Chapter 5
Supply Chain Integration
Mithun J Sharma
Case Study
Modern Book Distribution, Inc.
• MBD had been one of the largest efficient book
distributors in the country.
• They use advanced forecasting technique to
control inventory levels and technological
advanced warehouses to control operating
expenses.
• Evolution of two new types of retailers in the
industry: large superstores & online stores
Case Study
Modern Book Distribution, Inc.
• Challenges from large superstores:
• They demand new services from their
distributors.
• As the superstores consolidated they used this
leverage to force distributors to accept minimal
margins
Case Study
Modern Book Distribution, Inc.
• Challenges from online book sellers
• Previously, the online book sellers kept no
inventory at hand and relayed them to MBD like
distributors to deliver the books to the retailer.
• Online book sellers later established their own
DCs, due to magnification of their business,
where they kept inventory and handled
packaging & shipment of books directly to end
users.
Case Study
Modern Book Distribution, Inc.
• The changing business scenarios lead MBD to
embark on a different strategic model and the
list of queries popped by the manager are:
• The impact of internet on business strategy
used by the new categories of book sellers
• The utilization of internet by MBD to better
serve the customers
• Whether or not to move to pull distribution
strategy
Contents
• Push, Pull and Push-pull Base Supply Chain
• Demand driven supply chain strategies
• Impact of internet on supply chain
integration
• Effective distribution strategies
Push –Based Supply Chain
• Production & distribution decisions are
based on long term forecasts
• Push-based SC reacts slowly to the changing
market demand
• Variability in orders lead to bullwhip effect
• In push-based SC there is increased
transportation costs, high inventory levels,
and/or high manufacturing costs due to
emergency production change over.
Pull-Based Supply Chain
• Production and distribution are demand driven
so that there is co-ordination with the customer
demand
• Pull-based supply chain leads to decrease in lead
time, decrease in inventory in retailers, decrease
in variability in system, decreased inventory at
manufacture due to reduction in variability
• Pull-based systems are often difficult to
implement due to long lead times, difficult to take
advantage of economies of scale in
manufacturing & transportation
Push-pull Supply Chain
• Initial stages are push based and later stages are
pull based
PushPull
boundary
Push Strategy
Pull Strategy
Raw
Materials
End
Customer
Supply chain time line
Matching Supply Chain Strategy
Demand
Uncertainty
Pull
Push
H
I
Computer
II
Furniture
IV
Books & CDS
III
Grocery
Economies
of Scale
L
L
H
Pull
Push
Implementing push-pull strategy
• Push strategy implemented – demand
uncertainty small, so long term forecast
• Pull strategy implemented – uncertainty high so
based on realized demand
• Push portion – service level low – focus on cost
minimization
• Pull portion – high service level – focus on
flexibility and responsiveness
Characteristics of the Push & Pull
portions of Supply Chain
Portion
Push
Pull
Objective
Minimize cost
Maximize service
level
Low
Complexity
High
Focus
Responsiveness
Lead time
Resource
allocation
Long
Processes
SC planning
Order fulfillment
Short
Demand-Driven Strategies
• The two processes to integrate demand
information into supply chain planning process:
• Demand forecast: A process in which historical
demand data are used to develop long-term
estimates of expected demand
• Demand shaping: A process in which the firm
determines the impact of various marketing
plans such as promotion, discounts, rebates etc.
on demand forecast
Demand-Driven Strategies
• In either of the cases demand forecast is not
accurate so an important output from both the
processes is forecast error.
• This information insight into likelihood that
demand will be higher or lower than the forecast
Demand-Driven Strategies
• Approaches to decrease forecast error and
increase forecast accuracy are:
• Select push-pull boundary to aggregate demand
across products, geography, and time
• Use market analysis & demographic and
economic trend
• Incorporate collaborative planning and
forecasting processes with customers to better
understand the market demand,…
Impact of the Internet on SC
Strategies
• E-business: is a collection of business models
and processes motivated by Internet technology
and focusing on improvement of extended
enterprise performance
• E-commerce: is the ability to perform major
commerce transaction electronically.
Impact of the Internet on SC
Strategies
• Grocery industry: low level of demand
uncertainty for many products and high
economies of scale in transportation cost – push
strategy more appropriate
• Book industry: Inventory at the warehouse is
based on push strategy whereas demand is
satisfied based on pull strategy
• Retail industry: push strategy for high volume,
fast moving products and push-pull strategy for
low volume, slow moving products
Impact on Transportation &
Fulfillment
Traditional fulfillment
E-fulfillment
SC strategy
Push
Push-pull
Shipment
Bulk
Parcel
Reverse logistics
Small part of business
Imp. & complex
Delivery destination
Small no. of stores
Large no. of
geographically
dispersed customers
Lead times
Relatively long
Relatively short
Distribution Strategies
Strategy
Attribute
Direct
Shipment
Cross-Docking
Risk pooling
Take advantage
Transportation
Cost
Holding costs
Allocation
Inventory at
warehouses
Reduced
Inbound cost
No
warehouse
cost
Reduced
Inbound cost
No holding
costs
Delayed
Delayed
Distribution Strategies
• Transshipment: shipment of items between
different facilities at the same level in the supply
chain to meet some immediate need
• Centralized Vs Decentralized Control:
• Centralized control – leads to global
optimization
• Decentralized control – leads to local
optimization
Distribution Strategies
• Central Vs Local facilities
• Safety stock: Consolidating warehouses lowers
safety stock
• Overhead: Few large central warehouses
overhead cost < many small warehouse cost
• Economies of scale: can be realized on
consolidation of manufacturing units
• Lead time: reduced lead time directly
proportional to closer market area location
Distribution Strategies
• Service: Centralized warehousing enables the
utilization of risk pooling, which means that
more orders can be met with lower total
inventory level.
• Transportation cost: Transportation costs are
directly related to the number of warehouses.
Inbound transportation cost increases whereas
outbound cost decreases due to service facility
location
Conclusion
• Internet has created the opportunity to
revolutionize the supply chain strategies but at
the same time the collapse of many internet
companies implies the great challenges that ebusiness presents. The new push-pull strategy
advocates holding inventory. There is a need to
have an effective distribution strategy depending
on the details of the context, as mentioned in
the presentation such as cross docking,
transshipment and so on..
Case study
The Great Inventory Correction
• The problem• Due to fall in demand the high tech
companies were loaded with rapidly
depreciating goods
• They had to write-off huge unsalable
inventory
New Logic
• Altra designs programmable logic devices (PLDs).
• Altra’s outsourcing manufacturer is based in Taiwan.
• Initially there was a push strategy i.e. the finished goods
were stockpiled in Asian facilities in anticipation of
customer demand
• Also it build new products based on specs beyond what
customer needed for prototyping
• The benefit of this model was to provide cost
advantage to customers by holding the inventory stock
in the supply chain
New Logic
• Change in strategy:
• Continue to produce stock but in die banks i.e.
to keep inventory in flexible form
• Implement “build-to-order” strategy
• New order will be built on customer order
Visible Improvements
• The average cycle time for semi-conductors is
117 according to research (from fab to customer)
• Plenty of time for demand to change direction
• Altra collaborated with Nortel & Motorola on
product development
• Introduced software system (SCM i2 Tech.)
which is linked to fabs, suppliers, and
distributors
Visible Improvements
• Result: reduced cycle time from 10 to 1day and
long term cycle time from 4 weeks to 1 week.
• UMC’s customer can forecast collaboratively
using UMC’s web portal such that it
automatically finds the best slot for the
customer order.
Freak/Flop show
• Even after using SCM software , it couldn’t
prevent inventory glut. Growth changed from
40 % to negative 10%
• Reasons: New technology creates constraints in
supply. Ordering overly creates glut on the
manufacturer’s side
Check on Business History
• Flextronics an EMS company had unusually
high inventory glut but they had a good reason
for that because they wanted to obtain better
understanding of with customers of consumer
demand.
• The company wanted to create material hub but
there was some disputes with the distributors
who complained of surplus inventory. The case
was opposite in the year 2000 when there was a
shortage and the distributors made good margin.
IBM – The Crystal Ball
• IBM follows the pull strategy or just-in-time basis. Their
suppliers have visibility of their inventory level
• The pull strategies IBM applies in order to make it
effective are:
• Commonality across platforms & products
• The number of suppliers kept small
• Electronic purchase transaction to have faster
collaboration with suppliers
• Rationally exuberant sales force who knows their
customers in and out, the main strategy for their forecast,
meet frequently to discuss & anticipate demand
Thank You