The Future is Here…INTELLIGENT LOGISTICS!
Chapter 5 Distribution Strategies
A new Supply Chain Paradigm
• A shift from a Push System...– Production decisions are based on forecast
• …to a Push-Pull System
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
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
Push-Pull Supply Chains
The Supply Chain Time Line
Low Uncertainty
Long lead times
High Uncertainty
Short lead times
CustomersSuppliers
PUSH STRATEGY PULL STRATEGY
Push-Pull Boundary
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.
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
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
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
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.
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?
Characteristics and Skills
RawMaterial Customers
PullPush
Low Uncertainty
Long Lead Times
Cost Minimization
Resource Allocation
High Uncertainty
Short Cycle Times
Service Level
Responsiveness
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.
Locating the Push-Pull Boundary
reduce inventory holding cost
the location of the push-pull boundary for various companies and industries
3.6 Impact of the Internet – Expectations Were High
• E-business strategies were supposed to:– Reduce cost– Increase service level– Increase flexibility– Increase Profit
3.6.1 The Book Selling Industry
• From Push Systems...– Barnes and Noble
• ...To Pull Systems– Amazon.com, 1996-1999– No inventory, used Ingram Book Group 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
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
3.6.2 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%
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?
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
3.6.3 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
( Push)– Low volume/slow moving products for browsing and
purchase on line (risk pooling) (Push-Pull)
• Danger of channel conflict
5.6.4 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?
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
5.6.5 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
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
3.7 Distribution Strategies
• Warehousing• Direct Shipping
– No DC needed– Lead times reduced– “smaller trucks”– no risk pooling effects
• Cross-Docking
3.7.1 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 ????
What accounts for Wal-Mart’s remarkable success
• This was achieved by way 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.
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.
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
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.
StrategyAttribute
DirectShipment
CrossDocking
Inventory atWarehouses
RiskPooling
TakeAdvantage
TransportationCosts
ReducedInbound Costs
ReducedInbound Costs
HoldingCosts
No WarehouseCosts
No HoldingCosts
DemandVariability
DelayedAllocation
DelayedAllocation
Distribution Strategies
Transshipment
• What is the value of this?
• What tools are needed?
• What if the system is decentralized?
Important Considerations
• Level of Uncertainty
• Economies of Scale
• Lead Time
• Product Architecture
Supply Produce Distribute Sell
Plan/Design
Source
•Product Architecture•Make/Buy•Early Supplier Involvement
•Strategic Partnerships•Suppliers Selection•Supply Contracts
Fulfillment Supply Chain
Develo
pm
en
t Su
pp
ly
Ch
ain
The Enterprise Fulfillment and Development Supply Chains
What is the Right Supply Chain Strategy for your Product?
L H
H
L
Demand Uncertainty
Innovative
Functional
•PC/Fashion•Responsiveness•Pull Systems•Dynamic Pricing
•Pasta/Diapers•Efficiency•Push System
•Cell Phone engines•Push Systems•Efficiency
•Furniture/Tires•Push-Pull•Lead Time Reduction
Push Pull
Modular
Integral
ProductsCharacteristic
Product Architecture
Supply ChainStrategy
Product IntroductionFrequency
C
DA
B
• The Development Supply Chain• Industry clock speed
– Innovative vs Functional products
• Core competencies– Make vs. Buy
• Product Design – Postponement, Standardization, Packaging
A SNAPSHOTUNC Center For Logistics And Digital Strategy
• Established in 1997 as a resource for organizations struggling with logistics complexity and enterprise change management
• Areas of Specialization– Strategic visioning for intelligent enterprising– New logistics technology (Intelligent Software, RFID, Wireless, GPS/GIS)– Logistics and Supply Chains in Emerging Markets– Logistical Network Planning and Design– Intelligent Supply Chain Management Strategies
• Serves both public (SAP, FedEx, Boeing, Caterpillar) and private sector (NSA, DARPA, NASA, FAA) organizations
• Founding member of the Global Logistics Research Initiative (GLORI)