scm - supply chain integration
TRANSCRIPT
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Supply ChainIntegration
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© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
SUPPLY CHAIN INTEGRATION• A supply chain is a sequence of
processes that take place within different stages to fill a customer need for a product.
• There are two different ways to view the processes performed in a supply chain
1. Cycle View :- A series of cycles, each performed at the interface between two successive stages of a supply chain.
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2. Push / Pull View:- With Pull Processes – execution is initiated
in response to a customer order (Customer demand is known with certainty – also called as reactive processes)
With Push Processes – execution is initiated in anticipation of customer orders. (Customer demand is not known and must be forecast – also referred to as speculative processes)
The Push – Pull boundary in a supply chain separates push processes from pull processes.
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© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
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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
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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?
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A new Supply Chain Paradigm
A shift from a Push System...– Production decisions are based on forecast
…to a Push-Pull System
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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.
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Push-Pull Supply Chains
Push-Pull Boundary
PUSH STRATEGY PULL STRATEGY
Low Uncertainty High Uncertainty
The Supply Chain Time Line
CustomersSuppliers
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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
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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
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What is the Best Strategy?
Pull Push
Pull
Push
I
Computer
II
IV III
Demand uncertainty
(C.V.)
Delivery costUnit price
L H
H
L
Economies of Scale
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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.
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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?
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Characteristics and Skills
RawMaterial Customers
PullPush
Low Uncertainty
Long Lead Times
Cost Minimization
Resource Allocation
High Uncertainty
Short Cycle Times
Service Level
Responsiveness
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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
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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.
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Locating the Push-Pull Boundary
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Classification of Industries
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Classification of Industries
Based on Nature of work Production Industries
• Process Industries• Discrete Item Mfg. Industries
Project Industries• Workers / Tools / Equipments brought to the Site• Has to be completed within a stipulated duration of Time
Service Industries • Software Companies, Hospitality, Healthcare Sector etc
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Based on volume of work
Classification based on the volume of Goods produced Job shop Production
• A limited number of goods produced• Low repetitive orders
Batch / Intermittent Production• Orders are taken in Batches• Volume of Production higher than in Jobshop production
Mass Production• Production done on a large / extensive scale• Goods for mass consumption
Cellular Production• Modular system of Production of Goods
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Based on Manufacturing Environment
Manufacturing Environment is essentially a framework under which the Management strategies are developed and implemented
A Manufacturing Environment is influenced by External factors such as Corporate Strategy, Business Unit Strategy, Product Selection, Process / Batch Manufacturing etc
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Customer Order Decoupling Point (CODP)
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Customer order Decoupling Point(Order Penetration Point)
Order Penetration Point (OPP) is a point in the company Material Flow where an Item becomes earmarked to a particular, specific, known customer
OPP is the last point where unallocated Inventory is held-It is the last point of Inventory
OPP affects both capacity and Materials Management
Upstream OPP means less risk for the Manufacturer while downstream OPP means shorter delivery times
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Order Penetration Point (OPP)Design Manufacturing Assembly Distribution Installation
Customer
(Example)
Home Appliances
Computers
Furniture
Special Purpose M/Cs
Oil Platforms
Standard products
Standard modules
Parts manufacturing
Make-to-order
Design-to-order
OPP
OPP
OPP
OPP
OPP
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Engineer – to – order
• Products whose customer specification require unique Engineering Design & significant customisation
• Create Solutions in response to customer request
• Long Leadtimes
• Examples – Construction of Bridge, Oil Rig etc
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Customer Order Decoupling Point (CODP)
(Engineer to order System)
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Make – to – order
• It is a Production Environment where Goods are made and Services rendered after the receipt of a customer’s order
• Low sales volume
• Products are with Long Leadtimes
• High Price Items
• Customer Engineering in conjunction with Supplier’s Design
• Example – Aircraft, Special Purpose Machines
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Customer Order Decoupling Point (CODP)
(Make to order System)
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Assemble – to – order
• A Production Environment where Goods or Services are assembled / developed after the receipt of customers’ order
• Wide variety in high volume with short leadtimes
• Use market research, sales history to forecast sales
• Higher Product volumes with lower Inventory
• Example – Automobiles, Consumer Electronics etc
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Customer Order Decoupling Point (CODP)
(Assemble to order System)
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Make – to – stock
• Basically an environment where products are usually kept finished
• Standard Products
• Immediate Delivery from Stock
• All variations available from Stock
• Large finished Goods Inventories
• Examples – Consumer Goods like Clothes, Appliances, Food items etc
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Customer Order Decoupling Point (CODP)
(Make to stock System)
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Impact of the Internet – Expectations Were High
E-business strategies were supposed to:– Reduce cost– Increase service level– Increase flexibility– Increase Profit
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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.
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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
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Direct-to-Consumer:Cost Trade-Off
Cost Trade-Off for BuyPC.com
$0$2$4$6$8
$10$12$14$16$18$20
0 5 10 15
Number of DC's
Co
st (
$ m
illio
n)
Total Cost
Inventory
Transportation
Fixed Cost
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Industry Benchmarks:Number of Distribution Centers
Sources: CLM 1999, Herbert W. Davis & Co; LogicTools
Avg.# ofWH 3 14 25
Pharmaceuticals Food Companies Chemicals
- High margin product- Service not important (or easy to ship express)- Inventory expensiverelative to transportation
- Low margin product- Service very important- Outbound transportationexpensive relative to inbound
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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?
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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
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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
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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
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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
Reverse Logistics Simple Highly Complex
Destination Small Number of Stores Highly Dispersed Customers
Lead Times Depends Short
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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
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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
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Distribution Strategies
Warehousing Direct Shipping
– No DC needed– Lead times reduced– “smaller trucks”– no risk pooling effects
Cross-Docking
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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 ????
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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.
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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.
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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
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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.
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StrategyAttribute
DirectShipment
CrossDocking
Inventory atWarehouses
RiskPooling
TakeAdvantage
TransportationCosts
ReducedInbound Costs
ReducedInbound Costs
HoldingCosts
No WarehouseCosts
No HoldingCosts
DemandVariability
DelayedAllocation
DelayedAllocation
Distribution Strategies