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Supply Chain Integration

Case Study
Modern Book Distribution, Inc.
• MBD had been one of the largest efficient book distributors in the
country.
• They use advanced forecasting technique to control inventory levels and
technological advanced warehouses to control operating expenses.
• Evolution of two new types of retailers in the industry: large superstores
& online stores
Case Study
Modern Book Distribution, Inc.
• Challenges from large superstores:
• They demand new services from their distributors.
• As the superstores consolidated they used this leverage to force
distributors to accept minimal margins
Case Study
Modern Book Distribution, Inc.
• Challenges from online book sellers
• Previously, the online book sellers kept no inventory at hand and relayed
them to MBD like distributors to deliver the books to the retailer.
• Online book sellers later established their own DCs, due to magnification
of their business, where they kept inventory and handled packaging &
shipment of books directly to end users.
Case Study
Modern Book Distribution, Inc.
• The changing business scenarios lead MBD to embark on a different
strategic model and the list of queries popped by the manager are:
• The impact of internet on business strategy used by the new categories
of book sellers
• The utilization of internet by MBD to better serve the customers
• Whether or not to move to pull distribution strategy
Contents
• Push, Pull and Push-pull Base Supply Chain

• Demand driven supply chain strategies

• Impact of internet on supply chain integration

• Effective distribution strategies

Push –Based Supply Chain
• Production & distribution decisions are based on long term
forecasts
• Push-based SC reacts slowly to the changing market demand
• Variability in orders lead to bullwhip effect
• In push-based SC there is increased transportation costs, high
inventory levels, and/or high manufacturing costs due to
emergency production change over.
Pull-Based Supply Chain
• Production and distribution are demand driven so that there is co-
ordination with the customer demand
• Pull-based supply chain leads to decrease in lead time, decrease in
inventory in retailers, decrease in variability in system, decreased
inventory at manufacture due to reduction in variability
• Pull-based systems are often difficult to implement due to long lead times,
difficult to take advantage of economies of scale in manufacturing &
transportation
 Push-pull Supply Chain
• Initial stages are push based and later stages are pull based

Push-
Pull
boundary

Push Strategy Pull Strategy

Raw End
Materials Customer

Supply chain time line

Matching Supply Chain Strategy

Demand
Uncertainty
H
Pull
I II
Computer Furniture

IV III
Books & CDS Grocery Economies
Push L of Scale
L H

Pull Push
Implementing push-pull strategy

• Push strategy implemented – demand uncertainty small, so long term

forecast
• Pull strategy implemented – uncertainty high so based on realized
demand
• Push portion – service level low – focus on cost minimization
• Pull portion – high service level – focus on flexibility and responsiveness
Characteristics of the Push & Pull portions of
Supply Chain

Portion Push Pull

Objective Minimize cost Maximize service
level
Complexity High Low
Focus Resource Responsiveness
allocation
Lead time Long Short
Processes SC planning Order fulfillment
Demand-Driven Strategies
• The two processes to integrate demand information into supply chain
planning process:
• Demand forecast: A process in which historical demand data are used to
develop long-term estimates of expected demand
• Demand shaping: A process in which the firm determines the impact of
various marketing plans such as promotion, discounts, rebates etc. on
demand forecast
Demand-Driven Strategies

• In either of the cases demand forecast is not accurate so an important

output from both the processes is forecast error.
• This information insight into likelihood that demand will be higher or
lower than the forecast
Demand-Driven Strategies
• Approaches to decrease forecast error and increase forecast accuracy
are:
• Select push-pull boundary to aggregate demand across products,
geography, and time
• Use market analysis & demographic and economic trend
• Incorporate collaborative planning and forecasting processes with
customers to better understand the market demand,…
Impact of the Internet on SC Strategies

• E-business: is a collection of business models and processes motivated

by Internet technology and focusing on improvement of extended
enterprise performance
• E-commerce: is the ability to perform major commerce transaction
electronically.
Impact of the Internet on SC Strategies
• Grocery industry: low level of demand uncertainty for many products
and high economies of scale in transportation cost – push strategy more
appropriate
• Book industry: Inventory at the warehouse is based on push strategy
whereas demand is satisfied based on pull strategy
• Retail industry: push strategy for high volume, fast moving products and
push-pull strategy for low volume, slow moving products
Impact on Transportation & Fulfillment

Traditional fulfillment E-fulfillment

SC strategy Push Push-pull

Shipment Bulk Parcel
Reverse logistics Small part of business Imp. & complex

Delivery destination Small no. of stores Large no. of

geographically
dispersed customers

Lead times Relatively long Relatively short

Distribution Strategies

Strategy Direct Cross-Docking Inventory at

Attribute Shipment warehouses
Risk pooling Take advantage

Transportation Reduced Reduced

Cost Inbound cost Inbound cost

Holding costs No No holding

warehouse costs
cost
Allocation Delayed Delayed
Distribution Strategies
• Transshipment: shipment of items between different facilities at the
same level in the supply chain to meet some immediate need
• Centralized Vs Decentralized Control:
• Centralized control – leads to global optimization
• Decentralized control – leads to local optimization
Distribution Strategies
• Central Vs Local facilities
• Safety stock: Consolidating warehouses lowers safety stock
• Overhead: Few large central warehouses overhead cost < many small
warehouse cost
• Economies of scale: can be realized on consolidation of manufacturing
units
• Lead time: reduced lead time directly proportional to closer market area
location
Distribution Strategies
• Service: Centralized warehousing enables the utilization of risk pooling,
which means that more orders can be met with lower total inventory
level.
• Transportation cost: Transportation costs are directly related to the
number of warehouses. Inbound transportation cost increases whereas
outbound cost decreases due to service facility location
Conclusion
• Internet has created the opportunity to revolutionize the supply chain
strategies but at the same time the collapse of many internet companies
implies the great challenges that e-business presents. The new push-pull
strategy advocates holding inventory. There is a need to have an
effective distribution strategy depending on the details of the context, as
mentioned in the presentation such as cross docking, transshipment and
so on..
Case study
The Great Inventory Correction
• The problem-

• Due to fall in demand the high tech companies were loaded with
rapidly depreciating goods

• They had to write-off huge unsalable inventory

New Logic
• Altra designs programmable logic devices (PLDs).
• Altra’s outsourcing manufacturer is based in Taiwan.
• Initially there was a push strategy i.e. the finished
goods were stockpiled in Asian facilities in anticipation
of customer demand
• Also it build new products based on specs beyond
what customer needed for prototyping
• The benefit of this model was to provide cost
advantage to customers by holding the inventory
stock in the supply chain
New Logic

• Change in strategy:
• Continue to produce stock but in die banks i.e. to keep inventory in
flexible form
• Implement “build-to-order” strategy
• New order will be built on customer order
Visible Improvements
• The average cycle time for semi-conductors is 117 according to research
(from fab to customer)
• Plenty of time for demand to change direction
• Altra collaborated with Nortel & Motorola on product development
• Introduced software system (SCM i2 Tech.) which is linked to fabs,
suppliers, and distributors
Visible Improvements
• Result: reduced cycle time from 10 to 1day and long term cycle time
from 4 weeks to 1 week.
• UMC’s customer can forecast collaboratively using UMC’s web portal
such that it automatically finds the best slot for the customer order.
Freak/Flop show
• Even after using SCM software , it couldn’t prevent inventory glut.
Growth changed from 40 % to negative 10%
• Reasons: New technology creates constraints in supply. Ordering overly
creates glut on the manufacturer’s side
Check on Business History
• Flextronics an EMS company had unusually high inventory glut but they
had a good reason for that because they wanted to obtain better
understanding of with customers of consumer demand.
• The company wanted to create material hub but there was some
disputes with the distributors who complained of surplus inventory. The
case was opposite in the year 2000 when there was a shortage and the
distributors made good margin.
IBM – The Crystal Ball
• IBM follows the pull strategy or just-in-time basis. Their
suppliers have visibility of their inventory level
• The pull strategies IBM applies in order to make it
effective are:
• Commonality across platforms & products
• The number of suppliers kept small
• Electronic purchase transaction to have faster
collaboration with suppliers
• Rationally exuberant sales force who knows their
customers in and out, the main strategy for their
forecast, meet frequently to discuss & anticipate
demand
Thank You