Supply Chain Strategies &
e-Business Supply Chain
Supply Chain Strategies



Push-Based Supply Chain
Pull-Based Supply Chain
Push-Pull Supply Chain
The Old Paradigm:
Push Strategies



Production decisions based on longterm 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
Information Coordination: The
Bullwhip Effect
Consumer Sales at Retailer
Retailer's Orders to Wholesaler
900
900
800
800
300
Wholesaler's Orders to Manufacturer
Manufacturer Order
1000
900
800
700
600
500
400
300
200
100
900
800
700
600
500
400
300
200
40
37
34
31
28
25
22
19
16
13
10
7
4
0
1
41
39
37
35
33
31
29
27
25
23
21
19
17
15
13
9
7
5
3
1
11
100
0
41
39
37
35
33
31
29
27
25
23
21
Manufacturer's Orders with Supplier
1000
Wholesaler Order
19
1
41
39
37
35
33
31
29
27
25
23
21
19
17
15
13
9
11
7
0
5
0
3
100
1
100
17
200
15
200
400
13
300
9
400
500
11
500
600
7
600
700
5
700
3
Retailer Order
1000
Consumer demand
1000
A Newer Paradigm:
Pull Strategies

Production is demand driven



Pull Strategies result in:





Production and distribution coordinated with
true customer demand
Firms respond to specific orders
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
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
H
I
II
Computer
IV
Push
III
Delivery cost
Unit price
L
L
Pull
H
Push
Economies of
Scale
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.
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?
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:





Thus




Management based on forecasts is appropriate
Focus is on cost minimization
Achieved by effective resource utilization – supply chain
optimization
The pull section:




Uncertainty is relatively low
Economies of scale important
Long lead times
Complex supply chain structures:
High uncertainty
Simple supply chain structure
Short lead times
Thus



Reacting to realized demand is important
Focus on service level
Flexible and responsive approaches
Locating the Push-Pull Boundary

The push section requires:



The pull section requires:



Supply chain planning
Long term strategies
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.
Locating the Push-Pull Boundary
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.
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

$22 Million in sales the first nine
months

Over 1,000,000 visitors per month

Died November 6, 2000

Logistics costs too high
Reality is Different….

Dell Example:

Dell Computer has outperformed the
competition in terms of shareholder value
growth over the eight years period, 1988-1996,
by over 3,000% (see Anderson and Lee, 1999)
The Book Selling Industry

From Push Systems...


...To Pull Systems




Barnes and Noble
Amazon.com, 1996-1999
No inventory, used Ingram to meet most
demand
Why?
And, finally to Push-Pull Systems

Amazon.com, 1999-present


7 warehouses, 3M sq. ft.,
Why the switch?
 Margins, service, etc.

Volume grew
Direct-to-Consumer:Cost Trade-Off
Cost ($ million)
Cost Trade-Off for BuyPC.com
$20
$18
$16
$14
$12
$10
$8
$6
$4
$2
$0
Total Cost
Inventory
Transportation
Fixed Cost
0
5
10
Number of DC's
15
Industry Benchmarks:
Number of Distribution Centers
Food Companies
Pharmaceuticals
Avg.
# of
WH
3
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?
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


An effective approach - hybrid stocking
strategy



Wal-Mart, K-Mart, Barnes & Noble, Circuit City
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 online and catalogue selling?
Consider for instance Land’s 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-Mart’s remarkable
success

A focus on satisfying customer needs




This was achieved by way the company
replenished inventory the centerpiece of its
strategy.
Wal-Mart employed a logistics technique known as
cross-docking


providing customers access to goods when and
where they want them
cost structures that enable competitive pricing
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.
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.
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 satellitecommunications 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?