5.

Supply Chain Integration

Chapter 6
Designing and Managing the Supply Chain 3E
– D. Simchi-Levi – P. Kaminsky – E. Simchi-Levi

Source - https://wordart.com/edit/2r908qvfsn9d
Supply Chain Management – Supply Chain Integration by Punit Neb is licensed under CC BY-NC 4.0
Introduction

●
The structure and components of an organization’s
supply chain includes
– External suppliers
– Internal functions of the company
– External distributors

External Internal External

Suppliers Functions Distributors

Information
Funds 6-2
… Introduction

6-3
 … Introduction

Dairy products supply chain

6-4
Source – Operations Management An Integrated Approach 5E – Reid – Sanders Page 107
… Introduction

External Supplier
Organizations put substantial effort into developing the external
supplier portion of the supply chain because the cost of materials
might represent 50–60% or even more of the cost of goods sold
●
Tier one supplier
– Supplies materials or services directly to the processing facility
●
Tier two supplier
– Directly supplies materials or services to a tier one supplier in
the supply chain
●
Tier three supplier
– Directly supplies materials or services to a tier two supplier in
the supply chain

6-5
… Introduction

Internal functions
Performed within the organization, vary from
industry to industry
●
Generally comprise of procurement,
manufacturing, quality management and
shipping

6-6
… Introduction

External distributors
Transport finished products to the appropriate locations for eventual
sale to customers
●
Logistics
– Activities involved in obtaining, producing, and distributing
materials and products in the proper place and in proper
quantities
●
Traffic management
– Responsible for arranging the method of shipment for both
incoming and outgoing products or materials
●
Distribution management
– Responsible for movement of material from the manufacturer to
the customer

6-7
… Introduction

●
Effective SCM requires efficient integration of suppliers,
manufacturers, warehouses, and stores
●
Challenge in supply chain integration is coordinating activities across
the supply chain so that the organization can
– Improve performance
– Reduce cost
– Increase service level
– Reduce the bullwhip effect
– Better utilize resources
– Effectively respond to changes in the market place
●
Challenges can be met by integrating:the front-end, customer
demand, to the back-end, production and manufacturing portion of
the supply chain

6-8
… Introduction

●
Various supply chain integration strategies
– Push Strategy
– Pull Strategy
– Push–pull Strategy
●
Matching products and industries with supply chain
strategies
– Demand-driven supply chain strategies
– The impact of the Internet on supply chain
integration
●
Information plays a key role in supply chain integration

6-9
Push-Based Supply Chains

●
Production and distribution decisions based on long-term forecasts
●
Manufacturer demand forecasts based on orders received from the
retailer’s warehouses
●
Longer reaction time to changing marketplace
– Inability to meet changing demand patterns
– Obsolescence of supply chain inventory as demand for certain
products disappears
– Variability of orders received much larger than the variability in
customer demand due to the bullwhip effect
» Excessive inventories due to the need for large safety stocks
» Larger and more variable production batches
» Unacceptable service levels
» Product obsolescence

6 - 10
… Push-Based Supply Chains

●
Leads to inefficient resource utilization
– Planning and managing are much more difficult
– Lack of clarity about how a manufacturer should determine
the production capacity and transportation capacity
» Expected peak demand
» Expected average demand
– Results in
» Higher transportation costs
» Higher inventory levels and/or higher manufacturing
costs
» More emergency production changeovers

6 - 11
Pull-Based Supply Chains

●
Production and distribution are demand driven
– Coordinated with true customer demand rather than forecast
demand
– Firm does not hold any inventory and only responds to specific
orders
●
Apparently an appropriate strategy on account of
– Reduced lead times through the ability to better anticipate
incoming orders from the retailers
– Reduced inventory at retailers since without a pull based system,
inventory levels at these facilities increase with lead times
– Less variability in the system
– Decreased inventory at the manufacturer due to the reduction in
variability

6 - 12
… Pull-Based Supply Chains

●
Often difficult to implement
– When lead times are long, it is impractical
to react to demand information
– More difficult to take advantage of
economies of scale

6 - 13
… Push-Pull Based Supply Chains

●
A hybrid supply chain strategy
that takes the best of both
push and pull supply chain
strategies
●
Some stages of the supply
chain [usually the initial
stages] operated in a push-
based manner
●
Remaining stages employ a pull-based strategy
●
Interface between the push-based stages and the pull-
based stages is the push–pull boundary or
decoupling point

6 - 14
… Push-Pull Based Supply Chains

●
Make a part of the product to stock – generic product
●
The point where differentiation has to be introduced is
the push-pull boundary
●
Based on extent of customization, the position of the
boundary on the timeline is decided
●
e.g. Dell's build-to-order supply chain. Inventory levels
of individual components are determined by
forecasting general demand, but final assembly is in
response to a specific customer request. The
decoupling point would then be at the beginning of the
assembly line

6 - 15
… Push-Pull Based Supply Chains

Identifying the Appropriate Supply Chain Strategy

6 - 16
… Identifying the Appropriate Supply Chain Strategy

Identifying the Appropriate Supply Chain Strategy

Impact of demand uncertainty and economies of scale
Demand Uncertainty
●
Higher demand uncertainty leads to a preference for pull strategy
●
Lower demand uncertainty leads to an interest in managing the supply chain
based on a long-term forecast - push strategy
Economies of scale
●
The higher the importance of economies of scale in reducing cost
– The greater the value of aggregating demand
– The greater the importance of managing the supply chain based on long-
term forecast, a push-based strategy
●
In cases where economies of scale are not important
– Aggregation does not reduce cost
– A pull-based strategy is more appropriate

6 - 17
… Push-Pull Based Supply Chains

Implementing a push–pull strategy

●
Achieving the appropriate design depends on many factors
– Product complexity
– Manufacturing lead times
– Supplier–manufacturer relationships
●
Many ways to implement a push–pull strategy
– Location of the push–pull boundary
– Dell locates the boundary at the assembly point
– Furniture manufacturers locate the boundary at the
production point

6 - 18
… Push-Pull Based Supply Chains

Push portion Pull portion

●
Low uncertainty
●
Service level not an issue
●
High uncertainty
●
Focus on cost minimization ●
Simple supply chain
●
Long lead times structure
●
Complex supply chain structures
●
Cost minimization achieved by
●
Short cycle time
– Better utilizing resources such as ●
Focus on service level
production and distribution
capacities ●
Achieved by deploying a
– Minimizing inventory, flexible and responsive
transportation, and production supply chain
costs
●
Supply chain planning processes are ●
Order-fulfillment processes
applied
are applied

6 - 19
… Push-Pull Based Supply Chains

Characteristics of the push and pull portions of the supply chain

Portion Push Pull

Objective Minimize cost Maximize service level
Complexity High Low
Focus Resource allocation Responsiveness
Lead time Long Short
Processes Supply chain planning Order fulfillment

6 - 20
… Push-Pull Based Supply Chains

Interactions of the two portions

●
Only at the push-pull boundary, typically through buffer inventory
●
Different role for the inventory in each portion
– In the push portion, buffer inventory is part of the output
generated by the tactical planning process
– In the pull system, it represents the input to the fulfillment
process
●
Interface is forecast demand
– Forecast based on historical data obtained from the pull portion
– Used to drive the supply chain planning process and determine
the buffer inventory

6 - 21
… Push-Pull Based Supply Chains

The impact of lead time

●
Longer the lead time, more important it is to
implement a push based strategy
●
Typically difficult to implement a pull strategy
when lead times are so long that it is hard to
react to demand information

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… Push-Pull Based Supply Chains

Impact of lead time

●
Matching supply chain strategies with products requires the organization to
understand the impact of lead time and demand uncertainty
●
Make a part of the product to stock – generic product
●
The point where differentiation has to be introduced is the push-pull boundary
●
Based on extent of customization, the position of the boundary on the timeline is
decided

6 - 23
… Push-Pull Based Supply Chains

Impact of lead time

Box A
●
Items with short lead time and high demand uncertainty
●
Pull strategy should be applied as much as possible
Box B
●
Items with long supply lead time and low demand uncertainty
●
Appropriate supply chain strategy is push
Box C
●
Items with short supply lead time and highly predictable demand
●
Continuous replenishment strategy
●
Suppliers receive POS data
– Used by supplier to prepare shipments at previously agreed-upon intervals
– A pull strategy at the production and distribution stages and push at the retail outlets
Box D
●
Items with long lead times are long and unpredictable demand
– Inventory is critical in this type of environment
– Requires positioning inventory strategically in the supply chain

6 - 24
… Push-Pull Based Supply Chains

●
Production processes can be classified on
basis of type of customer order as
– Engineer to Order [ETO]
– Make to Order [MTO]
– Assemble to Order [ATO]
– Make to Stock [MTS]

6 - 25
… Push-Pull Based Supply Chains

Formula 1 cars

DELL’s customized
desktops and
laptops

FMCG products
White goods
6 - 26
… Push-Pull Based Supply Chains
Positioning inventory in the supply chain

Source: Operations and Supply Chain Management – Jacobs – Chase 15E Page 149
6 - 27
… Push-Pull Based Supply Chains

Positioning inventory in the supply chain

●
Customer order decoupling point
– Determines where inventory is positioned to allow processes or entities in
the supply chain to operate independently
●
Lead time
– The time needed to respond to a customer order
●
Inventory acts as a buffer to separate the customer from the manufacturing
process
●
Selection of decoupling points is a strategic decision that determines
customer lead times and can greatly impact inventory investment
●
The closer this point is to the customer, the quicker the customer can be
served
●
There is a trade-off where quicker response to customer demand comes at
the expense of greater inventory investment because finished goods
inventory is more expensive than raw material inventory

6 - 28
Impact of the Internet on Supply Chain Strategies

E-Business
●
A collection of business models and
processes motivated by Internet technology
and focusing on improvement of extended
enterprise performance
E-commerce
●
Ability to perform major commerce
transactions electronically

6 - 29
… Impact of the Internet on Supply Chain Strategies

●
E-commerce is a part of e-business
●
Internet technology is the force behind both
●
Focus in e-business is on the extended enterprise
– Business-to-consumer (B2C) transactions
» Refers to direct to customer
» Retail
activities over the internet, and includes products, insurance,
banking, and so forth
– Business-to-business (B2B) transactions
» Conducted over the internet between businesses
» Includes

Electronic sourcing (AKA eSourcing)

Reverse auctions

Collaboration with suppliers and vendors to achieve common goals
electronically

6 - 30
… Impact of the Internet on Supply Chain Strategies

Grocery Industry
●
Typical supermarket employs a push-based strategy
●
Peapod Online Grocer, LLC an American online grocery delivery service was built
on pure pull strategy with no inventory and no facilities
– Significant service problems with high stockout rates
– Changed to a push–pull strategy by setting up a number of warehouses
– Warehouse covers a large geographical area catering to aggregated demand
●
Other challenges:
– Reducing transportation costs
– Short response time
– Low customer density
●
Products have low demand uncertainty
– High economies of scale in transportation cost
– Push-based strategy is more appropriate

6 - 31
… Impact of the Internet on Supply Chain Strategies

Book Industry
●
Initial model of Amazon.com was a pure pull system with no warehouses and
no stock
– Ingram Book Group supplied most of Amazon’s customer demand.
●
As volume and demand increased
– Amazon.com’s service level was affected by Ingram Book’s distribution
capacity
– Using Ingram Book in the first few years allowed Amazon.com to avoid
inventory costs but significantly reduced profit margins
» As demand increased distributor no longer required
●
Current Amazon.com strategy
– Several warehouses around the country where most of the titles are stocked
– Inventory at the warehouses is managed using a push strategy
– Demand satisfied based on individual requests, a pull strategy
●
Slow moving low volume books and CDs are not stocked at Amazon
distribution centers
– Amazon orders those when demand arrives

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… Impact of the Internet on Supply Chain Strategies

General Retail Industry

●
Late to respond to competition from virtual stores and to
recognize the opportunities provided by the internet
●
Brick-and-mortar companies are adding an internet shopping
component to their offering
– Already have the distribution and warehousing infrastructure
●
Click-and-mortar firms
– High-volume, fast-moving products stocked in stores
» Push strategy
– Low-volume, slow-moving products are stocked centrally
» Push-Pull strategy

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… Impact of the Internet on Supply Chain Strategies

Traditional Fulfillment vs. E-Fulfillment

Traditional fulfillment E-fulfillment

Supply chain Push Push–pull

strategy
Shipment Bulk Parcel
Reverse Small part of the Important and highly
logistics business complex
Delivery Small number of stores Large number of
destination geographically
dispersed customers
Lead times Relatively long Relatively short
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… Impact of the Internet on Supply Chain Strategies

Conclusion
●
Implementation of push-pull strategies and demand-driven strategies
have helped many companies to improve performance, reduce
costs, increase service levels
●
Collapse of many Internet companies shows that e-business has
great challenges
●
Organizations need to
– Identify the appropriate supply chain strategy for individual
products
– Case for no physical infrastructure or inventory is tenuous
●
Push–pull strategy
– Advocates holding inventory
– Although it pushes the inventory upstream in the supply chain

6 - 35