Chapter 4

Supply Chain Integrations

Fajar Hidayat, ST, MsMM, CPIM

Outline
Push and Pull Strategy
Distributions Strategy

Push vs Pull
Push Strategy
Pull Strategy

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
Doesnt 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 b
oth 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 replenis

hed based on long-term forecasts

For example, parts inventory may be replenished

based on forecasts

Final supply chain stages based on actual cu

stomer demand.

For example, assembly may based on actual orde

rs.

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

What is the Best Strategy?

Demand
uncertainty
(C.V.)

Pull

Computer

IV

Push

II

III
Delivery cost
Unit price

L
L

Pull

Push

Economies
of Scale

Selecting the Best SC Strategy

Higher demand uncertainty suggests pull
Higher importance of economies of scale sugg
ests push
High uncertainty/ EOS not important such as t
he computer industry implies pull
Low uncertainty/ EOS important such as grocer
ies 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 economie
s of scale (high volume books and cds)
Either push strategies or push/pull strategies mi
ght be most appropriate

High uncertainty and high value of economi

es 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

The pull section:

Thus

Management based on forecasts is appropriate

Focus is on cost minimization
Achieved by effective resource utilization supply chain optimization
High uncertainty
Simple supply chain structure
Short lead times
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

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)

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.

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

Industry Benchmarks:
Number of Distribution Centers

Food Companies

Pharmaceuticals

Avg.
# of
WH

14

- High margin product

- Service not important (or
easy to ship express)
- Inventory expensive
relative to transportation

Chemicals

25
- Low margin product
- Service very important
- Outbound transportation
expensive relative to inbound

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 Store

s
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?

The Retail Industry

Brick-and-mortar companies establish virtual re
tail stores
Wal-Mart, K-Mart, Barnes & Noble, Circuit City

An effective approach - hybrid stocking strateg

y
High volume/fast moving products for local storage
Low volume/slow moving products for browsing an
d 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 Lands End which h
as both channels

E-Fulfillment Requires a New Logistics I

nfrastructure

Traditional Supply Chain

e-Supply Chain

Supply Chain Strategy

Push

Push-Pull

Shipment Type

Bulk

Parcel

Inventory Flow

Unidirectional

Bi-directional

Simple

Highly Complex

Destination

Small Number of Stores

Highly Dispersed Customers

Lead Times

Depends

Short

Reverse Logistics

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 Improv

e 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-Marts 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-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 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-Marts 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
Attribute

Direct
Shipment

Cross
Docking

Risk
Pooling

Take
Advantage

Transportation
Costs
Holding
Costs
Demand
Variability

Inventory at
Warehouses

Reduced
Inbound Costs
No Warehouse
Costs

Reduced
Inbound Costs

No Holding
Costs
Delayed
Allocation

Delayed
Allocation

 Thank You