1. LOG 408: Global Logistics Management
Lecture 5: Supply Chain Strategies

2. Key Points of Last Lesson
Examine various types of OEM– supplier relationships
Define integration and collaboration in the global SCM context, and explain how internal and external integration can be achieved
Discuss the barriers to collaboration, prisoner’s dilemma model, and how to solve it for effective partnerships
Study the VMI (vendor-managed inventory) in detail to understand SC collaboration in real business world
Discuss both vertical and horizontal collaborative partnerships
Elaborate on specific methods used to enable collaboration

3. Traditional Top-down Perspective on Strategy

4. A Holistic View of Logistics and SCM Strategy Formulation

5. The Evolution of Manufacturing -Production Strategies

6. Push, Pull, Push-Pull Systems
Push and Pull are traditional categories of manufacturing operations
Both are modernized with more fashionable terms, lean and agile
More recent hybrid strategy of combining the two, push-pull systems (leagile)

7. Push-based supply chains (1)
Production & distribution decisions are based on long-term forecasts
Good news: long production runs – mass production - can mean manufacturing cost per unit is low (economies of scale for both manufacturing and transportation)
Not so good news: long-term forecasts adjust slowly => push-based systems slow to react to customer demand => too much or too little inventory (stock outs/poor service levels, high inventory holding costs, obsolescence/perishability)

8. Push-based supply chains (2)
Focus on cost reduction & chain efficiency
Modern version: Lean production
Eliminating waste in a value stream of activities with level production (i.e. even production runs with neither idle time nor surges in demand) and just-in-time inventory management
Originally developed by Toyota, called Toyota Production System (TPS)

9. The Seven Wastes (Muda) in TPS
Overproduction
Waiting
Transportation
Inappropriate processing
Unnecessary inventory
Unnecessary motion
Defects

10. The Principles of Lean Consumption
Solve the customer’s problem completely
Don’t waste the customer’s time
Provide exactly what the customer wants
Provide what’s wanted exactly where its wanted
Provide what’s wanted where its wanted exactly when its wanted
Continually aggregate solutions to reduce the customers time and hassle (after Womack & Jones, 1991)

11. Pull-based supply chains (1)
Production & distribution decisions are demand driven – more coordinated with current customer demand, less dependent on long-term forecasts – mass customization
Greater dependence on information flow, agile coordination (POS)
Good news: inventory ‘right sizing’ => lower holding costs, fewer stock outs and hence higher service levels (happier customers), less obsolescence)
Not so good news: more difficult to take advantage of economies of scale in manufacturing and transportation

12. Pull-based supply chains (2)
Production & distribution decisions are designed to cope with volatile demand
Modern version: agile supply chain
Structured so as to allow maximum flexibility
Enabled by mass customization
Often incorporates postponed production

13. Mass Customization
Different product configurations contain a majority of shared components and features to accommodate volume and variety
Enabled by postponement
the reconfiguration of product and process design so as to allow postponement of final product customization as far downstream as possible
Not only applied to manufacturing
E.g. Packaging postponement is merely delaying final packaging of products until customer orders are received
5-13

14. Principles of Postponement

15. What’s the appropriate strategy?
Rules of thumb:
Demand uncertainty:
Higher demand uncertainty => manage the supply chain based on realized demand => a pull strategy (agile SC).
Lower demand uncertainty => manage the supply chain based on long-term forecast => a push strategy (lean SC)
Economies of scale:
Higher importance of economies of scale in reducing cost => the greater the value in aggregating demand => the greater the importance of managing the supply chain based on long-term forecast => push strategy (lean SC)
Lower importance of economies of scale in reducing cost => the greater the value of managing the supply chain based on current demand => pull strategy (agile SC)

16. Identifying the Appropriate Supply Chain Strategy (I)
Box I: high demand uncertainty; economies of scale in production, assembly, or distribution are not important (e.g., computers) (pull or agile)
Box III: low demand uncertainty; high economies of scale (e.g., beer, pasta, soup) (push or lean)

17. Identifying the Appropriate Supply Chain Strategy (II)
Box IV: low demand uncertainty; economies of scale in production, assembly, or distribution are not important (high volume, fast moving books and CDs) (push or lean)
Box II: high demand uncertainty; high economies of scale (furniture, auto) (push-pull or leagile)

18. Push-Pull Strategy
Some stages of the supply chain operated in a push-based manner
typically the initial stages
Remaining stages employ a pull-based strategy.
Interface between the push-based stages and the pull-based stages is the push–pull boundary, or called decoupling point.

19. Supply Chain Timeline
FIGURE 7: Push-pull supply chains

20. The Leagile Supply Chain

21. General Strategy Make a part of the product to stock – generic product
The point where differentiation has to be introduced is the push-pull boundary, or the decoupling point
Based on extent of customization, the position of the boundary on the timeline is decided

22. Implementing a push-pull strategy
Where to locate the push-pull boundary?
Furniture manufacturers locate the boundary at the production point
Buffer inventory is usually what is at the interface

23. In class case discussion: Zara
How would you classify Zara’s supply chain strategy?
What is the purpose of Zara to put design and manufacturing department in the same facility?
Why do Zara's products contain multi-country labels?
Why does Zara keep spare capacity on hand?

24. Impact of lead time
Long lead times make it difficult to react to high variance demand information => push systems since pull systems are difficult to implement
Shorter lead times allow for pull systems (at perhaps higher transportation costs)
Box A: high demand uncertainty, short lead times (computers) => agile, quick response
Box B: low demand uncertainty, long lead times (dry cereal, frozen meat) => lean, planning and execution
Box C: low demand uncertainty, short lead times (perishable foods, e.g., bread, dairy products, produce, refrigerated meat) => lean, continuous replenishment
Box D: high demand uncertainty, long lead times => leagile production /logistics postponement
Buffer inventory used to cope with long lead time

25. Combined Supply Chain Strategies

26. Critical Factors to Consider in Supply Chain Planning
Focus on processes and flows
Focus on high level objectives
The importance of people
It’s supply chains that compete
Increasingly it is supply chains that compete more than individual firms and products
5-26

27. Questions to think
What is an example of a product with a primarily push-based (lean) supply chain? A product with a primarily pull-based (agile) supply chain?
Is it possible for the appropriate supply chain (lean, agile, or leagile) to change during a product’s life cycle? If not, explain why? If it is possible, what are some specific examples of products for which the appropriate supply chain changed?
Linking supply chain with product types, which supply chain is more suitable for functional products? Which for innovative products?