Supply Chain Integration

Phil Simchi-Levi
David Kaminsky
kaminsky@ieor.berkeley.edu
Philip Kaminsky
Edith 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
2003 Simchi-Levi, Kaminsky, Simchi-Levi
 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
Doesnt work in all cases

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 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?

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 A new Supply Chain
Paradigm
A shift from a Push System...
Production decisions are based on forecast
to a Push-Pull System

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Push-Pull Supply Chains
The Supply Chain Time Line

Customers
Suppliers

PUSH STRATEGY PULL STRATEGY

Low Uncertainty High Uncertainty

Push-Pull Boundary

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 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.
2003 Simchi-Levi, Kaminsky, Simchi-Levi
 Consider Two PC
Manufacturers:
Build to Stock Build to order
Forecast demand Forecast demand
Buys components Buys components
Assembles computers Observes demand
Observes demand and Assembles computers
meets demand if Meets demand
possible.
A push-pull system
A traditional push
system

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 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
2003 Simchi-Levi, Kaminsky, Simchi-Levi
 What is the Best
Strategy?
Demand
uncertainty
(C.V.)

Pull H

I II
Computer

IV III
Delivery cost
Unit price
Push L

L H Economies of
Scale
Pull Push
2003 Simchi-Levi, Kaminsky, Simchi-Levi
 Selecting the Best SC
Strategy
Higher demand uncertainty suggests push
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.

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Selecting the Best SC
Strategy
Low uncertainty but low value of economies
of scale (high volume books and cds)
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?

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Characteristics and Skills

Raw
Material Customers
Push Pull

Low Uncertainty High Uncertainty

Long Lead Times Short Cycle Times

Cost Minimization Service Level

Resource Allocation Responsiveness

2003 Simchi-Levi, Kaminsky, Simchi-Levi
 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

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 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.
2003 Simchi-Levi, Kaminsky, Simchi-Levi
Locating the Push-Pull
Boundary

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Impact of the Internet
Expectations Were High
E-business strategies were supposed to:
Reduce cost
Increase service level
Increase flexibility
Increase Profit

2003 Simchi-Levi, Kaminsky, 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

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Reality is Different.

Furniture.com launched in 1999, with

thousands of products
$22 Million in sales the first nine months
Over 1,000,000 visitors per month
Died November 6, 2000
Logistics costs too high

2003 Simchi-Levi, Kaminsky, 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)

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 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.
2003 Simchi-Levi, Kaminsky, Simchi-Levi
 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

2003 Simchi-Levi, Kaminsky, Simchi-Levi

Direct-to-Consumer:Cost
Trade-Off
Cost Trade-Off for BuyPC.com

$20
$18
$16
Cost ($ million)

$14 Total Cost

$12 Inventory
$10 Transportation
$8
Fixed Cost
$6
$4
$2
$0
0 5 10 15
Number of DC's
 Industry Benchmarks:
Number of Distribution Centers

Pharmaceuticals Food Companies Chemicals

Avg.
# of
WH 3 14 25
- High margin product - Low margin product
- Service not important (or - Service very important
easy to ship express) - Outbound transportation
- Inventory expensive expensive relative to inbound
relative to transportation

Sources: CLM 1999, Herbert W. Davis & Co; LogicTools

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 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%
2003 Simchi-Levi, Kaminsky, Simchi-Levi
 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?

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Less than 300,000
shoppers
Number of Average Delivery charges
customers order
Webvan 21000 $ 71 $4.95 for < $50
free for > $50
Peapod 140000 $ 1 20 $7.95 per order

HomeGrocer.com 50000 $ 1 10 $9.95 < $75 free

for > $75
NetGrocer.com 60000 $ 70 $2.99 for < $50
$4.99 for > $50
ShopLink.com 33 0 0 $ 98 $25 monthly

Streamline.com 34 0 0 $ 1 00 $3 0

Source: D. Ratliff 2003 Simchi-Levi, Kaminsky, 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

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 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

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 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 Lands End which has
both channels
2003 Simchi-Levi, Kaminsky, 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

Reverse Logistics Simple Highly Complex

Destination Small Number of Stores Highly Dispersed Customers

Lead Times Depends Short

2003 Simchi-Levi, Kaminsky, 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
2003 Simchi-Levi, Kaminsky, 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

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Distribution Strategies

Warehousing
Direct Shipping
No DC needed
Lead times reduced
smaller trucks
no risk pooling effects
Cross-Docking

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 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 ????

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 What accounts for Wal-Marts
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-Marts cost of sales significantly
and made it possible to offer everyday low prices to their
customers.

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 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.

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 System Characteristics:

Very difficult to manage

Requires advanced information technology. Why? What
kind of technology?
All of Wal-Marts 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

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 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.

2003 Simchi-Levi, Kaminsky, Simchi-Levi

Distribution Strategies

Strategy Direct Cross Inventory at

Attribute Shipment Docking Warehouses
Risk Take
Pooling Advantage
Transportation Reduced Reduced
Costs Inbound Costs Inbound Costs
Holding No Warehouse No Holding
Costs Costs Costs
Demand Delayed Delayed
Variability Allocation Allocation

2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Transshipment
What is the value of this?
What tools are needed?

What if the system is

decentralized?

2003 Simchi-Levi, Kaminsky, Simchi-Levi