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Supply Chain Strategies & e-Business Supply Chain

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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 ... – PowerPoint PPT presentation

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Title: Supply Chain Strategies & e-Business Supply Chain


1
Supply Chain Strategies e-Business Supply Chain
2
Supply Chain Strategies
  • Push-Based Supply Chain
  • Pull-Based Supply Chain
  • Push-Pull Supply Chain

3
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

4
Information Coordination The Bullwhip Effect
Consumer Sales at Retailer
Retailer's Orders to Wholesaler
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Consumer demand
Retailer Order
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Wholesaler's Orders to Manufacturer
Manufacturer's Orders with Supplier
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Manufacturer Order
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Wholesaler Order
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5
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
  • Doesnt work in all cases

6
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?

7
A new Supply Chain Paradigm
  • A shift from a Push System...
  • Production decisions are based on forecast
  • to a Push-Pull System

8
Push-Pull Supply Chains
The Supply Chain Time Line
Customers
Suppliers
9
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.

10
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

11
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

12
What is the Best Strategy?

13
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.

14
Selecting the Best SC Strategy
  • Low uncertainty but low value of economies of
    scale (high volume books and cds)
  • 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?

15
Characteristics and Skills
Raw Material
Customers
Push
Pull
High Uncertainty Short Cycle Times Service
Level Responsiveness
Low Uncertainty Long Lead Times Cost
Minimization Resource Allocation
16
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

17
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.

18
Locating the Push-Pull Boundary
19
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.

20
Impact of the Internet Expectations Were High
  • E-business strategies were supposed to
  • Reduce cost
  • Increase service level
  • Increase flexibility
  • Increase Profit

21
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

22
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

23
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)

24
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

25
Direct-to-ConsumerCost Trade-Off
26
Industry BenchmarksNumber of Distribution
Centers
Food Companies
Chemicals
Pharmaceuticals
Avg. of WH
3
14
25
- High margin product - Service not important (or
easy to ship express) - Inventory
expensive relative to transportation
- Low margin product - Service very important -
Outbound transportation expensive relative to
inbound
Sources CLM 1999, Herbert W. Davis Co
LogicTools
27
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

28
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?

29
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

30
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

31
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 Lands End which has both
    channels

32
E-Fulfillment Requires a New Logistics
Infrastructure
33
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

34
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

35
Distribution Strategies
  • Warehousing
  • Direct Shipping
  • No DC needed
  • Lead times reduced
  • smaller trucks
  • no risk pooling effects
  • Cross-Docking

36
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 ????

37
What accounts for Wal-Marts 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-Marts cost of sales
    significantly and made it possible to offer
    everyday low prices to their customers.

38
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.

39
System Characteristics
  • Very difficult to manage
  • Requires advanced information technology. Why?
    What kind of technology?
  • All of Wal-Marts 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-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

40
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.

41
Distribution Strategies
42
Transshipment
  • What is the value of this?
  • What tools are needed?
  • What if the system is decentralized?
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