Chapter 5

Supply Chain Integration

Mithun J Sharma

Case Study
Modern Book Distribution,
Inc.
MBD had been one of the largest efficient
book distributors in the country.
They use advanced forecasting technique
to control inventory levels and
technological advanced warehouses to
control operating expenses.
Evolution of two new types of retailers in
the industry: large superstores & online
stores

Case Study
Modern Book Distribution,
Inc.
Challenges from large superstores:
They demand new services from
their distributors.
As the superstores consolidated they
used this leverage to force
distributors to accept minimal
margins

Case Study
Modern Book Distribution,
Inc.
Challenges from online book sellers
Previously, the online book sellers kept
no inventory at hand and relayed them
to MBD like distributors to deliver the
books to the retailer.
Online book sellers later established
their own DCs, due to magnification of
their business, where they kept
inventory and handled packaging &
shipment of books directly to end users.

Case Study
Modern Book Distribution,
Inc.
The changing business scenarios lead MBD
to embark on a different strategic model
and the list of queries popped by the
manager are:
The impact of internet on business strategy
used by the new categories of book sellers
The utilization of internet by MBD to better
serve the customers
Whether or not to move to pull distribution
strategy

Contents
Push, Pull and Push-pull Base Supply
Chain
Demand driven supply chain strategies
Impact of internet on supply chain
integration
Effective distribution strategies

Push Based Supply

Chain
Production & distribution decisions are
based on long term forecasts
Push-based SC reacts slowly to the
changing market demand
Variability in orders lead to bullwhip
effect
In push-based SC there is increased
transportation costs, high inventory
levels, and/or high manufacturing costs
due to emergency production change
over.

Pull-Based Supply Chain

Production and distribution are demand
driven so that there is co-ordination with
the customer demand
Pull-based supply chain leads to decrease
in lead time, decrease in inventory in
retailers, decrease in variability in system,
decreased inventory at manufacture due
to reduction in variability
Pull-based systems are often difficult to
implement due to long lead times, difficult
to take advantage of economies of scale in
manufacturing & transportation

Push-pull Supply Chain

Initial stages are push based and
later stages are pull based
PushPull
boundary

Push Strategy

Pull Strategy

Raw
Materials

End
Customer

Supply chain time line

Matching Supply Chain

Strategy
Demand
Uncertainty
Pull

Push

H
I
Computer

II
Furniture

IV
Books & CDS

III
Grocery

Economies
of Scale

L
L

Pull

Push

Implementing push-pull
strategy
Push strategy implemented demand
uncertainty small, so long term forecast
Pull strategy implemented uncertainty
high so based on realized demand
Push portion service level low focus
on cost minimization
Pull portion high service level focus
on flexibility and responsiveness

Characteristics of the Push

& Pull portions of Supply
Chain
Portion
Push
Objective Minimize
cost
Complexi High
ty
Focus
Resource
allocation
Lead
Long
time
Processe SC planning

Pull
Maximize
service level
Low
Responsivenes
s
Short
Order

Demand-Driven
Strategies
The two processes to integrate demand
information into supply chain planning
process:
Demand forecast: A process in which
historical demand data are used to develop
long-term estimates of expected demand
Demand shaping: A process in which the
firm determines the impact of various
marketing plans such as promotion,
discounts, rebates etc. on demand forecast

Demand-Driven
Strategies
In either of the cases demand
forecast is not accurate so an
important output from both the
processes is forecast error.
This information insight into
likelihood that demand will be
higher or lower than the forecast

Demand-Driven
Strategies
Approaches to decrease forecast error
and increase forecast accuracy are:
Select push-pull boundary to aggregate
demand across products, geography,
and time
Use market analysis & demographic and
economic trend
Incorporate collaborative planning and
forecasting processes with customers to
better understand the market demand,

Impact of the Internet on

SC Strategies
E-business: is a collection of
business models and processes
motivated by Internet technology
and focusing on improvement of
extended enterprise performance
E-commerce: is the ability to
perform major commerce
transaction electronically.

Impact of the Internet on

SC Strategies
Grocery industry: low level of demand
uncertainty for many products and high
economies of scale in transportation cost
push strategy more appropriate
Book industry: Inventory at the warehouse
is based on push strategy whereas demand
is satisfied based on pull strategy
Retail industry: push strategy for high
volume, fast moving products and pushpull strategy for low volume, slow moving
products

Impact on Transportation &

Fulfillment
Traditional
fulfillment

E-fulfillment

SC strategy

Push

Push-pull

Shipment

Bulk

Parcel

Reverse
logistics

Small part of
business

Imp. & complex

Delivery
destination

Small no. of
stores

Large no. of
geographically
dispersed
customers

Lead times

Relatively long

Relatively short

Distribution Strategies
Strategy
Attribute

Direct
Shipment

CrossDocking

Risk pooling
Transportatio
n
Cost

Inventory at
warehouses
Take
advantage

Reduced
Inbound
cost

Reduced
Inbound
cost

Holding costs No
No holding
warehouse costs
cost
Allocation

Delayed

Delayed

Distribution Strategies
Transshipment: shipment of items
between different facilities at the
same level in the supply chain to meet
some immediate need
Centralized Vs Decentralized Control:
Centralized control leads to global
optimization
Decentralized control leads to local
optimization

Distribution Strategies
Central Vs Local facilities
Safety stock: Consolidating warehouses
lowers safety stock
Overhead: Few large central warehouses
overhead cost < many small warehouse
cost
Economies of scale: can be realized on
consolidation of manufacturing units
Lead time: reduced lead time directly
proportional to closer market area location

Distribution Strategies
Service: Centralized warehousing
enables the utilization of risk pooling,
which means that more orders can be
met with lower total inventory level.
Transportation cost: Transportation
costs are directly related to the
number of warehouses. Inbound
transportation cost increases whereas
outbound cost decreases due to
service facility location

Conclusion
Internet has created the opportunity to
revolutionize the supply chain strategies
but at the same time the collapse of many
internet companies implies the great
challenges that e-business presents. The
new push-pull strategy advocates holding
inventory. There is a need to have an
effective distribution strategy depending
on the details of the context, as
mentioned in the presentation such as
cross docking, transshipment and so on..

Case study
The Great Inventory
Correction

The problem-

Due to fall in demand the high

tech companies were loaded with
rapidly depreciating goods
They had to write-off huge
unsalable inventory

New Logic
Altra designs programmable logic devices
(PLDs).
Altras outsourcing manufacturer is based in
Taiwan.
Initially there was a push strategy i.e. the
finished goods were stockpiled in Asian
facilities in anticipation of customer demand
Also it build new products based on specs
beyond what customer needed for prototyping
The benefit of this model was to provide cost
advantage to customers by holding the
inventory stock in the supply chain

New Logic
Change in strategy:
Continue to produce stock but in die
banks i.e. to keep inventory in
flexible form
Implement build-to-order strategy
New order will be built on customer
order

Visible Improvements
The average cycle time for semiconductors is 117 according to
research (from fab to customer)
Plenty of time for demand to change
direction
Altra collaborated with Nortel &
Motorola on product development
Introduced software system (SCM i2
Tech.) which is linked to fabs,
suppliers, and distributors

Visible Improvements
Result: reduced cycle time from 10
to 1day and long term cycle time
from 4 weeks to 1 week.
UMCs customer can forecast
collaboratively using UMCs web
portal such that it automatically
finds the best slot for the customer
order.

Freak/Flop show
Even after using SCM software , it
couldnt prevent inventory glut.
Growth changed from 40 % to
negative 10%
Reasons: New technology creates
constraints in supply. Ordering
overly creates glut on the
manufacturers side

Check on Business
History
Flextronics an EMS company had
unusually high inventory glut but they
had a good reason for that because they
wanted to obtain better understanding of
with customers of consumer demand.
The company wanted to create material
hub but there was some disputes with the
distributors who complained of surplus
inventory. The case was opposite in the
year 2000 when there was a shortage and
the distributors made good margin.

IBM The Crystal Ball

IBM follows the pull strategy or just-in-time
basis. Their suppliers have visibility of their
inventory level
The pull strategies IBM applies in order to
make it effective are:
Commonality across platforms & products
The number of suppliers kept small
Electronic purchase transaction to have faster
collaboration with suppliers
Rationally exuberant sales force who knows
their customers in and out, the main strategy
for their forecast, meet frequently to discuss &
anticipate demand

Thank
You