Chapter 04

Chapter 4
Supply Chain Integration

Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
Outline of the Presentation
The Bullwhip Effect

Distribution Strategies and Information
Systems

Supply Chain Management: Pitfalls and
Opportunities
The Bullwhip Effect
and its Impact on the Supply Chain
Consider the order pattern of a single color
television model sold by a large electronics
manufacturer to one of its accounts, a
national retailer.
Figure 1. Order
Stream
Huang at el. (1996), Working paper, Philips Lab
Figure 2. Point-of-sales
Data-Original
Figure 3. POS Data After
Removing Promotions
The Bullwhip Effect
Figure 4. POS Data After Removing Promotion & Trend
The Bullwhip Effect
Higher Variability in Orders Placed by Computer
Retailer to Manufacturer Than Actual Sales
Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review
Increasing Variability of Orders
Up the Supply Chain
Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review
We Conclude .
Order Variability is amplified up the
supply chain; upstream echelons face
higher variability.

What you see is not what they face.

What are the Causes.
Promotional sales
Inflated orders
- IBM Aptiva orders increased by 2-3 times
when retailers though that IBM would be out
of stock over Christmas
- Same with Motorolas Cellular phones
Demand Forecast
Long cycle times
Order Batching
What are the causes
Single retailer, single manufacturer.
Retailer observes customer demand, D
t
.
Retailer orders q
t
from manufacturer.
Lead time + 1 = L.

Retailer Manufacturer
D
t
q
t
L
Consequences.
Increased safety stock
Reduced service level
Inefficient allocation of resources
Increased transportation costs
The Bullwhip Effect:
Managerial Insights
Exists, in part, due to the retailers need to
estimate the mean and variance of demand.
The increase in variability is an increasing
function of the lead time.
The more complicated the demand models
and the forecasting techniques, the greater
the increase.
Centralized demand information can reduce
the bullwhip effect, but will not eliminate it.
Coping with the Bullwhip Effect
Reduce Variability and Uncertainty
- POS
- Sharing Information
- Year-round low pricing
Reduce Lead Times
- EDI
- Cross Docking
Alliance Arrangements
Vendor managed inventory
On-site vendor representatives
Example:
Quick Response at Benetton
Benetton, the Italian sportswear manufacturer, was
founded in 1964. In 1975 Benetton had 200 stores
across Italy.

Ten years later, the company expanded to the U.S.,
Japan and Eastern Europe. Sales in 1991 reached 2
trillion.
Many attribute Benettons success to successful use
of communication and information technologies.
Example:
Quick Response at Benetton
Benetton uses an effective strategy, referred to
as Quick Response, in which manufacturing,
warehousing, sales and retailers are linked
together. In this strategy a Benetton retailer
reorders a product through a direct link with
Benettons mainframe computer in Italy.
Using this strategy, Benetton is capable of
shipping a new order in only four weeks, several
week earlier than most of its competitors.

How Does Benetton
Cope with the Bullwhip Effect?
1. Integrated Information Systems
Global EDI network that links agents with
production
and inventory information
EDI order transmission to HQ
EDI linkage with air carriers
Data linked to manufacturing
2. Coordinated Planning
Frequent review allows fast reaction
Integrated distribution strategy
Distribution Strategies
and Information Systems
Pull Vs. Push Strategies

Push Strategies
Production decisions based on forecasts
Manual purchase orders and invoices are
employed
Ordering decisions based on inventory &
forecasts.

Push Strategies
Retailer observes customer demand,
D
t
.
Retailer orders q
t
from manufacturer.

D
t
q
t
L
Problems with Push Strategies:

Excess finished goods inventory
Inefficient production
Inefficient operations, high costs, low service
levels
- Excess capacity
- Low utilization of resources
- High transportation cost

and Information Systems

Pull Strategies
Retailer observes customer demand, D
t
.
Retailer orders q
t
from manufacturer.

POS Data
D
t
q
t
L
Pull Strategies
Production is demand driven
Faster information flow mechanisms are used
Inventory levels are reduced
Distribution facilities are transformed from
storage points to coordinators of flow.
But:
Harder to leverage economies of scale
Doesnt work in all cases

Distribution Strategies and
Information Systems
Push and Pull Systems
To take advantage of both
How can this be accomplished?
Warehousing
Direct Shipping
No DC needed
Lead times reduced
smaller trucks
no risk pooling effects
Cross Docking
In 1979, Kmart was the king of the retail industry
with 1891 stores and average revenues per store of
$7.25 million
At that time Wal-Mart was a small niche retailer in
the South with only 229 stores and average revenues
about half of those Kmart stores.
Ten years later, Wal-Mart transformed itself; it has
the highest sales per square foot, inventory turnover
and operating profit of any discount retailer. Today
Wal-Mart is the largest and highest profit retailer in
the world.

What accounts for Wal-Marts
remarkable success
The starting point was a relentless focus on satisfying
customer needs; Wal-Mart goal was simply to provide
customers access to goods when and where they
want them and to develop cost structures that enable
competitive pricing
The key to achieving this goal was to make the way
the company replenished inventory the centerpiece
of its strategy.
What accounts for Wal-Marts
remarkable success?
This was obtained by using a logistics technique
known as cross-docking. Here goods are continuously
delivered to Wal-Marts warehouses where they are
dispatched to stores without ever sitting in inventory.
This strategy reduced Wal-Marts cost of sales
significantly and made it possible to offer everyday
low prices to their customers.

Characteristics of Cross-Docking:
Goods spend at most 48 hours in the
warehouse,
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.

System Characteristics:
Very difficult to manage,
Requires linking Wal-Marts distribution
centers, suppliers and stores 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

System Characteristics:
Need a fast and responsive transportation
system:
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.

Strategy
Attribute
Direct
Shipment
Cross
Docking
Inventory at
Warehouses
Risk
Pooling
Take
Advantage
Transportation
Costs
Reduced
Inbound Costs
Reduced
Inbound Costs
Holding
Costs
No Warehouse
Costs
No Holding
Costs
Demand
Variability
Delayed
Allocation
Delayed
Allocation
Transshipment
What is the value of this?
What tools are needed?
What if the system is decentralized?
Supply Chain Integration - Dealing
with Conflicting Goals
Lot Size vs. Inventory
Inventory vs. Transportation
Lead Time vs. Transportation
Product Variety vs. Inventory
Cost vs. Customer Service
Supply Chain Management:
Pitfalls and Opportunities
Conflicting Objectives in the Supply
Chain
1. Purchasing
Stable volume requirements
Flexible delivery time
little variation in mix
large quantities
2. Manufacturing
Long run production
High quality
High productivity
Low production cost

Supply Chain Management:
Pitfalls and Opportunities
3. Warehousing
Low inventory
Reduced transportation costs
Quick replenishment capability
4. Customers
Short order lead time
High in stock
Enormous variety of products
Low prices

Symptoms of Supply Chain Problems
Stock-outs and High Inventory
Long Cycle Times
High Returns
High Costs
Poor Service Level

Common Pitfalls
1. Information and Management
No Supply Chain Metrics
Inadequate Definition of Customer Service
Inaccurate Delivery Status Data
Inefficient Information Systems
2. Operational Control
Ignoring the Impact of Uncertainties
Simplistic Inventory Stocking Policies
Discrimination against Internal Customers
Poor Coordination

Common Pitfalls
3. Design and Strategy
Incomplete Shipment Methods Analysis
Incorrect Assessment of Inventory Costs
Product and Process Design without SC
Consideration
Focus on Incomplete Supply Chain

Chapter 04

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Supply Chain Integration

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