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Supply ChainIntegration
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
SUPPLY CHAIN INTEGRATION• A supply chain is a sequence of
processes that take place within different stages to fill a customer need for a product.
• There are two different ways to view the processes performed in a supply chain
1. Cycle View :- A series of cycles, each performed at the interface between two successive stages of a supply chain.
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
2. Push / Pull View:- With Pull Processes – execution is initiated
in response to a customer order (Customer demand is known with certainty – also called as reactive processes)
With Push Processes – execution is initiated in anticipation of customer orders. (Customer demand is not known and must be forecast – also referred to as speculative processes)
The Push – Pull boundary in a supply chain separates push processes from pull processes.
© 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
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
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
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
© 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 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.
© 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
Classification of Industries
Classification of Industries
Based on Nature of work Production Industries
• Process Industries• Discrete Item Mfg. Industries
Project Industries• Workers / Tools / Equipments brought to the Site• Has to be completed within a stipulated duration of Time
Service Industries • Software Companies, Hospitality, Healthcare Sector etc
Based on volume of work
Classification based on the volume of Goods produced Job shop Production
• A limited number of goods produced• Low repetitive orders
Batch / Intermittent Production• Orders are taken in Batches• Volume of Production higher than in Jobshop production
Mass Production• Production done on a large / extensive scale• Goods for mass consumption
Cellular Production• Modular system of Production of Goods
Based on Manufacturing Environment
Manufacturing Environment is essentially a framework under which the Management strategies are developed and implemented
A Manufacturing Environment is influenced by External factors such as Corporate Strategy, Business Unit Strategy, Product Selection, Process / Batch Manufacturing etc
Customer Order Decoupling Point (CODP)
Customer order Decoupling Point(Order Penetration Point)
Order Penetration Point (OPP) is a point in the company Material Flow where an Item becomes earmarked to a particular, specific, known customer
OPP is the last point where unallocated Inventory is held-It is the last point of Inventory
OPP affects both capacity and Materials Management
Upstream OPP means less risk for the Manufacturer while downstream OPP means shorter delivery times
Order Penetration Point (OPP)Design Manufacturing Assembly Distribution Installation
Customer
(Example)
Home Appliances
Computers
Furniture
Special Purpose M/Cs
Oil Platforms
Standard products
Standard modules
Parts manufacturing
Make-to-order
Design-to-order
OPP
OPP
OPP
OPP
OPP
Engineer – to – order
• Products whose customer specification require unique Engineering Design & significant customisation
• Create Solutions in response to customer request
• Long Leadtimes
• Examples – Construction of Bridge, Oil Rig etc
Customer Order Decoupling Point (CODP)
(Engineer to order System)
Make – to – order
• It is a Production Environment where Goods are made and Services rendered after the receipt of a customer’s order
• Low sales volume
• Products are with Long Leadtimes
• High Price Items
• Customer Engineering in conjunction with Supplier’s Design
• Example – Aircraft, Special Purpose Machines
Customer Order Decoupling Point (CODP)
(Make to order System)
Assemble – to – order
• A Production Environment where Goods or Services are assembled / developed after the receipt of customers’ order
• Wide variety in high volume with short leadtimes
• Use market research, sales history to forecast sales
• Higher Product volumes with lower Inventory
• Example – Automobiles, Consumer Electronics etc
Customer Order Decoupling Point (CODP)
(Assemble to order System)
Make – to – stock
• Basically an environment where products are usually kept finished
• Standard Products
• Immediate Delivery from Stock
• All variations available from Stock
• Large finished Goods Inventories
• Examples – Consumer Goods like Clothes, Appliances, Food items etc
Customer Order Decoupling Point (CODP)
(Make to stock System)
© 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
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
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
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