Strategy Development for Supply Chain Integration

Dr. R K Singh Associate Professor IIFT, Delhi

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Strategy Development for Supply Chain Integration

Outline

Concept of Supply Chain Integration Types of Products Push and Pull type of strategies Types of Supply chains
Competitive and supply chain strategies Achieving strategic fit Expanding strategic scope Drivers and Obstacles of Supply chains

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Introduction

Effective SCM

Efficient integration of suppliers, manufacturers, warehouses, and stores. Coordinate activities across the supply chain

Various supply chain integration strategies:

Push, pull, pushpull strategy. Matching products and industries with supply chain strategies. Demand-driven supply chain strategies. The impact of the Internet on supply chain integration.

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Supply Chain Performance Measures

Cost of service Low Service Level

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High

Impact of Service Level on Revenue Costs and Profits

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Types of Products and Supply Chains (Hau Lees Framework)

Demand Uncertainty Supply Uncertainty
Low (Stable Process) Low (Functional Products) Grocery, Basic apparel, food, Oil and Gas Efficient Supply Chain High (Innovative Products) Fashion apparel, popular music Responsive Supply chain Telecom, High end computers, semiconductor Agile Supply Chain
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High (Evolving Process)

Hydroelectric power, Some food products Risk-Hedging Supply Chain

Functional Versus Innovative Products: Differences in Demand

Aspects of demand Functional (predictable Demand) More than 2 years 5% to 20% Innovative (Unpredictable Demand) 3 months to 1 year 20% to 60% Product Life cycle Contribution margin ( % of sales price) Product variety

Low ( 10 to 20 variants per category) 5% to 20% 1% to 2%

High ( often thousands of variants per category) 40% to 100% 10% to 40%

Likely forecast error Average stock-out rate

End-of-season mark markdown

0%

10% to 30%

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Push-Based Supply Chains

Production and distribution decisions based on long-term forecasts. Longer reaction time to changing marketplace Causes Bullwhip Effect

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Bullwhip Effect
Occurs when slight demand variability is magnified as information moves back upstream

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Bullwhip Effect in Push-Based Supply Chains

Leads to inefficient resource utilization Planning and managing are much more difficult. Not clear how a manufacturer should determine production capacity? Transportation capacity?

Peak demand? Average demand? Inability to meet changing demand patterns. Higher inventory levels and/or higher manufacturing costs Larger and more variable production batches
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Results:

Pull-Based Supply Chains

Production and distribution demand driven

Coordinated with true customer demand rather than forecast demand firm does not hold any inventory and only responds to specific orders. Enabled by fast information flow.

It leads to

Reduced lead times Reduced inventory

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Push-Pull Strategy

New supply chain strategy that takes the best of both. Some stages of the supply chain operated in a push-based manner typically the initial stages Remaining stages employ a pull-based strategy. Interface is the pushpull boundary.
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Push-Pull Supply Chains

PUSH STRATEGY

PULL STRATEGY

Suppliers

Low Uncertainty

High Uncertainty

Customers

Push-Pull Boundary

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Traditional computer industry

High level of demand uncertainty Low delivery cost (% to the unit price)

Demand forecast made on long term forecast

Manufacturing
Inventory of finished products

Push
Raw Materials

Production Assembly Manufacturer DC

Distributor DC

Store
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End Customer

Inventory of finished products

Inventory of finished products

PC SUPPLY CHAINS
Customer Customer

PULL
Distribution Channels Virtual Integration

PULL
Dell

PUSH
Manufacturer

Suppliers

Suppliers

PUSH

Typical PC Supply Chain (Compaq, HP, IBM, etc.)

Dell Supply Chain

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Identifying the Appropriate Supply Chain Strategy

FIGURE : Push-pull supply chains

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Impact of Lead Time

FIGURE Matching supply chain strategies with products: the impact of lead time and demand uncertainty
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Implementing a PushPull Strategy

Achieving the appropriate design depends on many factors:

product complexity manufacturing lead times suppliermanufacturer relationships.

Many ways to implement a pushpull strategy

location of the pushpull boundary.

Dell

locates the boundary at the assembly point Furniture manufacturers locate the boundary at the production point
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Characteristics of the Push and Pull Portions of the Supply Chain

Portion Objective Push Minimize cost Pull Maximize service level

Complexity

High

Low

Focus Lead time Processes

Resource allocation Long Supply chain planning

Responsiveness Short Order fulfillment

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Dell - the Pull-Push boundary

High level of demand uncertainty Low delivery cost (% to the unit price)

Raw Materials

Parts inventory made on forecast

Production Assembly

Manufacturer Distributor DC DC

Store
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End Customer

Demand forecast made at assembly

Pull from customer demand No inventory of finished products

The furniture industry

High level of demand uncertainty High delivery cost (% to the unit price)
Many different type of fabrics, colors decided on order.

Raw Materials

Production

Assembly

Manufacturer Distributor DC DC

Store
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End Customer

Made on order

Inventory

Consolidation of bulky shipments Inventory

Car industry
High level of demand uncertainty High delivery cost (% to the unit price)
Demand forecast made on long term forecast
Manufacturing

Push Raw Materials

Production Assembly

Manufacturer

Factory storage

Automobile dealers

End Customer
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Inventory of Inventory finished of cars finished cars

Inventory of finished cars

The Grocery Pull-Push boundary

Low level of demand uncertainty High delivery cost (% to the unit price) Very predictable distribution patterns. Because high level of predictability, orders can be made on long-term forecast Push Raw Materials Pasta Soup Drinks

Demand forecast made at Distributor DC

Pull from customer demand

Manufacturer Production Assembly DC

Distributor DC

Store
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End Customer

Demand-Driven Strategies

Requires integrating demand information into the supply chain planning process

Demand forecast:
Use

historical demand data to develop long-term estimates of expected demand

Demand shaping:
Firm

determines the impact of various marketing plans such as promotion, pricing discounts, rebates, new product introduction, and product withdrawal on demand forecasts.
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Grocery Industry

Products have low demand uncertainty

high economies of scale in transportation cost push-based strategy is more appropriate.

Peapod (Online Grocery) was built on pure pull strategy with no inventory and no facilities.

Significant service problems with high stockout rates Changed to a pushpull strategy by setting up a number of warehouses Warehouse covers a large geographical area

Aggregated demand

Challenges in Online Grocery Industry

Reducing transportation costs Short response time Low customer density

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Book Industry

Initial model of Amazon.com a pure pull system with no warehouses and no stock.

Ingram Book Group supplied most of Amazons customer demand. Amazon.coms service level was affected by Ingram Books distribution capacity Using Ingram Book in the first few years allowed Amazon.com to avoid inventory costs but significantly reduced profit margins.

As volume and demand increased:

As demand increased distributor no longer required.

Current Amazon.com:

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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Locating the Push-Pull Boundary

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From Sequential Optimization to Global Optimization

Sequential Optimization

Procurement Planning

Manufacturing Planning

Distribution Planning

Demand Planning

Global Optimization
Supply Contracts/Collaboration/Integration/DSS

Procurement Planning

Manufacturing Planning

Distribution Planning

Demand Planning

Source: Duncan McFarlane

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Competitive and Supply Chain Strategies

Competitive strategy: defines the set of customer needs a firm seeks to satisfy through its products and services Product development strategy Marketing and sales strategy Supply chain strategy:

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The Value Chain: Linking Supply Chain and Business Strategy Business Strategy
New Product Marketing Strategy Strategy

Supply Chain Strategy

New Operati Product ons Development

Marketing and Distribution Service Sales

Finance, Accounting, Information Technology, Human Resources

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Achieving Strategic Fit

Strategic fit:
Consistency between customer priorities of competitive strategy and supply chain capabilities specified by the supply chain strategy Competitive and supply chain strategies have the same goals

Example of strategic fit -- Dell

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How is Strategic Fit Achieved?

Step 1: Understanding the customer and supply chain uncertainty Step 2: Understanding the supply chain Step 3: Achieving strategic fit

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Achieving Strategic Fit

Understanding the Customer

Lot size Response time Service level Product variety Price Innovation

Implied Demand Uncertainty

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Impact of Customer Needs on Implied Demand Uncertainty

Customer Need Range of quantity increases
Causes implied demand uncertainty to increase because Wider range of quantity implies greater variance in demand Less time to react to orders Demand per product becomes more disaggregated Total customer demand is now disaggregated over more channels New products tend to have more uncertain demand Firm now has to handle unusual surges in demand
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Lead time decreases

Variety of products required increases

Number of channels increases

Rate of innovation increases Required service level increases

Levels of Implied Demand Uncertainty

Detergent Long lead time steel Purely functional products High Fashion Palm top computer Entirely new products

Customer Need
Price Responsiveness

Low

High

Implied Demand Uncertainty

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Correlation Between Implied Demand Uncertainty and Other Attributes

Attribute Product margin Low Implied Uncertainty Low High Implied Uncertainty High

Avg. forecast error

Avg. stockout rate

10%
1%-2%

40%-100%
10%-40%

Avg. forced season- 0% end markdown

10%-25%

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Step 2: Understanding the Supply Chain

How does the firm best meet demand? Supply chain responsiveness -- ability to

respond to wide ranges of quantities demanded meet short lead times handle a large variety of products build highly innovative products meet a very high service level Handle supply uncertainty

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Understanding the Supply Chain: CostResponsiveness Efficient Frontier

Responsiveness
High

Low

Cost
High Low
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Step 3: Achieving Strategic Fit

Step is to ensure that what the supply chain does well is consistent with target customers needs Examples: Dell, Wallmart, Amul

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Responsiveness Spectrum

Highly efficient

Somewhat efficient

Somewhat responsive

Highly responsive

Integrated steel mill

Hanes apparel

Most automotive production

Dell

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Step 3: Achieving Strategic Fit

All functions in the value chain must support the competitive strategy Two extremes: Efficient supply chains (Salt) and responsive supply chains (Dell) There is no right supply chain strategy independent of competitive strategy

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Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map

Responsive supply chain

Responsiven ess spectrum

Efficient supply chain Certain demand Implied uncertainty spectrum Uncertain demand
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Comparison of Efficient and Responsive Supply Chains

Efficient
Primary goal Product design strategy Pricing strategy Mfg strategy Inventory strategy Lead time strategy Supplier selection strategy Transportation strategy
Lowest cost Min product cost Lower margins High utilization Minimize inventory Reduce but not at expense of greater cost Cost and low quality Greater reliance on low cost modes

Responsive
Quick response Modularity to allow postponement Higher margins Capacity flexibility Buffer inventory Aggressively reduce even if costs are significant Speed, flexibility, quality Greater reliance on responsive (fast) modes
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Other Issues Affecting Strategic Fit

Multiple products and customer segments Product life cycle Competitive changes over time

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Multiple Products and Customer Segments

Firms sell different products to different customer segments (with different implied demand uncertainty) The supply chain has to be able to balance efficiency and responsiveness Two approaches:

Different supply chains Tailor supply chain to best meet the needs of each products demand

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Products Life Cycle

Introduction
Best period to increase market share
R&D engineering critical

Growth
Practical to change price or quality image Strengthen niche

Maturity
Poor time to change image, price or quality Competitive costs become critical Defend market position

Decline
Cost control critical

Sales

Time

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SC Strategy during Product Life cycle The demand characteristics of a product change as a product goes through its life cycle Early: uncertain demand, high margins (time is important), product availability is most important, cost is secondary Late: predictable demand, lower margins, price is important Examples: pharmaceutical firms, Intel

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Changes in Supply Chain strategy over a Product life cycle

Responsive supply chain

Responsiven ess spectrum

Efficient supply chain Product Maturity Implied uncertainty spectrum Product introduction
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Competitive Changes Over Time

Competitive pressures can change over time Increased emphasis on variety at a reasonable price The Internet makes it easier to offer a wide variety of products The supply chain strategy must change for strategic fit.
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Expanding Strategic Scope

Scope of strategic fit

The functions and stages within a supply chain that devise an integrated stategy with a shared objective

Five categories:

Intracompany intraoperation scope Intracompany intrafunctional scope Intracompany interfunctional scope Intercompany interfunctional scope Flexible interfunctional scope

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Strategic Scope
Suppliers Manufacturer Distributor Competitiv e Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy Retailer Customer

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Strategic Scope: Intracompany Intraoperation Scope

Suppliers Manufacturer Distributor Competitiv e Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy Retailer Customer

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Strategic Scope: Intracompany Intrafunctional Scope Suppliers Manufacturer Distributor Retailer Customer
Competitiv e Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy

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Strategic Scope: Intracompany Interfunctional Scope Suppliers Manufacturer Distributor Retailer Customer
Competitiv e Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy

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Intercompany Interfunctional Scope

All stages coordinate strategy across all functions Each company must evaluate its actions in the context of the entire supply chain Increasing supply chain surplus or profit

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Strategic Scope: Intercompany Interfunctional Scope Suppliers Manufacturer Distributor Retailer Customer
Competitiv e Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy

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Flexible Intercompany Interfunctional Scope

Ability to achieve strategic fit when partnering with stages that change over time in the supply chain
Customer needs and members of the supply chain change over time A firm may have to partner with many different firms over time

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Drivers of Supply Chain Performance

Facilities

places where inventory is stored, assembled, or fabricated production sites and storage sites raw materials, WIP, finished goods within a supply chain inventory policies moving inventory from point to point in a supply chain combinations of transportation modes and routes data and analysis regarding inventory, transportation, facilities throughout the supply chain potentially the biggest driver of supply chain performance
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Inventory

Transportation

Information

A Framework for Structuring Drivers

Efficiency Responsiveness

Supply chain structure

Facilities

Transportation

Inventory

Information

Drivers

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Obstacles to Achieving Strategic Fit

Increasing variety of products Decreasing product life cycles Increasingly demanding customers Fragmentation of supply chain ownership Globalization Difficulty executing new strategies

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Major Obstacles to Achieving Fit

Multiple owners / incentives in a supply chain

Local optimization and lack of global fit

Increasing product variety / shrinking life cycles / customer fragmentation

Increasing implied uncertainty
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Model for Selection of SCM Practices

Supply chain capabilities and Resources
Logistics

Type of product Functional Innovative

Level of customization

Supplier relations Process capability Customer service Information sharing Organizational structure E-business readiness

Type of industry
Chemicals Food

Length of product life cycle

Supply Chain Strategy

Selection of SCM practices

Review of Supply chain Performance 6 1-62