The Future is Here…INTELLIGENT LOGISTICS!

Chapter 5 Distribution Strategies

A new Supply Chain Paradigm

• A shift from a Push System...– Production decisions are based on forecast

• …to a Push-Pull System

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

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

Push-Pull Supply Chains

The Supply Chain Time Line

Low Uncertainty

Long lead times

High Uncertainty

Short lead times

CustomersSuppliers

PUSH STRATEGY PULL STRATEGY

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

Pull Push

Pull

Push

I

Computer

II

IV III

Demand uncertainty

(C.V.)

Delivery costUnit price

L H

H

L

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

RawMaterial Customers

PullPush

Low Uncertainty

Long Lead Times

Cost Minimization

Resource Allocation

High Uncertainty

Short Cycle Times

Service Level

Responsiveness

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.

Locating the Push-Pull Boundary

reduce inventory holding cost

the location of the push-pull boundary for various companies and industries

3.6 Impact of the Internet – Expectations Were High

• E-business strategies were supposed to:– Reduce cost– Increase service level– Increase flexibility– Increase Profit

3.6.1 The Book Selling Industry

• From Push Systems...– Barnes and Noble

• ...To Pull Systems– Amazon.com, 1996-1999– No inventory, used Ingram Book Group 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 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

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

3.6.2 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?

Less than 300,000 shoppers

NNuummbbeerr ooff ccuussttoommeerrss

AAvveerraaggee oorrddeerr

DDeelliivveerryy cchhaarrggeess

WWeebbvvaann 2211000000 $$7711 $$44..9955 ffoorr << $$5500 ffrreeee ffoorr >> $$5500

PPeeaappoodd 114400000000 $$112200 $$77..9955 ppeerr oorrddeerr

HHoommeeGGrroocceerr..ccoomm 5500000000 $$111100 $$99..9955 << $$7755 ffrreeee ffoorr >> $$7755

NNeettGGrroocceerr..ccoomm 6600000000 $$7700 $$22..9999 ffoorr << $$5500 $$44..9999 ffoorr >> $$5500

SShhooppLLiinnkk..ccoomm 33330000 $$9988 $$2255 mmoonntthhllyy

SSttrreeaammlliinnee..ccoomm 33440000 $$110000 $$3300

Source: D. Ratliff

3.6.3 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

( Push)– Low volume/slow moving products for browsing and

purchase on line (risk pooling) (Push-Pull)

• Danger of channel conflict

5.6.4 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?

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

5.6.5 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

3.7 Distribution Strategies

• Warehousing• Direct Shipping

– No DC needed– Lead times reduced– “smaller trucks”– no risk pooling effects

• Cross-Docking

3.7.1 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

• This was achieved by way 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.

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 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

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.

StrategyAttribute

DirectShipment

CrossDocking

Inventory atWarehouses

RiskPooling

TakeAdvantage

TransportationCosts

ReducedInbound Costs

ReducedInbound Costs

HoldingCosts

No WarehouseCosts

No HoldingCosts

DemandVariability

DelayedAllocation

DelayedAllocation

Distribution Strategies

Transshipment

• What is the value of this?

• What tools are needed?

• What if the system is decentralized?

Important Considerations

• Level of Uncertainty

• Economies of Scale

• Lead Time

• Product Architecture

Supply Produce Distribute Sell

Plan/Design

Source

•Product Architecture•Make/Buy•Early Supplier Involvement

•Strategic Partnerships•Suppliers Selection•Supply Contracts

Fulfillment Supply Chain

Develo

pm

en

t Su

pp

ly

Ch

ain

The Enterprise Fulfillment and Development Supply Chains

What is the Right Supply Chain Strategy for your Product?

L H

H

L

Demand Uncertainty

Innovative

Functional

•PC/Fashion•Responsiveness•Pull Systems•Dynamic Pricing

•Pasta/Diapers•Efficiency•Push System

•Cell Phone engines•Push Systems•Efficiency

•Furniture/Tires•Push-Pull•Lead Time Reduction

Push Pull

Modular

Integral

ProductsCharacteristic

Product Architecture

Supply ChainStrategy

Product IntroductionFrequency

C

DA

B

• The Development Supply Chain• Industry clock speed

– Innovative vs Functional products

• Core competencies– Make vs. Buy

• Product Design – Postponement, Standardization, Packaging

A SNAPSHOTUNC Center For Logistics And Digital Strategy

• Established in 1997 as a resource for organizations struggling with logistics complexity and enterprise change management

• Areas of Specialization– Strategic visioning for intelligent enterprising– New logistics technology (Intelligent Software, RFID, Wireless, GPS/GIS)– Logistics and Supply Chains in Emerging Markets– Logistical Network Planning and Design– Intelligent Supply Chain Management Strategies

• Serves both public (SAP, FedEx, Boeing, Caterpillar) and private sector (NSA, DARPA, NASA, FAA) organizations

• Founding member of the Global Logistics Research Initiative (GLORI)