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Integration
Phil Simchi-Levi
David Kaminsky
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
– Doesn’t work in all cases
systems?
Is there a system that has the
Customers
Suppliers
Pull H
I II
Computer
IV III
Delivery cost
Unit price
Push L
L H Economies of
Scale
Pull Push
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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.
Raw
Material Customers
Push Pull
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
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)
$20
$18
$16
Cost ($ million)
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
both channels
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
E-Fulfillment Requires a New
Logistics Infrastructure
Warehousing
Direct Shipping
– No DC needed
– Lead times reduced
– “smaller trucks”
– no risk pooling effects
Cross-Docking
decentralized?