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Supply Chain Integration
Phil Kaminskykaminsky@ieor.berkeley.edu
David Simchi-Levi
Philip Kaminsky
Edith Simchi-Levi
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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?
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
A new Supply Chain Paradigm
A shift from a Push System...– Production decisions are based on forecast
…to a Push-Pull System
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Push-Pull Supply Chains
Push-Pull Boundary
PUSH STRATEGY PULL STRATEGY
Low Uncertainty High Uncertainty
The Supply Chain Time Line
CustomersSuppliers
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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.
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Selecting the Best SC Strategy
Higher demand uncertainty suggests push 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.
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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?
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Characteristics and Skills
RawMaterial Customers
PullPush
Low Uncertainty
Long Lead Times
Cost Minimization
Resource Allocation
High Uncertainty
Short Cycle Times
Service Level
Responsiveness
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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.
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Locating the Push-Pull Boundary
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Impact of the Internet – Expectations Were High
E-business strategies were supposed to:– Reduce cost– Increase service level– Increase flexibility– Increase Profit
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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)
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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.
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
$0$2$4$6$8
$10$12$14$16$18$20
0 5 10 15
Number of DC's
Co
st (
$ m
illio
n)
Total Cost
Inventory
Transportation
Fixed Cost
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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%
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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?
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Less than 300,000 shoppers
NNuummbbeerr ooff ccuussttoommeerrss
AAvveerraaggee oorrddeerr
DDeelliivveerryy cchhaarrggeess
WWeebbvvaann 2211000000 $$7711 $$44..9955 ffoorr << $$5500 ffrreeee ffoorr >> $$5500
PPeeaappoodd 114400000000 $$112200 $$77..9955 ppeerr oorrddeerr
HHoommeeGGrroocceerr..ccoomm 5500000000 $$111100 $$99..9955 << $$7755 ffrreeee ffoorr >> $$7755
NNeettGGrroocceerr..ccoomm 6600000000 $$7700 $$22..9999 ffoorr << $$5500 $$44..9999 ffoorr >> $$5500
SShhooppLLiinnkk..ccoomm 33330000 $$9988 $$2255 mmoonntthhllyy
SSttrreeaammlliinnee..ccoomm 33440000 $$110000 $$3300
Source: D. Ratliff
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Distribution Strategies
Warehousing Direct Shipping
– No DC needed– Lead times reduced– “smaller trucks”– no risk pooling effects
Cross-Docking
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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 ????
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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.
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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.
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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.
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
StrategyAttribute
DirectShipment
CrossDocking
Inventory atWarehouses
RiskPooling
TakeAdvantage
TransportationCosts
ReducedInbound Costs
ReducedInbound Costs
HoldingCosts
No WarehouseCosts
No HoldingCosts
DemandVariability
DelayedAllocation
DelayedAllocation
Distribution Strategies
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Transshipment
What is the value of this?What tools are needed?What if the system is
decentralized?
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