chapter 6 supply chain Integration in.ppt
- 1. Supply Chain Integration Phil Kaminsky kaminsky@ieor.berkeley.edu David Simchi-Levi Philip Kaminsky Edith Simchi-Levi
- 2. © 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
- 3. © 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: – 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
- 4. © 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?
- 5. © 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
- 6. © 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 Customers Suppliers
- 7. © 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.
- 8. © 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
- 9. © 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
- 10. © 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 cost Unit price L H H L Economies of Scale
- 11. © 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.
- 12. © 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?
- 13. © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Characteristics and Skills Raw Material Customers Pull Push Low Uncertainty Long Lead Times Cost Minimization Resource Allocation High Uncertainty Short Cycle Times Service Level Responsiveness
- 14. © 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
- 15. © 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.
- 16. © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Locating the Push-Pull Boundary
- 17. © 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
- 18. © 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
- 19. © 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
- 20. © 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)
- 21. © 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.
- 22. © 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
- 23. Direct-to-Consumer:Cost Trade-Off Cost Trade-Off for BuyPC.com $0 $2 $4 $6 $8 $10 $12 $14 $16 $18 $20 0 5 10 15 Number of DC's Cost ($ million) Total Cost Inventory Transportation Fixed Cost
- 24. © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Industry Benchmarks: Number of Distribution Centers Sources: CLM 1999, Herbert W. Davis & Co; LogicTools Avg. # of WH 3 14 25 Pharmaceuticals Food Companies Chemicals - High margin product - Service not important (or easy to ship express) - Inventory expensive relative to transportation - Low margin product - Service very important - Outbound transportation expensive relative to inbound
- 25. © 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%
- 26. © 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?
- 27. © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Less than 300,000 shoppers N Nu um mb be er r o of f c cu us st to om me er rs s A Av ve er ra ag ge e o or rd de er r D De el li iv ve er ry y c ch ha ar rg ge es s W We eb bv va an n 2 21 10 00 00 0 $ $7 71 1 $ $4 4. .9 95 5 f fo or r < < $ $5 50 0 f fr re ee e f fo or r > > $ $5 50 0 P Pe ea ap po od d 1 14 40 00 00 00 0 $ $1 12 20 0 $ $7 7. .9 95 5 p pe er r o or rd de er r H Ho om me eG Gr ro oc ce er r. .c co om m 5 50 00 00 00 0 $ $1 11 10 0 $ $9 9. .9 95 5 < < $ $7 75 5 f fr re ee e f fo or r > > $ $7 75 5 N Ne et tG Gr ro oc ce er r. .c co om m 6 60 00 00 00 0 $ $7 70 0 $ $2 2. .9 99 9 f fo or r < < $ $5 50 0 $ $4 4. .9 99 9 f fo or r > > $ $5 50 0 S Sh ho op pL Li in nk k. .c co om m 3 33 30 00 0 $ $9 98 8 $ $2 25 5 m mo on nt th hl ly y S St tr re ea am ml li in ne e. .c co om m 3 34 40 00 0 $ $1 10 00 0 $ $3 30 0 Source: D. Ratliff
- 28. © 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
- 29. © 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
- 30. © 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
- 31. © 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
- 32. © 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
- 33. © 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
- 34. © 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
- 35. © 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 ????
- 36. © 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.
- 37. © 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.
- 38. © 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
- 39. © 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.
- 40. © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Strategy Attribute Direct Shipment Cross Docking Inventory at Warehouses Risk Pooling Take Advantage Transportation Costs Reduced Inbound Costs Reduced Inbound Costs Holding Costs No Warehouse Costs No Holding Costs Demand Variability Delayed Allocation Delayed Allocation Distribution Strategies
- 41. © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Transshipment What is the value of this? What tools are needed? What if the system is decentralized?
Editor's Notes
- #16: The figure provides examples of the location of the push-pull boundary for various companies and industries What is the impact of pushing the push-pull boundary from right to left? Clearly as items move along the supply chain time line (from left to right) their value increase. Thus, locating the boundary as far to the left as possible will reduce inventory holding cost. However this is appropriate for products with short assembly and transportation lead times.
- #20: This example is important in this discussion since in the PC industry competition is not on technology (all PC manufacturers use the same technology; Microsoft and Intel). Competition in this industry is on price and service level; the two dimension that are important in any definition of SCM. So here is a company that has been very successful competing on SCM What did Dell do and can we learn anything from Dell and perhaps apply to other industry.
- #28: It is appropriate at this point to refer to the framework developed in slide 10. While other on-line grocers fit box III in that framework and face high distribution cost, grocerystreet.com solves the problem by moving to box iv.
- #30: The point here is that e-fulfillment is not so different than catalogue selling. Indeed, Land’s End uses the same fulfillment systems for both channels.
- #32: Two Summary Slides: opportunities provided by e-business