LOG 408: Global Logistics Management

Lecture 5: Supply Chain Strategies

• Examine various types of OEM– supplier relationships

• Define integration and collaboration in the global SCM context, and explain how internal and external integration can be achieved

• Discuss the barriers to collaboration, prisoner’s dilemma model, and how to solve it for effective partnerships

• Study the VMI (vendor-managed inventory) in detail to understand SC collaboration in real business world

• Discuss both vertical and horizontal collaborative partnerships

• Elaborate on specific methods used to enable collaboration

Key Points of Last Lesson

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Traditional Top-down Perspective on Strategy

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A Holistic View of Logistics and SCM Strategy Formulation

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The Evolution of Manufacturing -Production Strategies

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Push, Pull, Push-Pull Systems

• Push and Pull are traditional categories of manufacturing operations

• Both are modernized with more fashionable terms, lean and agile

• More recent hybrid strategy of combining the two, push-pull systems (leagile)

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Push-based supply chains (1)

– Production & distribution decisions are based on long-term forecasts

– Good news: long production runs – mass production - can mean manufacturing cost per unit is low (economies of scale for both manufacturing and transportation)

– Not so good news: long-term forecasts adjust slowly => push-based systems slow to react to customer demand => too much or too little inventory (stock outs/poor service levels, high inventory holding costs, obsolescence/perishability)

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Push-based supply chains (2)

– Focus on cost reduction & chain efficiency– Modern version: Lean production• Eliminating waste in a value stream of activities with level

production (i.e. even production runs with neither idle time nor surges in demand) and just-in-time inventory management

– Originally developed by Toyota, called Toyota Production System (TPS)

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The Seven Wastes (Muda) in TPS

• Overproduction• Waiting• Transportation• Inappropriate processing• Unnecessary inventory• Unnecessary motion• Defects

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The Principles of Lean Consumption

• Solve the customer’s problem completely• Don’t waste the customer’s time• Provide exactly what the customer wants• Provide what’s wanted exactly where its wanted• Provide what’s wanted where its wanted exactly

when its wanted• Continually aggregate solutions to reduce the

customers time and hassle (after Womack & Jones, 1991)

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Pull-based supply chains (1)

– Production & distribution decisions are demand driven – more coordinated with current customer demand, less dependent on long-term forecasts – mass customization

– Greater dependence on information flow, agile coordination (POS)

– Good news: inventory ‘right sizing’ => lower holding costs, fewer stock outs and hence higher service levels (happier customers), less obsolescence)

– Not so good news: more difficult to take advantage of economies of scale in manufacturing and transportation

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Pull-based supply chains (2)

– Production & distribution decisions are designed to cope with volatile demand

– Modern version: agile supply chain• Structured so as to allow maximum flexibility• Enabled by mass customization• Often incorporates postponed production

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Mass Customization

• Different product configurations contain a majority of shared components and features to accommodate volume and variety

• Enabled by postponement – the reconfiguration of product and process design so as to

allow postponement of final product customization as far downstream as possible

– Not only applied to manufacturing – E.g. Packaging postponement is merely delaying final

packaging of products until customer orders are received

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Principles of Postponement

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What’s the appropriate strategy?• Rules of thumb:

– Demand uncertainty: • Higher demand uncertainty => manage the supply chain based on realized

demand => a pull strategy (agile SC). • Lower demand uncertainty => manage the supply chain based on long-term

forecast => a push strategy (lean SC)– Economies of scale:

• Higher importance of economies of scale in reducing cost => the greater the value in aggregating demand => the greater the importance of managing the supply chain based on long-term forecast => push strategy (lean SC)

• Lower importance of economies of scale in reducing cost => the greater the value of managing the supply chain based on current demand => pull strategy (agile SC)

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Identifying the Appropriate Supply Chain Strategy (I)

– Box I: high demand uncertainty; economies of scale in production, assembly, or distribution are not important (e.g., computers) (pull or agile)

– Box III: low demand uncertainty; high economies of scale (e.g., beer, pasta, soup) (push or lean)

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Identifying the Appropriate Supply Chain Strategy (II)

– Box IV: low demand uncertainty; economies of scale in production, assembly, or distribution are not important (high volume, fast moving books and CDs) (push or lean)

– Box II: high demand uncertainty; high economies of scale (furniture, auto) (push-pull or leagile)

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Push-Pull Strategy

• Some stages of the supply chain operated in a push-based manner– typically the initial stages

• Remaining stages employ a pull-based strategy. • Interface between the push-based stages and the

pull-based stages is the push–pull boundary, or called decoupling point.

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Supply Chain Timeline

FIGURE 7: Push-pull supply chains

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The Leagile Supply Chain

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General Strategy

• Make a part of the product to stock – generic product

• The point where differentiation has to be introduced is the push-pull boundary, or the decoupling point

• Based on extent of customization, the position of the boundary on the timeline is decided

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Implementing a push-pull strategy

• Where to locate the push-pull boundary?– Furniture manufacturers locate the boundary at the production

point

• Buffer inventory is usually what is at the interface

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In class case discussion: Zara

• How would you classify Zara’s supply chain strategy?

• What is the purpose of Zara to put design and manufacturing department in the same facility?

• Why do Zara's products contain multi-country labels?

• Why does Zara keep spare capacity on hand?

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Impact of lead time

• Long lead times make it difficult to react to high variance demand information => push systems since pull systems are difficult to implement

• Shorter lead times allow for pull systems (at perhaps higher transportation costs)

• Box A: high demand uncertainty, short lead times (computers) => agile, quick response

• Box B: low demand uncertainty, long lead times (dry cereal, frozen meat) => lean, planning and execution

• Box C: low demand uncertainty, short lead times (perishable foods, e.g., bread, dairy products, produce, refrigerated meat) => lean, continuous replenishment

• Box D: high demand uncertainty, long lead times => leagile production /logistics postponement– Buffer inventory used to cope with long lead time

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Combined Supply Chain Strategies

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Critical Factors to Consider in Supply Chain Planning

• Focus on processes and flows• Focus on high level objectives• The importance of people • It’s supply chains that compete– Increasingly it is supply chains that compete more

than individual firms and products

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Questions to think• What is an example of a product with a primarily push-based

(lean) supply chain? A product with a primarily pull-based (agile) supply chain?

• Is it possible for the appropriate supply chain (lean, agile, or leagile) to change during a product’s life cycle? If not, explain why? If it is possible, what are some specific examples of products for which the appropriate supply chain changed?

• Linking supply chain with product types, which supply chain is more suitable for functional products? Which for innovative products?

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