CL2-RKS-SCM

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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, 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.

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Supply Chain Performance MeasuresC

ost

of s

ervi

ce

Service LevelLow High

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Impact of Service Level on Revenue Costs and Profits

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Types of Products and Supply Chains (Hau Lee’s Framework)

Supply Uncertainty

Demand Uncertainty

Low

(Functional Products)

High

(Innovative Products)

Low

(Stable Process)

Grocery, Basic apparel, food, Oil and Gas

Efficient Supply Chain

Fashion apparel, popular music

Responsive Supply chain

High

(Evolving Process)

Hydroelectric power, Some food products

Risk-Hedging Supply Chain

Telecom, High end computers,

semiconductor

Agile Supply Chain

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Aspects of demand Functional (predictable Demand)

Innovative (Unpredictable Demand)

Product Life cycle More than 2 years 3 months to 1 year

Contribution margin ( % of sales price)

5% to 20% 20% to 60%

Product variety Low ( 10 to 20 variants per category)

High ( often thousands of variants per category)

Likely forecast error 5% to 20% 40% to 100%

Average stock-out rate 1% to 2% 10% to 40%

End-of-season mark markdown

0% 10% to 30%

Functional Versus Innovative Products: Differences in Demand

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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 EffectOccurs 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?

Results: Inability to meet changing demand patterns. Higher inventory levels and/or higher manufacturing

costs Larger and more variable production batches

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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 push–pull boundary.

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Push-Pull Supply Chains

Low

Uncertainty High

Uncertainty

CustomersSuppliers

PUSH STRATEGY PULL STRATEGY

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

Ma

nu

fact

uri

ng

Inventory of finished products

Inventory of finished products

Inventory of finished products

Ra

w M

ate

ria

ls

En

d C

ust

om

er

Production Assembly Manufacturer DC

Distributor DC

Store

Push

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PC SUPPLY CHAINS

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

Customer

DistributionChannels

Manufacturer

Suppliers

PUSH

PULL

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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 Push–Pull Strategy Achieving the appropriate design depends

on many factors:product complexitymanufacturing lead timessupplier–manufacturer relationships.

Many ways to implement a push–pull strategylocation of the push–pull boundary.

Dell locates the boundary at the assembly pointFurniture manufacturers locate the boundary at the

production point

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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

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Dell - the Pull-Push boundary

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

Demand forecast made at assembly

Parts inventory made on forecast

Pull from customer demand

No inventoryof

finished products

Production Assembly Manufacturer DC

Distributor DC

Store

Ra

w M

ate

ria

ls

En

d C

ust

om

erPush

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The furniture industry

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

Many different type of fabrics, colorsdecided on order.

Made on order

Inve

nto

ry

Consolidation of bulky shipments Inventory

Production Assembly Manufacturer Store

DC DC

Distributor

Ra

w M

ate

ria

ls

En

d C

ust

om

er

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Car industry•High level of demand uncertainty• High delivery cost (% to the unit price)

Demand forecast made on long term forecast

Ma

nu

fact

uri

ngInventory of finished cars

Inventory of finished cars

Ra

w M

ate

ria

ls

En

d C

ust

om

er

Production Assembly Manufacturer

Push

Factorystorage

Automobiledealers

Inventory of finished cars

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The Grocery Pull-Push boundary

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

Pasta Soup Drinks

Very predictable distribution patterns.Because high level of predictability,orders can be made on long-term forecast

DemandforecastmadeatDistributorDC

Ra

w M

ate

ria

ls

En

d C

ust

om

er

Push

Pull fromcustomerdemand

Production AssemblyManufacturer DC

Distributor DC Store

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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 push–pull 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 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:

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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Procurement Planning

ManufacturingPlanning

DistributionPlanning

DemandPlanning

Sequential Optimization

Supply Contracts/Collaboration/Integration/DSS

Procurement Planning

ManufacturingPlanning

DistributionPlanning

DemandPlanning

Global Optimization

From Sequential Optimization to Global Optimization

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

NewProduct

Development

Marketingand

Sales Distribution Service

Finance, Accounting, Information Technology, Human Resources

Business Strategy

New ProductStrategy

MarketingStrategy Supply Chain Strategy

Operations

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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 CustomerLot sizeResponse timeService levelProduct varietyPriceInnovation

ImpliedDemand

Uncertainty

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Impact of Customer Needs on Implied Demand Uncertainty

Customer Need Causes implied demand uncertainty to increase because …

Range of quantity increases Wider range of quantity implies greater variance in demand

Lead time decreases Less time to react to orders

Variety of products required increases

Demand per product becomes more disaggregated

Number of channels increases Total customer demand is now disaggregated over more channels

Rate of innovation increases New products tend to have more uncertain demand

Required service level increases

Firm now has to handle unusual surges in demand

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Levels of Implied Demand Uncertainty

Low High

Price Responsiveness

Customer Need

Implied Demand Uncertainty

DetergentLong lead time steelPurely functional products

High FashionPalm top computer

Entirely new products

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Correlation Between Implied Demand Uncertainty and Other Attributes

Attribute Low Implied Uncertainty

High Implied Uncertainty

Product margin Low High

Avg. forecast error 10% 40%-100%

Avg. stockout rate 1%-2% 10%-40%

Avg. forced season-end markdown

0% 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 timeshandle a large variety of productsbuild highly innovative productsmeet a very high service levelHandle supply uncertainty

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Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier

High Low

Low

High

Responsiveness

Cost

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Step 3: Achieving Strategic Fit

Step is to ensure that what the supply chain does well is consistent with target customer’s needs

Examples: Dell, Wallmart, Amul

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Responsiveness Spectrum

Integratedsteel mill

Dell

Highlyefficient

Highlyresponsive

Somewhatefficient

Somewhatresponsive

Hanesapparel

Mostautomotiveproduction

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Step 3: Achieving Strategic FitAll 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

Implied uncertainty spectrum

Responsive supply chain

Efficient supply chain

Certain demand

Uncertain demand

Responsiveness spectrum Zone of

Strategic Fit

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Comparison of Efficient and Responsive Supply ChainsEfficient Responsive

Primary goal Lowest cost Quick response

Product design strategy

Min product cost Modularity to allow postponement

Pricing strategy Lower margins Higher margins

Mfg strategy High utilization Capacity flexibility

Inventory strategy Minimize inventory Buffer inventory

Lead time strategy Reduce but not at expense of greater cost

Aggressively reduce even if costs are significant

Supplier selection strategy

Cost and low quality Speed, flexibility, quality

Transportation strategy

Greater reliance on low cost modes

Greater reliance on responsive (fast) modes

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Other Issues Affecting Strategic Fit

Multiple products and customer segmentsProduct life cycleCompetitive 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 chainsTailor supply chain to best meet the needs of

each product’s demand

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Product’s Life Cycle

Introduction Growth Maturity Decline

Time

Sales

• Best period to increase market share

•R&D engineering critical

•Practical to change price or quality image•Strengthen niche

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

•Cost control critical

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SC Strategy during Product Life cycleThe 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

Implied uncertainty spectrum

Responsive supply chain

Efficient supply chain

Product Maturity

Product introduction

Responsiveness spectrum Zone of

Strategic Fit

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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 Retailer Customer

Competitive Strategy

Product Dev. Strategy

Supply Chain Strategy

Marketing Strategy

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Strategic Scope: Intracompany Intraoperation Scope

Suppliers Manufacturer Distributor Retailer Customer

Competitive Strategy

Product Dev. Strategy

Supply Chain Strategy

Marketing Strategy

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Strategic Scope:Intracompany Intrafunctional

ScopeSuppliers Manufacturer Distributor Retailer Customer

Competitive Strategy

Product Dev. Strategy

Supply Chain Strategy

Marketing Strategy

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Strategic Scope: Intracompany Interfunctional

ScopeSuppliers Manufacturer Distributor Retailer Customer

Competitive 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

ScopeSuppliers Manufacturer Distributor Retailer Customer

Competitive 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

Inventory raw materials, WIP, finished goods within a supply chain inventory policies

Transportation moving inventory from point to point in a supply chain combinations of transportation modes and routes

Information data and analysis regarding inventory, transportation, facilities

throughout the supply chain potentially the biggest driver of supply chain performance

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A Framework for Structuring Drivers

Efficiency Responsiveness

Facilities Transportation Inventory Information

Supply chain structure

Drivers

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Obstacles to Achieving Strategic Fit

Increasing variety of productsDecreasing product life cycles Increasingly demanding customersFragmentation of supply chain ownershipGlobalizationDifficulty executing new strategies

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Major Obstacles to Achieving Fit

Multiple owners / incentives in a supply chain

Increasing product variety / shrinking life cycles / customer fragmentation

Increasing implied uncertainty

Local optimization and lack of global fit

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Type of industry

• Chemicals• Food

Length of product life

cycle

Level of customization

Type of product• Functional• Innovative

Supply Chain Strategy

Selection of SCM practices

Supply chain capabilities and Resources

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

Review of Supply chain Performance

Model for Selection of SCM Practices

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