Ch5 Integration

Supply Chain Integration
Phil Simchi-Levi
Kaminsky
David
kaminsky@ieor.berkeley.edu
Philip Kaminsky
Edith 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
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:
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 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
Low Uncertainty
PULL STRATEGY
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
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 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
II
Computer
IV
Push
III
Delivery cost
Unit price
L
L
Pull
Economies of
Scale
Push
Selecting the Best SC

Strategy
Higher demand uncertainty suggests push

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 cds)
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

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.

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
Direct-to-Consumer:Cost
Trade-Off
Cost ($ million)
Cost Trade-Off for BuyPC.com

$20
$18
$16
$14
$12
$10
$8
$6
$4
$2
$0
Total Cost
Inventory
Transportation
Fixed Cost
10
Number of DC's
15
Industry Benchmarks:
Number of Distribution Centers
Pharmaceuticals
Avg.
# of
WH
Food Companies
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 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?
Less than 300,000

shoppers
Number of
customers
Average
order
Delivery charges
Webvan
21000
$ 71
Peapod
140000
$120
$4.95 for < $50

free for > $50
$7.95 per order
HomeGrocer.com
50000
$110
NetGrocer.com
60000
$ 70
ShopLink.com
3300
$ 98
$9.95 < $75 free

for > $75
$2.99 for < $50
$4.99 for > $50
$25 monthly
Streamline.com
3400
$100
$30
Source: D. Ratliff
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 Lands 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
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 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-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 crossdocking
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 CrossDocking:
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
Transshipment
What
is the value of this?

What tools are needed?
What if the system is
decentralized?

Ch5 Integration

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Supply Chain Integration

The Old Paradigm:

Production decisions based on long-term

Production is demand driven

Pull Strategies result in:

Reduced lead times (better anticipation)

Push and Pull Systems

are the advantages of push

A new Supply Chain

A shift from a Push System...

2003 Simchi-Levi, Kaminsky, Simchi-Levi

Push-Pull Supply Chains

2003 Simchi-Levi, Kaminsky, Simchi-Levi

A new Supply Chain

A shift from a Push System...

example, parts inventory may be replenished

Final supply chain stages based on actual

example, assembly may based on actual orders.

2003 Simchi-Levi, Kaminsky, Simchi-Levi

The push-pull system takes advantage of

Risk Pooling Concept

Delayed differentiation is another example

What is the Best

Selecting the Best SC

Higher demand uncertainty suggests push

Selecting the Best SC

Low uncertainty but low value of economies

High uncertainty and high value of

Long Lead Times

Short Cycle Times

Locating the Push-Pull

The push section:

Uncertainty is relatively low

The pull section:

Locating the Push-Pull

The push section requires:

The pull section requires:

Buffer inventory at the boundaries:

Locating the Push-Pull

2003 Simchi-Levi, Kaminsky, Simchi-Levi

Impact of the Internet

E-business strategies were supposed to:

2003 Simchi-Levi, Kaminsky, Simchi-Levi

Founded in 1995; 1st Internet purchase for most people

$22 Million in sales the first nine months

Over 1,000,000 visitors per month

Died November 6, 2000

2003 Simchi-Levi, Kaminsky, Simchi-Levi

E-business is a collection of business models and

The Internet can have a huge impact on supply chain

The Book Selling

From Push Systems...

...To Pull Systems

And, finally to Push-Pull Systems

7 warehouses, 3M sq. ft.,

Why the switch?

Margins, service, etc.

Cost Trade-Off for BuyPC.com

- High margin product

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

The Grocery Industry

From Push Systems...

...To Pull Systems