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Instead, they took orders and relayed them to distributors like MBD, who
delivered the books to the retailers for repackaging and shipment. Recently,
the large on-line retailers had started moving toward a new business model:
they established their own distribution centers where they kept inventory and
handled packaging and shipment of books directly to the end customers.
Guy realized that these industry changes could provide opportunities and
challenges for his company. In particular, the new business model developed by
some of the on-line retailers, in which they established their own warehouses,
may cut MBDs profit margins. Clearly, if MBD was to maintain its reputation as
one of the nations leading book distributors, it would have to start doing
things differently.
Furthermore, he had the consultants report, filled with recommendations and
designs for new distribution systems. Guy knew that he and his management
team would have to develop an understanding of these issues in order to
properly assess the consultants suggestions.
As he prepared for the next days meeting.
Guy made a list of many questions:
What is the impact of the Internet on the business strategy used by the
superstores and the on-line sellers? In particular, are on-line retailers
going to keep inventory of most book categories in their distribution
centers?
How cab MBD use the Internet to better sever their customers, the
superstores, and the on-line sellers?
Should MBD encourage retailers to make point-of-sale (POS) data
available? What is the value of these data? How can they be used
effectively?
Should MBD establish more regional warehouses? Should it eliminate
some warehouses and became more centralized: was cross-docking
really a viable strategy for book distributors?
Should MBD encourage customers to utilize direct shipping services?
should it discourage them?
By the end of this chapter, you should be able to answer the following
questions:
Various supply chain strategies, including push, pull, and a relatively new
paradigm, the push-pull strategy.
A framework for matching products and industries with supply chain
strategies.
Demand-driven supply chain strategies
The impact of the Internet on supply chain integration.
Effective distribution strategies.
In addition, we saw in Chapter 4 that the variability of orders received from the
retailers and the warehouses is much larger than the variability in customer
demand, due to the bullwhip effect. This increase in variability leads to
Excessive inventories due to the need for large safety stocks (see
chapter 3)
Larger and more variable production batches
Product obsolescence
Example 5-1
A major apparel manufacturer recently changed its supply chain strategy to a
pull-based system. Retailers order from this manufacturer about once a month,
but transfer POS data much more frequently, for example daily or weekly.
These data allow the manufacturer to continuously adjust production quantities
according to true customer demand.
manufacturer takes advantage of the fact that aggregate forecast are more
accurate (see chapter 3). Indeed, demand for a component is an aggregation of
demand for all finished products that use this component. Since aggregate
forecasts are more accurate, uncertainly in component demand is much
smaller than uncertainly in finished goods demand and this leads to safety
stock reduction. Dell Computers has used this strategy very effectively and is
an excellent example of the impact of the push-pull strategy on supply chain
performance.
Postponement, or delayed differentiation in product design (see chapter9), is
also an excellent example of a push-pull strategy. In postponement, the firm
designs the product and the manufacturing process so that decisions about
which specific product is being manufactured can be delayed as long as
possible. The manufacturing process starts by producing a generic or family
product, which is differentiated to a specific end-product when demand is
revealed. The portion of the supply chain prior to product differentiation is
typically operated using a push-based strategy. In other words, the generic
product is built and transported based on a long-terms forecast. Since demand
for the generic product is an aggregation of demand for all its corresponding
end-products, forecast are more accurate and thus inventory levels are
reduced. In contrast, customer demand for a specific end-product typically has
a high level of uncertainty and thus product differentiation occurs only in
response to individual demand. Thus, the portion of the supply chain starting
from time of differentiation is pull- based.