 2000
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Example Benetton

• Benetton uses Quick Response, in which
  manufacturing, warehousing, sales and retailers
  are linked together. In this strategy a Benetton
  retailer reorders a product through a direct link
  with Benettons information system in Italy.
• Using this strategy, Benetton is capable of
  shipping a new order in only four weeks, several
  week earlier than most of its competitors.

Source Simchi-Levi al, 2000
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How does Benettoncope with the Bullwhip effect?

• 1. Integrated Information Systems
• Global EDI network that links agents with
  production and inventory information
• EDI order transmission to HQ
• EDI linkage with air carriers
• Data linked to manufacturing
• 2. Coordinated Planning
• Frequent review allows fast reaction
• Integrated distribution strategy

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Retailer-Supplier Partnerships

• Continuous Replenishment strategy
• The vendors receive POS data and use them to
  prepare shipments at previously agreed upon
  intervals to maintain specific levels of inventory

Wal-Mart
Wrangler, Lee
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Retailer-Supplier partnerships

• Vendor Managed Inventory (VMI)
• The suppliers decides of the appropriate
  inventory levels of each of the products and the
  appropriate inventory policies to maintain these
  levels

Wal-Mart
J.C. Penney
Toy'sR us
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Requirements for effective RSP

• Advanced information systems
• Top management commitment
• Mutual trust

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Important RSP issues

• Inventory ownership
• Supplier owns the goods until they are sold
• Retailer owns the goods
• Performance measures fill rate, inventory level,
  inventory turns
• Confidentiality
• Communication and cooperation

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Main characteristics of RSP
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Advantages of RSP

• Decrease required inventory levels
• Improve service levels
• Decrease work duplication
• Improve forecasts

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Disadvantages of RSP

• Expensive advanced technology is required
• Supplier/retailer trust must be developed.
• Supplier responsibility increases.
• Expenses at the supplier often increase.

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Problems with RSPs

• Require expensive advanced technology
• Require to develop trust when relationship may
  have been adversarial in the past
• Human resources needs increase for the supplier
  as their level of responsibilities in the
  relationship increases
• Expenses at the supplier often increases as
  managerial responsibilities increase
• The use of technology and particularly EDI
  results in the decrease of payment terms for the
  retailer

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Issues in RSP implementation

• When an RSP is implemented, there will initially
  be problems that can only be worked out through
  communication and cooperation.

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Distributor integration (DI)

• Distributors have a wealth of information about
  customers needs and wishes, and successful
  manufacturers use this information when
  developing new products and product lines.

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Distributor integration (DI)

• DI can be used to address both inventory and
  service related issues
• DI can be used to create a large pool of
  inventory across the entire distribution network,
  lowering total inventory costs while raising
  service levels

US automobile industry
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Distributor integration (DI)

• DI can be used to get rid of increased inventory
  which are traditionally used to meet unusual rush
  orders and to provide spare parts quickly to
  facilitate repairs
• each distributor can check the inventories of
  other distributors to locate a needed product or
  part
• thanks to DI, a customers specific request can
  be routed to the distributor with the most
  expertise

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Issues in distributor integration

• Distributors may be skeptical of the rewards of
  participating in such a system
• Participating distributors will be forced to rely
  upon other distributors, some of whom they may
  not know, to help them provide good customer
  service
• Responsibilities and areas of expertise are taken
  away from certain distributors and concentrated
  on a few ones
• Organizers must work hard to build trust.
  Distributors must feel sure that this is a
  long-term alliance.

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Supply Chain Integration Dealing with
Conflicting Goals

• Lot Size vs. Inventory
• Inventory vs. Transportation
• Lead Time vs. Transportation
• Product Variety vs. Inventory
• Cost vs. Customer Service

Trade-offs...
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Integrated Supply Chain
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Internet Supply Chain management

• Internet E-business are not the magical
  solution to all problems
• If you take a business that is a bad business
  and put it online, it is still a bad business. It
  has just become an online bad business.
• Michael
  Dell

Source ADL 2001
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E-Fulfillment requires a new logistics
infrastructure
Source Simchi-Levi al, 2000
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Matching Supply Chain Strategies with Products

Source Simchi-Levi al, 2000
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Integrated Supply Chain obstacles

• Organizational problems
• complexity of supply chain management
• inappropriate organizational structure
• poor alignment of objectives
• resistance to change

Source ADL 2001
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Integrated Supply Chain challenges

• Cost effective processes providing value to
  customers
• Extensive connection with suppliers customers
• Learn continuously and use acquired learning to
  increase customer value
• Need to have people, processes, systems that are
  adaptive, flexible, empowered and innovative

Source ADL 2001
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Integrated Supply Chain implementation

• Tools
• know the limits, be realistic, robust solutions,
  limited focus at the beginning, quality of input
  data
• Processes
• complete review of processes required, basic
  data management, customer interface, upstream
  downstream planning, cooperation mode,
  multi-function, multi-sites multi-cultural
  dimensions
• Organization
• need to know how to use tools apply new
  processes able to handle daily conflicts,
  deployment thru geographical multilingual
  dimensions, global network competences
  management

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Effective SCM key success factors

• 4 Key Success factors
• Collaboration
• Technology
• Processes metrics
• Functional excellence

Source ADL 2001
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Effective SCM key success factors
How Supply Chain participants collaborate share
information
How is technology used to create
new opportunities support existing processes
Collaboration
Technology
SCM excellence
How professionally are the various functions in
the SC operated
Processes metrics ensuring standardization along
the chain
Functional Excellence
Processes metrics
Source ADL 2001
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Supply Chain environment challenges

• More demanding customers
• complexity diversity are a reality and a
  challenge
• More aggressive competition global
• redesign of competition at global local levels
• Product/service life cycle shorter shorter
• pressure on total process from design to
  delivery to reduce costs increase efficiency

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Supply Chain trends (1)

• Focused towards customers
• move from push - by firm to pull - by customer
• more personalized
• logistic chain to take into account need for
  global coherence, thus rationalization
• global process allowing for reactivity

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Supply Chain trends (2)

• Integration synchronization of the logistic
  network
• demand driven
• sharing of demand data between customers
  suppliers
• integration of incompatible information systems
• set up of appropriate production flexibility for
  the firms its partners
• permanent synchronization efforts between
  internal external logistic chain

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Supply Chain trends (3)

• Partnership strategy on the way up
• move from risk reduction approach to balanced
  relationship
• focus on core competencies, brand, customers,
  new product introduction
• outsourcing of non-strategic activities, such
  as delivery, transport, storage

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SC transformations

• From functions to processes
• From profit to performance
• From products to customers
• From inventory to information
• From transactions to relationships

Source Christopher, 1998
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The SC of the future
Source Christopher, 1998
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Extended enterprise Virtual SC
Source AT Kearney
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Conclusion

• SCM is more than just technology
• Need to develop SCM process where to use the
  technology
• Integrated SC and SCM require major
  organizational transformations