Chapter 5Supply Chain Integration

Mithun J Sharma

Case StudyModern Book Distribution,

Inc.• MBD had been one of the largest

efficient book distributors in the country.• They use advanced forecasting technique

to control inventory levels and technological advanced warehouses to control operating expenses.

• Evolution of two new types of retailers in the industry: large superstores & online stores

• Challenges from large superstores:• They demand new services from

their distributors. • As the superstores consolidated they

used this leverage to force distributors to accept minimal margins

Case StudyModern Book Distribution,

Inc.

• Challenges from online book sellers• Previously, the online book sellers kept

no inventory at hand and relayed them to MBD like distributors to deliver the books to the retailer.

• Online book sellers later established their own DCs, due to magnification of their business, where they kept inventory and handled packaging & shipment of books directly to end users.

Case StudyModern Book Distribution,

Inc.

• The changing business scenarios lead MBD to embark on a different strategic model and the list of queries popped by the manager are:

• The impact of internet on business strategy used by the new categories of book sellers

• The utilization of internet by MBD to better serve the customers

• Whether or not to move to pull distribution strategy

Case StudyModern Book Distribution,

Inc.

Contents

• Push, Pull and Push-pull Base Supply Chain

• Demand driven supply chain strategies

• Impact of internet on supply chain integration

• Effective distribution strategies

Push –Based Supply Chain

• Production & distribution decisions are based on long term forecasts

• Push-based SC reacts slowly to the changing market demand

• Variability in orders lead to bullwhip effect

• In push-based SC there is increased transportation costs, high inventory levels, and/or high manufacturing costs due to emergency production change over.

Pull-Based Supply Chain• Production and distribution are demand

driven so that there is co-ordination with the customer demand

• Pull-based supply chain leads to decrease in lead time, decrease in inventory in retailers, decrease in variability in system, decreased inventory at manufacture due to reduction in variability

• Pull-based systems are often difficult to implement due to long lead times, difficult to take advantage of economies of scale in manufacturing & transportation

Push-pull Supply Chain• Initial stages are push based and

later stages are pull based

Push Strategy Pull Strategy

Push-Pull

boundary

EndCustomer

RawMaterials

Supply chain time line

Matching Supply Chain Strategy

IComputer

IIFurniture

IVBooks & CDS

IIIGrocery

H

LHL

Pull

Pull

Push

Push

Demand Uncertainty

Economies of Scale

Implementing push-pull strategy

• Push strategy implemented – demand uncertainty small, so long term forecast

• Pull strategy implemented – uncertainty high so based on realized demand

• Push portion – service level low – focus on cost minimization

• Pull portion – high service level – focus on flexibility and responsiveness

Characteristics of the Push & Pull portions of Supply

ChainPortion Push Pull

Objective Minimize cost

Maximize service level

Complexity

High Low

Focus Resource allocation

Responsiveness

Lead time

Long Short

Processes

SC planning Order fulfillment

Demand-Driven Strategies

• The two processes to integrate demand information into supply chain planning process:

• Demand forecast: A process in which historical demand data are used to develop long-term estimates of expected demand

• Demand shaping: A process in which the firm determines the impact of various marketing plans such as promotion, discounts, rebates etc. on demand forecast

• In either of the cases demand forecast is not accurate so an important output from both the processes is forecast error.

• This information insight into likelihood that demand will be higher or lower than the forecast

Demand-Driven Strategies

• Approaches to decrease forecast error and increase forecast accuracy are:

• Select push-pull boundary to aggregate demand across products, geography, and time

• Use market analysis & demographic and economic trend

• Incorporate collaborative planning and forecasting processes with customers to better understand the market demand,…

Demand-Driven Strategies

Impact of the Internet on SC Strategies

• E-business: is a collection of business models and processes motivated by Internet technology and focusing on improvement of extended enterprise performance

• E-commerce: is the ability to perform major commerce transaction electronically.

• Grocery industry: low level of demand uncertainty for many products and high economies of scale in transportation cost – push strategy more appropriate

• Book industry: Inventory at the warehouse is based on push strategy whereas demand is satisfied based on pull strategy

• Retail industry: push strategy for high volume, fast moving products and push-pull strategy for low volume, slow moving products

Impact of the Internet on SC Strategies

Impact on Transportation & Fulfillment

Traditional fulfillment

E-fulfillment

SC strategy Push Push-pull

Shipment Bulk Parcel

Reverse logistics

Small part of business

Imp. & complex

Delivery destination

Small no. of stores

Large no. of geographically dispersed customers

Lead times Relatively long Relatively short

Distribution Strategies

Strategy Attribute

DirectShipment

Cross-Docking

Inventory at warehouses

Risk pooling Take advantage

TransportationCost

ReducedInbound cost

ReducedInbound cost

Holding costs No warehouse cost

No holding costs

Allocation Delayed Delayed

• Transshipment: shipment of items between different facilities at the same level in the supply chain to meet some immediate need

• Centralized Vs Decentralized Control:• Centralized control – leads to global

optimization• Decentralized control – leads to local

optimization

Distribution Strategies

• Central Vs Local facilities• Safety stock: Consolidating warehouses

lowers safety stock• Overhead: Few large central warehouses

overhead cost < many small warehouse cost

• Economies of scale: can be realized on consolidation of manufacturing units

• Lead time: reduced lead time directly proportional to closer market area location

Distribution Strategies

• Service: Centralized warehousing enables the utilization of risk pooling, which means that more orders can be met with lower total inventory level.

• Transportation cost: Transportation costs are directly related to the number of warehouses. Inbound transportation cost increases whereas outbound cost decreases due to service facility location

Distribution Strategies

Conclusion

• Internet has created the opportunity to revolutionize the supply chain strategies but at the same time the collapse of many internet companies implies the great challenges that e-business presents. The new push-pull strategy advocates holding inventory. There is a need to have an effective distribution strategy depending on the details of the context, as mentioned in the presentation such as cross docking, transshipment and so on..

Case studyThe Great Inventory

Correction• The problem-

• Due to fall in demand the high tech companies were loaded with rapidly depreciating goods

• They had to write-off huge unsalable inventory

New Logic

• Altra designs programmable logic devices (PLDs).

• Altra’s outsourcing manufacturer is based in Taiwan.

• Initially there was a push strategy i.e. the finished goods were stockpiled in Asian facilities in anticipation of customer demand

• Also it build new products based on specs beyond what customer needed for prototyping

• The benefit of this model was to provide cost advantage to customers by holding the inventory stock in the supply chain

• Change in strategy:• Continue to produce stock but in die

banks i.e. to keep inventory in flexible form

• Implement “build-to-order” strategy• New order will be built on customer

order

New Logic

Visible Improvements

• The average cycle time for semi-conductors is 117 according to research (from fab to customer)

• Plenty of time for demand to change direction

• Altra collaborated with Nortel & Motorola on product development

• Introduced software system (SCM i2 Tech.) which is linked to fabs, suppliers, and distributors

• Result: reduced cycle time from 10 to 1day and long term cycle time from 4 weeks to 1 week.

• UMC’s customer can forecast collaboratively using UMC’s web portal such that it automatically finds the best slot for the customer order.

Visible Improvements

Freak/Flop show

• Even after using SCM software , it couldn’t prevent inventory glut. Growth changed from 40 % to negative 10%

• Reasons: New technology creates constraints in supply. Ordering overly creates glut on the manufacturer’s side

Check on Business History

• Flextronics an EMS company had unusually high inventory glut but they had a good reason for that because they wanted to obtain better understanding of with customers of consumer demand.

• The company wanted to create material hub but there was some disputes with the distributors who complained of surplus inventory. The case was opposite in the year 2000 when there was a shortage and the distributors made good margin.

IBM – The Crystal Ball

• IBM follows the pull strategy or just-in-time basis. Their suppliers have visibility of their inventory level

• The pull strategies IBM applies in order to make it effective are:

• Commonality across platforms & products• The number of suppliers kept small• Electronic purchase transaction to have

faster collaboration with suppliers• Rationally exuberant sales force who knows

their customers in and out, the main strategy for their forecast, meet frequently to discuss & anticipate demand

Thank You