Supply Chain Strategies &

e-Business Supply Chain

Supply Chain Strategies
 Push-Based Supply Chain
 Pull-Based Supply Chain
 Push-Pull Supply Chain
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

 Information Coordination: The
Bullwhip Effect
Consumer Sales at Retailer Retailer's Orders to Wholesaler
1000 1000
900 900
Consumer demand

800 800

Retailer Order
700 700
600 600
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Wholesaler's Orders to Manufacturer Manufacturer's Orders with Supplier
1000 1000

Manufacturer Order
Wholesaler Order

900 900
800 800
700 700
600 600
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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 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?
A new Supply Chain Paradigm
 A shift from a Push System...
 Production decisions are based on
forecast
 …to a Push-Pull System
 Push-Pull Supply Chains
The Supply Chain Time Line

Customers
Suppliers

PUSH STRATEGY PULL STRATEGY

Low Uncertainty High Uncertainty

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
 Finalsupply chain stages based on actual
customer demand.
 For example, assembly may based on actual
orders.
Consider Two PC Manufacturers:

 Build to Stock  Build to order

 Forecast demand  Forecast demand
 Buys components  Buys components
 Assembles  Observes demand
computers  Assembles
 Observes demand computers
and meets demand  Meets demand
if possible.
 A push-pull system
 A traditional push
system
Push-Pull Strategies
 The push-pull system takes advantage of
the rules of forecasting:
 Forecastsare 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?
Demand
uncertainty
(C.V.)

Pull H

I II
Computer

IV III
Delivery cost
Unit price
Push L

L H Economies of
Scale
Pull Push
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

Raw
Material Customers
Push Pull

Low Uncertainty High Uncertainty

Long Lead Times Short Cycle Times

Cost Minimization Service Level

Resource Allocation Responsiveness

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
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
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.
Impact of the Internet – Expectations
Were High

 E-business strategies were

supposed to:
 Reduce cost
 Increase service level

 Increase flexibility

 Increase Profit
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
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
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)
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
 Direct-to-Consumer:Cost Trade-
Off

Cost Trade-Off for BuyPC.com

$20
$18
$16
Cost ($ million)

$14 Total Cost

$12 Inventory
$10 Transportation
$8
Fixed Cost
$6
$4
$2
$0
0 5 10 15
Number of DC's
 Industry Benchmarks:
Number of Distribution Centers

Pharmaceuticals Food Companies Chemicals

Avg.
# of
WH 3 14 25
- High margin product - Low margin product
- Service not important (or - Service very important
easy to ship express) - Outbound transportation
- Inventory expensive expensive relative to inbound
relative to transportation

Sources: CLM 1999, Herbert W. Davis & Co; LogicTools

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?
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
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
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
 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

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

Distribution Strategies
 Warehousing
 Direct Shipping
 No DC needed
 Lead times reduced

 “smaller trucks”

 no risk pooling effects

 Cross-Docking
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

 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.
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.
Distribution Strategies

Strategy Direct Cross Inventory at

Attribute Shipment Docking Warehouses
Risk Take
Pooling Advantage
Transportation Reduced Reduced
Costs Inbound Costs Inbound Costs
Holding No Warehouse No Holding
Costs Costs Costs
Demand Delayed Delayed
Variability Allocation Allocation
Transshipment
 What is the value of this?
 What tools are needed?

 What if the system is

decentralized?