Supply Chain Strategies & e-Business Supply Chain

1. Supply Chain Strategies &e-Business Supply Chain

2. Supply Chain Strategies • Push-Based Supply Chain • Pull-Based Supply Chain • Push-Pull Supply Chain

3. 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

4. Information Coordination: The Bullwhip Effect Consumer Sales at Retailer Retailer's Orders to Wholesaler 1000 1000 900 900 800 800 700 700 600 600 Consumer demand Retailer Order 500 500 400 400 300 300 200 200 100 100 0 0 1 3 5 7 9 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 Wholesaler's Orders to Manufacturer Manufacturer's Orders with Supplier 1000 1000 900 900 800 800 700 700 Manufacturer Order 600 Wholesaler Order 600 500 500 400 400 300 300 200 200 100 100 0 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 1 4 7 10 19 40 13 16 22 25 28 31 34 37

5. 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

6. 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?

7. A new Supply Chain Paradigm • A shift from a Push System... • Production decisions are based on forecast • …to a Push-Pull System

8. PUSH STRATEGY PULL STRATEGY High Uncertainty Low Uncertainty Push-Pull Boundary Push-Pull Supply Chains The Supply Chain Time Line Customers Suppliers

9. 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.

10. 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 Consider Two PC Manufacturers:

11. 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

12. Demand uncertainty (C.V.) Pull Push H L I Computer II IV III Delivery cost Unit price L H Economies of Scale Pull Push What is the Best Strategy?

13. 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.

14. 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?

15. Characteristics and Skills Raw Material Customers Push Pull High Uncertainty Short Cycle Times Service Level Responsiveness Low Uncertainty Long Lead Times Cost Minimization Resource Allocation

16. 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

17. 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.

18. Locating the Push-Pull Boundary

19. 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.

20. Impact of the Internet – Expectations Were High • E-business strategies were supposed to: • Reduce cost • Increase service level • Increase flexibility • Increase Profit

21. 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

22. 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

23. 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)

24. 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

25. Direct-to-Consumer:Cost Trade-Off

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

27. 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%

28. 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?

29. 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

30. 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

31. 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

32. E-Fulfillment Requires a New Logistics Infrastructure

33. 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

34. 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

35. Distribution Strategies • Warehousing • Direct Shipping • No DC needed • Lead times reduced • “smaller trucks” • no risk pooling effects • Cross-Docking

36. 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 ????

37. 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.

38. 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.

39. 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

40. 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.

41. Distribution Strategies

42. Transshipment • What is the value of this? • What tools are needed? • What if the system is decentralized?