Supply Chain Integration David SimchiLevi Phil Kaminsky Philip

Supply Chain Integration David Simchi-Levi Phil Kaminsky Philip Kaminsky kaminsky@ieor. berkeley. edu 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 © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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? © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

A new Supply Chain Paradigm A shift from a Push System. . . – Production decisions are based on forecast …to a Push-Pull System © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Push-Pull Supply Chains The Supply Chain Time Line Customers Suppliers PUSH STRATEGY Low Uncertainty PULL STRATEGY High Uncertainty Push-Pull Boundary © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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. © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Consider Two PC Manufacturers: Build to Stock – – Forecast demand Buys components Assembles computers Observes demand 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 © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

What is the Best Strategy? Demand uncertainty (C. V. ) Pull H I II Computer IV Push III Delivery cost Unit price L L Pull H Push © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Economies of Scale

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. © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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? © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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. © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Locating the Push-Pull Boundary © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Impact of the Internet – Expectations Were High E-business strategies were supposed to: – Reduce cost – Increase service level – Increase flexibility – Increase Profit © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Reality is Different…. . Amazon. com Example – – – Founded in 1995; 1 st Internet purchase for most people 1996: $16 M Sales, $6 M Loss 1999: $1. 6 B Sales, $720 M Loss 2000: $2. 7 B Sales, $1. 4 B Loss Last quarter of 2001: $50 M Profit Total debt: $2. 2 B Peapod Example – – Founded 1989 140, 000 members, largest on-line grocer Revenue tripled to $73 million in 1999 1 st Quarter of 2000: $25 M Sales, Loss: $8 M © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Reality is Different…. Furniture. com – launched in 1999, with thousands of products $22 Million in sales the first nine months Over 1, 000 visitors per month Died November 6, 2000 – Logistics costs too high © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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) © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 (B 2 C) Business to Business (B 2 B) The Internet can have a huge impact on supply chain performance. © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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, 3 M sq. ft. , – Why the switch? Margins, service, etc. Volume grew © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Direct-to-Consumer: Cost Trade-Off

Industry Benchmarks: Number of Distribution Centers Food Companies Pharmaceuticals Avg. # of WH 3 Chemicals 14 - High margin product - Service not important (or easy to ship express) - Inventory expensive relative to transportation 25 - Low margin product - Service very important - Outbound transportation expensive relative to inbound Sources: CLM 1999, Herbert W. Davis & Co; Logic. Tools © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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% © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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? © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Less than 300, 000 shoppers Source: D. Ratliff © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

E-Fulfillment Requires a New Logistics Infrastructure © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Distribution Strategies Warehousing Direct Shipping – No DC needed – Lead times reduced – “smaller trucks” – no risk pooling effects Cross-Docking © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 ? ? © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 crossdocking – 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. © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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. © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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. © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Distribution Strategies © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Transshipment What is the value of this? What tools are needed? What if the system is decentralized? © 2003 Simchi-Levi, Kaminsky, Simchi-Levi