Designing & Managing The Supply Chain
Chapter 5
Zhang Xiaohui

Case: Modern Book Distribution
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Seven regional warehouses, services major bookstore chains and smaller independent booksellers
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Bookselling industry change superstores: require MDB ship directly to stores online booksellers: establish their own DC
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Opportunities and challenges for MDB

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Introduction
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Push, pull, push-pull systems
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Demand-driven strategies
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Impact of the Internet on supply chain strategies
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Distribution strategies
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Central versus Decentralized Control
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Central versus local facilities
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Summary

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Supply chain integration coordinate activities across the supply chain, including coordinating production, transportation, inventory decisions and more generally, integrating the front-end of the supply chain – customer demand, to the back-end of the supply chain
– the production and manufacturing portion.
Purpose reduce cost increase service level reduce the bullwhip effect better utilize resources effectively respond to changes in the market place

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Push-based supply chain
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• production and distribution decisions are based on long-term forecasts.
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React slow and large variability lead to:
Inability to meet changing demand patterns
Excessive inventories
Larger and more variable production batches
Unacceptable service levels
Product obsolescence

Push, pull, push-pull systems. cont
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Pull-based supply chain production and distribution are demand driven.
Effect: decrease lead times decrease inventory of retailers decrease variability in the system decrease inventory of manufacturer
Lead times too long, difficult to implement pull-based systems
Difficult to take advantage of economies of scale in manufacturing and transportation

Push, pull, push-pull systems. cont
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Push-pull supply chain some stages operated in a push-based manner, the remaining stages employ a pull-based strategy. (PC, delayed differentiation)
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The interface: push-pull boundary
Push-pull boundary
Raw materials
Push strategy Pull strategy
Supply chain time line
End customer

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components: push-based assembly: pull-based
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produce a generic or family product: push-based specific end-products: pull-based

Push, pull, push-pull systems. cont
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Identifying the appropriate supply chain strategy pull
Demand uncertainty
H
Ⅰ computer push L
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Books & CDs
L pull
Ⅱ furniture
Ⅲ grocery
H push
Economies of scale

Push, pull, push-pull systems. cont
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Box Ⅱ high demand uncertainty: pull important economies of scale: push furniture industry: production-pull; delivery-push
Box Ⅳ low demand uncertainty: push low economies of scale: pull books & CDs: push-pull strategy
Demand uncertainty pull
H
Box Ⅱ automobile: push-based strategy failure of GM’s push-pull strategy push L
L pull
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Economies of scale
H push

Push, pull, push-pull systems. cont
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Portion
Portion of SCM
Objective
Complexity
Focus
Lead time
Processes
Buffer inventory
Push
Relatively small uncertainty
Minimize cost
High
Resource allocation
Long
Supply chain planning output
Pull
High uncertainty
Maximize service level
Low
Responsiveness
Short
Order fulfillment input

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Demand forecast use historical demand to develop long-term estimates of expected demand
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Demand shaping determines the impact of various marketing plans (promotion, rebates)
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Accuracy – forecast error: standard deviation

cont
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Increase forecast accuracy push-pull boundary market analysis, demographic and economic trends optimal assortment incorporate collaborative planning and forecasting processes
Supply and demand management allocate marketing budgets and associate resources impact of deviations from forecast demand impact of changes in supply chain lead times impact of competitors’ promotional activities

Impact of the Internet on supply chain strategies
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B2B increase from $43 billion in 1998 to $1.3 trillion in 2003
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Living.com
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Furniture.com
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Peapod
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Amazon.com
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Dell computers
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Cisco

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E-business
 a collection of business models and processes motivated by Internet technology and focusing on improvement of extended enterprise performance
E-commerce
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 the ability to perform major commerce transactions electronically
E-commerce is only part of e-bussiness
Internet technology is the force behind the business change
The focus in e-business is on the extended enterprise (B2B, B2C)

cont
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Grocery industry
Peapod change from a pure pull strategy to a push-pull strategy most on-line grocers have failed low level of demand uncertainty, high economies of scale a push-based strategy is more appropriate
Book industry (Amazon.com) a pure pull system in the first few years(Ingram Book Group) a push-pull system (several warehouses)
Retail industry (Wal-Mart, Kmart, Target) distribution and warehousing infrastructure in place high-volume, fast-moving products: push strategy low-volume, slow-moving products: push-pull strategy

cont
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Transportation and Fulfillment
Traditional
Supply chain strategy Push
Shipment
Reverse logistics
Delivery destination
Bulk
Small part of the business
Small number of stores
Lead times Relatively long
E-fulfillment
Push-pull
Parcel
Important and highly complex
Large number of geographically dispersed customers
Relatively short

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Direct shipment directly from the supplier to the retail stores without going through DCs
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Warehousing (classical strategy) warehouses keep stock and provide items to customers
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Cross-docking distribute continuously from the suppliers through warehouses to customers (keep items no more than 10 to 15 hours)

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Advantages retailer avoids the expenses of operating a distribution center lead times are reduced
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Disadvantages risk-pooling effects are negated transportation costs increase
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Common when:
Fully loaded trucks
Lead time is critical (grocery industry)

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Warehouses function as inventory coordination points
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Store often less than 12 hours
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Difficult to manage: advanced information systems fast and responsive transportation system forecasts are critical, sharing of information effective only for large distribution systems
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Wal-Mart

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Factors influence distribution strategies: customer demand and demand variability service level transportation costs inventory costs
Comparison
Strategy
Attribute
Risk pooling
Transportation costs
Holding costs
Allocation
Direct shipment
No warehouse costs
Cross-docking Inventory at warehouses
Take advantage
Reduced inbound costs Reduced inbound costs
No holding costs
Delayed Delayed

cont
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Transshipment shipment of items between different facilities at the same level in the SCM to meet some immediate need
Retailer level ship the items either to the store where the customer originally tried to purchase or to the customer’s home
Conditions appropriate information systems reasonable shipment costs same owner
Take advantage of risk-pooling one can view inventory in different retail outlets

Centralized versus decentralized control
Decentralized control
Centralized control
Lead to
Local optimization
Global optimization
Information access
Only its own information
Sharing information

Local central
Safety stock
High
Low
Overhead Economies of scale
High
Lead time
Service
Unrealized Short Better
Transportation costs
Low Realized Long
Inbound
Outbound
Inbound
Outbound

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