1. The Future is Here… INTELLIGENT LOGISTICS! Chapter 5 Distribution Strategies

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

3. 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

4. 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 –Doesn ’ t work in all cases

5. Push-Pull Supply Chains The Supply Chain Time Line Low Uncertainty Long lead times High Uncertainty Short lead times Customers Suppliers PUSH STRATEGY PULL STRATEGY Push-Pull Boundary

6. 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.

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

8. 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

9. What is the Best Strategy Pull Push Pull Push I Computer II IVIII Demand uncertainty (C.V.) Delivery cost Unit price L H HLHL Economies of Scale

10. Selecting the Best SC Strategy Higher demand uncertainty suggests pull 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.

11. Selecting the Best SC Strategy Low uncertainty but low value of economies of scale (high volume books and cd ’ s) –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?

12. Characteristics and Skills Raw Material Customers Pull Push Low Uncertainty Long Lead Times Cost Minimization Resource Allocation High Uncertainty Short Cycle Times Service Level Responsiveness

13. 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.

14. Locating the Push-Pull Boundary reduce inventory holding cost the location of the push-pull boundary for various companies and industries

15. 3.6 Impact of the Internet – Expectations Were High E-business strategies were supposed to: –Reduce cost –Increase service level –Increase flexibility –Increase Profit

16. 3.6.1 The Book Selling Industry From Push Systems... –Barnes and Noble...To Pull Systems –Amazon.com, 1996-1999 –No inventory, used Ingram Book Group 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

17. Direct-to-Consumer:Cost Trade-Off

18. Industry Benchmarks: Number of Distribution Centers Sources: CLM 1999, Herbert W. Davis & Co; LogicTools Avg. # of WH 31425 Pharmaceuticals Food CompaniesChemicals - High margin product - Service not important (or easy to ship express) - Inventory expensive relative to transportation - Low margin product - Service very important - Outbound transportation expensive relative to inbound

19. 3.6.2 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%

20. 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?

21. Less than 300,000 shoppers Source: D. Ratliff

22. 3.6.3 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 ( Push) –Low volume/slow moving products for browsing and purchase on line (risk pooling) (Push-Pull) Danger of channel conflict

23. 5.6.4 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?

24. E-Fulfillment Requires a New Logistics Infrastructure

25. 5.6.5 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

26. 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

27. 3.7 Distribution Strategies Warehousing Direct Shipping –No DC needed –Lead times reduced –“ smaller trucks ” –no risk pooling effects Cross-Docking

28. 3.7.1 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 ????

29. What accounts for Wal-Mart’s remarkable success This was achieved by way 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-Mart ’ s cost of sales significantly and made it possible to offer everyday low prices to their customers.

30. 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.

31. System Characteristics: Very difficult to manage Requires advanced information technology. Why? What kind of technology? All of Wal-Mart ’ s 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

32. 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.

33. Distribution Strategies

34. Transshipment What is the value of this? What tools are needed? What if the system is decentralized?

35. Important Considerations Level of Uncertainty Economies of Scale Lead Time Product Architecture

36. SupplyProduce Distribute Sell Plan/Design Source Product Architecture Make/Buy Early Supplier Involvement Strategic Partnerships Suppliers Selection Supply Contracts Fulfillment Supply Chain Development Supply Chain The Enterprise Fulfillment and Development Supply Chains

37. What is the Right Supply Chain Strategy for your Product? L H HLHL Demand Uncertainty Innovative Functional PC/Fashion Responsiveness Pull Systems Dynamic Pricing Pasta/Diapers Efficiency Push System Cell Phone engines Push Systems Efficiency Furniture/Tires Push-Pull Lead Time Reduction Push Pull Modular Integral Products Characteristic Product Architecture Supply Chain Strategy Product Introduction Frequency C DA B

38. The Development Supply Chain Industry clock speed –Innovative vs Functional products Core competencies –Make vs. Buy Product Design –Postponement, Standardization, Packaging

40. A SNAPSHOT UNC Center For Logistics And Digital Strategy Established in 1997 as a resource for organizations struggling with logistics complexity and enterprise change management Areas of Specialization –Strategic visioning for intelligent enterprising –New logistics technology (Intelligent Software, RFID, Wireless, GPS/GIS) –Logistics and Supply Chains in Emerging Markets –Logistical Network Planning and Design –Intelligent Supply Chain Management Strategies Serves both public (SAP, FedEx, Boeing, Caterpillar) and private sector (NSA, DARPA, NASA, FAA) organizations Founding member of the Global Logistics Research Initiative (GLORI)