Supply Chain Strategy

Various supply chain strategies

Push strategies
Pull strategies
Push-pull systems
Matching products/industries with supply chain
strategies
Impact of the Internet on supply chain integration
Effective distribution strategies
Direct shipment
Warehousing
Cross-docking
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
Hard to predict production capacity or transportation
capacity hence inefficient system
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
Doesnt work in all cases
Push-Pull Supply Chains
The Supply Chain Time Line
Low Uncertainty
Long lead times
High Uncertainty
Short lead times
Customers
Suppliers
PUSH STRATEGY
PULL STRATEGY
Push-Pull Boundary
Push-pull systems
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 worse the forecast
Aggregate forecasts are more accurate
Risk Pooling impact
Characteristics and Skills
Raw
Material
Customers
Pull
Push
Low Uncertainty
Long Lead Times
Cost Minimization
Resource
Allocation/utilization
High Uncertainty
Short Cycle
Times
Service Level
Responsiveness
What is the Best Strategy?
Pull Push
Pull
Push
Demand
uncertainty
(C.V.)
Delivery cost
Unit price
L H
H
L
Economies of
Scale
I
II
IV
III
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.
Postponement Strategy in Build-to-
Order (BTO) Model in Dell
Pull-based strategy
De-coupling point
part supplier OEM
production
center
logistics customers
assembly manufacturing form packaging & logistics
Demand-driven strategies
Demand forecast: Using historical data to develop long-term estimates of
expected demand
Demand shaping: Determining the impact various marketing plans such as
promotions, pricing discounts, rebates, new product introductions and product
withdrawal on demand forecasts
Inaccuracy of the forecast has a detrimental impact on supply chain
performance: lost sales, obsolete inventory, inefficient resource utilization
Employing supply chain strategies to reduce the impacts of forecast
inaccuracy
Select the push-pull boundary so that the demand is aggregated over different
dimensions: products, geography, time
Use market analysis and demographic and economic trends to improve forecast
Determine the optimal assortment of products by store to reduce the impact of
competing SKUs in the same market
Incorporate collaborative planning and forecasting processes with customers to better
understand market demand, impact of promotions, pricing and advertising
What does internet change for a SC?
Enables a whole new business model.
Online purchasing, direct shipping, auctioning, secondary markets
Improves or enables integration between different parties of
the supply chain
Enables information sharing
Enables collaboration
Reduces lead time
Reduction in order processing times
Improves product availability
Impact of internet
E-business: a collection of business models and processes
motivated by Internet technology and focusing on
improvement of extended enterprise performance
Business-to-consumer (B2C): direct to customer, retail activities over
the internet
Business-to-business (B2B): business conducted over the internet
between businesses
E-business Opportunities:
Reduce Facility Costs
Eliminate retail/distributor sites
Reduce Inventory Costs
Appl y 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
Distribution Strategies
Distribution Strategies
Direct Shipping: items are shipped directly from
the supplier to the retail stores without going
through distribution centers.
Lead times reduced
smaller trucks
no risk pooling effects
Warehousing: warehouses keep stock and provide
customers with items as required.
Cross-docking: items are distributed continuously
from suppliers through warehouses to customers.
Items rarely kept for more than 10 to 15 hours
Direct Shipment Distribution Strategies
Advantages:
Retailer avoids the expenses of operating a distribution center
Lead times are reduced.
Disadvantages:
Risk-pooling effects are negated
Manufacturer and distributor transportation costs increase
Commonly used scenarios:
Retail store requires fully loaded trucks
Often mandated by powerful retailers
Lead time is critical.
Prevalent in the grocery industry: lead times are critical because of
perishable goods.
Intermediate Inventory Storage
Point Strategies
Based on length of time inventory is stored at
warehouses/distribution centers 3 different strategies:
1. Traditional warehousing strategy
distribution centers and warehouses hold stock inventory & provide
their downstream customers with inventory as needed.
2. Cross-docking strategy:
Warehouses/distribution centers serve as transfer points for inventory
no inventory is held at these transfer points.
3. Centralized pooling and transshipment strategies:
may be useful when there is a large variety of different products
Issues in Traditional Warehousing
Inventory management and risk pooling key factors
Other factors also play a significant role
Centralized vs Decentralized Management
Central vs Local Facilities
Centralized vs Decentralized Management
Decentralized system (Leads to local optimization).
Each facility identifies its most effective strategy without
considering the impact on the other facilities in the supply chain.
Centralized system (leads to global optimization).
decisions are made at central location for entire supply chain.
Typical objective: minimize the total cost of the system subject
to satisfying some service-level requirements.
Allow use of coordinated strategies
If system cannot be centralized
often helpful to form partnerships to approach the advantages of
a centralized system.
Central vs. Local Facilities
Factors affecting the decision:
Safety stock. Lower safety stock levels with centralized facilities
Overhead. Lower total overhead cost with centralized facilities
Economies of scale. Greater economies of scale with centralized facilities
Lead time. Lead time to market reduced with local facilities
Service level: Utilization of risk pooling better with centralized, whereas,
Shipping times better with local
Transportation costs: Costs between production facilities & warehouses
higher with local, whereas, Costs from warehouses to retailers lesser with
local
Cross Docking
In 1979
Kmart had 1891 stores and average revenues per store of $7.25 million.
Kmart was the king of the retail industry.
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 largest & highest profit retailer in the world
Kmart ????
What accounts for Wal-Marts
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-Marts cost of sales significantly and
made it possible to offer everyday low prices to their customers.
Characteristics of Cross-Docking:
Goods spend at most 12-15 hours in the warehouse,
lowers inventory handling costs,
Wal-Mart delivers about 85% of its goods through its cross
docking facility, compared to about 50% for Kmart,
Stores trigger orders for products.
Issues with Cross-Docking
Require a significant start-up investment and are very difficult
to manage
Supply chain partners must be linked with advanced
information systems for coordination
A fast and responsive transportation system is necessary
Forecasts are critical, necessitating the sharing of information.
Effective only for large distribution systems
Sufficient volume every day to allow shipments of fully loaded trucks from
the suppliers to the warehouses.
Sufficient demand at retail outlets to receive full truckload quantities
Inventory Pooling: Example
Two retailers face random demand for a single product.
No differences between the retailers
Compare two systems
centralized pooled system,
retailers together operate a joint inventory facility
take items out of the pooled inventory to meet demand.
decentralized system
each retailer individually orders from the manufacturer to meet
demand
In both systems, inventory is owned by the retailers
Transshipment
Shipment of items between different facilities at the same level
in the supply chain to meet some immediate need
Occurs mostly at the retail level
Takes advantage of Risk Pooling
Can be achieved:
with advanced information systems
Shipping costs are reasonable
Retailers have same owner
Which Distribution Strategy to Adopt?
Different approaches for different products
Factors:
Customer demand and location
Service level
Costs => transportation & inventory costs
Demand Variability
Distribution Strategies
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
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