Supply Chain Integration and eBusiness Strategies
David Simchi-Levi
Professor of Engineering Systems
Massachusetts Institute of Technology
Tel: 617-253-6160
E-mail: dslevi@mit.edu
Outline
• Review
– Supply Chain Dynamics
• A new Supply Chain Paradigm
• Matching Products with Strategies
• e-Business Opportunities
©Copyright 2002 D. Simchi-Levi
Order Size
The Dynamics of the Supply Chain
Customer
Demand
Distributor Orders
Retailer Orders
Production Plan
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
©Copyright 2002 D. Simchi-Levi
Order Size
The Dynamics of the Supply Chain
Customer
Demand
Production Plan
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
©Copyright 2002 D. Simchi-Levi
What are the Causes….
• Promotional sales
• Volume and Transportation discounts
– Batching
•
•
•
•
Inflated orders
Demand Forecast
Long cycle times
Lack of Visibility to demand information
©Copyright 2002 D. Simchi-Levi
Consequences….
• Increased safety stock
• Reduced service level
• Inefficient allocation of resources
• Increased transportation costs
©Copyright 2002 D. Simchi-Levi
The Bullwhip Effect:
Managerial Insights
• Exists, in part, due to the retailer’s need to estimate
the mean and variance of demand.
• The increase in variability is an increasing function of
the lead time.
• The more complicated the demand models and the
forecasting techniques, the greater the increase.
• Centralized demand information can reduce the
bullwhip effect, but will not eliminate it.
©Copyright 2002 D. Simchi-Levi
Coping with the Bullwhip Effect
in Leading Companies
• Reduce Variability and Uncertainty
- POS
- Sharing Information
- Year-round low pricing
• Reduce Lead Times
- EDI
- Cross Docking
• Alliance Arrangements
– Vendor managed inventory
– On-site vendor representatives
©Copyright 2002 D. Simchi-Levi
Example:
Quick Response at Benetton
• Benetton, the Italian sportswear
manufacturer, was founded in 1964. In 1975
Benetton had 200 stores across Italy.
• Ten years later, the company expanded to the
U.S., Japan and Eastern Europe. Sales in 1991
reached 2 trillion.
• Many attribute Benetton’s success to
successful use of communication and
information technologies.
©Copyright 2002 D. Simchi-Levi
Example:
Quick Response at Benetton
• Benetton uses an effective strategy, referred to
as Quick Response, in which manufacturing,
warehousing, sales and retailers are linked
together. In this strategy a Benetton retailer
reorders a product through a direct link with
Benetton’s mainframe computer in Italy.
• Using this strategy, Benetton is capable of
shipping a new order in only four weeks, several
week earlier than most of its competitors.
©Copyright 2002 D. Simchi-Levi
How Does Benetton
Cope with the Bullwhip Effect?
1. Integrated Information Systems
• Global EDI network that links agents with
production
and inventory information
• EDI order transmission to HQ
• EDI linkage with air carriers
• Data linked to manufacturing
2. Coordinated Planning
• Frequent review allows fast reaction
• Integrated distribution strategy
©Copyright 2002 D. Simchi-Levi
Distribution Strategies
• Warehousing
• Direct Shipping
– No DC needed
– Lead times reduced
– “smaller trucks”
– no risk pooling effects
• Cross-Docking
©Copyright 2002 D. Simchi-Levi
Cross Docking
In 1979, Kmart was the king of the retail industry
with 1891 stores and average revenues per store of
$7.25 million
• At that time Wal-Mart was a small niche retailer in
the South with only 229 stores and average revenues
about half of those Kmart stores.
• Ten years later, Wal-Mart transformed itself; it has
the highest sales per square foot, inventory turnover
and operating profit of any discount retailer. Today
Wal-Mart is the largest and highest profit retailer in
the world.
©Copyright 2002 D. Simchi-Levi
What accounts for Wal-Mart’s
remarkable success
• The starting point was a relentless focus on satisfying
customer needs; Wal-Mart goal was simply to provide
customers access to goods when and where they
want them and to develop cost structures that enable
competitive pricing
• The key to achieving this goal was to make the way
the company replenished inventory the centerpiece of
its strategy.
©Copyright 2002 D. Simchi-Levi
What accounts for Wal-Mart’s
remarkable success?
• This was obtained by using a logistics technique
known as cross-docking. Here goods are continuously
delivered to Wal-Mart’s 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.
©Copyright 2002 D. Simchi-Levi
Characteristics of Cross-Docking:
• Goods spend at most 48 hours in the
warehouse,
• 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.
©Copyright 2002 D. Simchi-Levi
System Characteristics:
• Very difficult to manage,
• Requires linking Wal-Mart’s distribution
centers, suppliers and stores to guarantee
that any order is processed and executed in a
matter of hours,
• Wal-Mart operates a private satellitecommunications system that sends point-ofsale data to all its vendors allowing them to
have a clear vision of sales at the stores
©Copyright 2002 D. Simchi-Levi
System Characteristics:
• Need a fast and responsive transportation
system:
• Wal-Mart has a dedicated fleet of 2000 trucks
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.
©Copyright 2002 D. Simchi-Levi
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
©Copyright 2002 D. Simchi-Levi
Supply Chain Integration - Dealing
with Conflicting Goals
•
•
•
•
•
Lot Size vs. Inventory
Inventory vs. Transportation
Lead Time vs. Transportation
Product Variety vs. Inventory
Cost vs. Customer Service
©Copyright 2002 D. Simchi-Levi
The Future is Not What it Used to Be
• A new e-Business Model
– Reduce cost
– Increase Profit
– Increase service level
– Increase flexibility
©Copyright 2002 D. Simchi-Levi
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
©Copyright 2002 D. 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)
©Copyright 2002 D. Simchi-Levi
Reality is Different….
• Cisco Example:
– Cisco’s Internet based business model has been
instrumental in our ability to quadruple in size
from fiscal 1994 to fiscal 1998 ($1.3B to over
$8B), hire approximately 1000 new employees per
quarter and saving $560M annually in business
expenses (Peter Solvik, CIO Cisco)
©Copyright 2002 D. Simchi-Levi
The e- Business Model
• 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 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)
©Copyright 2002 D. Simchi-Levi
A new Supply Chain Paradigm
• A shift from a Push System...
– Production decisions are based on forecast
• …to a Push-Pull System
©Copyright 2002 D. Simchi-Levi
From Make-to-Stock Model….
Suppliers
Assembly
Configuration
©Copyright 2002 D. Simchi-Levi
Demand Forecast
• The three principles of all forecasting
techniques:
– Forecasts are always wrong
– The longer the forecast horizon the worst is the
forecast
– Aggregate forecasts are more accurate
• The Risk Pooling Concept
©Copyright 2002 D. Simchi-Levi
A new Supply Chain Paradigm
• A shift from a Push System...
– Production decisions are based on forecast
• …to a Push-Pull System
©Copyright 2002 D. Simchi-Levi
Push-Pull Supply Chains
The Supply Chain Time Line
Customers
Suppliers
PUSH STRATEGY
Low Uncertainty
PULL STRATEGY
High Uncertainty
Push-Pull Boundary
©Copyright 2002 D. Simchi-Levi
A new Supply Chain Paradigm
• A shift from a Push System...
– Production decisions are based on forecast
• …to a Push-Pull System
– Parts inventory is replenished based on
forecasts
– Assembly is based on accurate customer
demand
©Copyright 2002 D. Simchi-Levi
….to Assemble-to-Order Model
Suppliers
Assembly
Configuration
©Copyright 2002 D. Simchi-Levi
Business models in the Book
Industry
• From Push Systems...
– Barnes and Noble
• ...To Pull Systems
– Amazon.com, 1996-1999
• And, finally to Push-Pull Systems
– Amazon.com, 1999-present
• 7 warehouses, 3M sq. ft.,
©Copyright 2002 D. Simchi-Levi
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
©Copyright 2002 D. Simchi-Levi
Business models in the Grocery
Industry
• From Push Systems...
– Supermarket supply chain
• ...To Pull Systems
– Peapod, 1989-1999
• Stock outs 8% to 10%
• And, finally to Push-Pull Systems
– Peapod, 1999-present
• Dedicated warehouses
• Stock outs less than 2%
©Copyright 2002 D. Simchi-Levi
Business models in the Grocery
Industry
• Key Challenges for e-grocer:
– 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
©Copyright 2002 D. Simchi-Levi
Less than 300,000 shoppers
Number of
customers
Average
order
Delivery charges
Webvan
21000
$71
Peapod
140000
$120
$4.95 for < $50
free for > $50
$7.95 per order
HomeGrocer.com
50000
$110
NetGrocer.com
60000
$70
ShopLink.com
3 30 0
$98
$9.95 < $75 free
fo r > $ 7 5
$2.99 for < $50
$4.99 for > $50
$25 monthly
Streamline.com
3 40 0
$100
$30
Source: D. Ratliff
©Copyright 2002 D. 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
©Copyright 2002 D. Simchi-Levi
e-Business in the Retail Industry
• Brick-&-Mortar companies establish Virtual
retail stores
– Wal-Mart, K-Mart, Barnes and Noble
• Use a hybrid approach in stocking
– High volume/fast moving products for local
storage
– Low volume/slow moving products for browsing
and purchase on line
• Channel Conflict Issues
©Copyright 2002 D. Simchi-Levi
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
©Copyright 2002 D. Simchi-Levi
Wal-Mart’s e-fulfillment Strategy
• Wal-Mart has always prided itself in its in-house
distribution operations.
• Thus, it was a huge surprise when the company
announced that it plans to hire an outside firm to
handle order fulfillment and warehousing for it’s online store Wal-Mart.com, which the retailer launched
in the fall of 1999.
• Filling orders behind the scenes of Wal-Mart’s
cyberstore is Fingerhut Business Services. Fingerhut
will provide Internet order fulfillment, warehousing,
shipment, payment processing, customer service and
merchandise returns.
©Copyright 2002 D. Simchi-Levi
E-Fulfillment
• Is it a new concept?
• What is the difference between on-line
and catalogue selling?
• Consider for instance Land’s End which
has both channels
©Copyright 2002 D. Simchi-Levi
Matching Supply Chain Strategies
with Products
Demand
uncertainty
(C.V.)
Pull
H
I
II
Computer
IV
Push
III
Delivery cost
Unit price
L
L
Pull
H
Economies of
Scale
Push
©Copyright 2002 D. Simchi-Levi
Locating the Push-Pull Boundary
©Copyright 2002 D. Simchi-Levi
Organizational Skills Needed
Raw
Material
Customers
Push
Pull
Low Uncertainty
High Uncertainty
Long Lead Times
Short Cycle Times
Cost Minimization
Service Level
Resource Allocation
Responsiveness
©Copyright 2002 D. 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
©Copyright 2002 D. 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
©Copyright 2002 D. Simchi-Levi