Lecture supply chain management chapter 7 sc design and integration

14-Sep-21

LOGO

Chapter 7: SC design and
integration

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Contents

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1

Bullwhip Effect

2

Pull-Push Strategy

3

Supply Chain design

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1. Bullwhip Effect – Case study

 Procter & Gamble (P&G) examined order patterns for
Pampers.
 Its sales at retail stores were fluctuating, but the variability was
not excessive.
 For the distributors' orders, P&G was surprised by the greater
degree of variability.
 When they looked at P&G's orders of materials to their suppliers,
such as 3M, the swings were even greater.

 While babies consumed diapers at a steady rate, the
demand order variability in the supply chain was
amplified as we move up the supply chain. P&G called
this phenomenon the "bullwhip" effect.

ECR: Potential $30 billion opportunity
Efficient
Consumer
Response
(ECR)
initiative
One motivation for the initiative was the
excessive amount of inventory in the supply
chain.
Studies found more than 100 days of
inventory supply from production lines to
retailers' shelves.
Distorted information led to stockpiling
because of demand uncertainty and
variability

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Bullwhip
As we move further away from the endcustomer in the supply chain,
Distortion in demand information,
Increase in variance of orders

1.
2.

Information Coordination: The Bullwhip Effect
Consumer Sales at Retailer

Retailer's Orders to Wholesaler
900

800

800

300

Wholesaler's Orders to Manufacturer

41

39

37

35

33

31

29

27

25

23

21

Manufacturer's Orders with Supplier

1000

1000

Manufacturer Order

900

800
700
600
500
400
300
200
100

900
800
700
600
500
400
300
200
100

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40

37

34

31

28

25

22

19

16

13

10

7

0
4

41

39

37

35

33

31

29

27

25

23

21

19

17

15

13

11

9

7

5

3

1

0

1

Wholesaler Order

19

1

41

39

37

35

33

31

29

27

25

23

21

19

17

15

13

9

7

11

5

3

0

1

100

0

17

200

100

15

200

400

9

300

500

13

400

600

11

500

700

7

600

5

700

3

Retailer Order

1000

900

Consumer demand

1000

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Causes of the Bullwhip Effect
 Best illustration of the bullwhip effect is "beer game."
 Participants play the roles of customers, retailers,
wholesalers, and suppliers of a popular brand of beer.
Supplier
 They cannot communicate with each other and must
make order decisions based only on orders from the

Manufacturer
next downstream player.
 The ordering patterns share a common, recurring
Distributor
theme: the variability of an upstream site is always
greater than those of the downstream site, a simple, yet
Retailer
powerful illustration of the bullwhip effect.
 the bullwhip effect is a consequence of the players'
Customer
rational behavior within the supply chains
infrastructure.

So What?
When a supply chain is plagued with a bullwhip
effect and demand information is distorted,
It results in







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excessive inventory
poor product forecasts
insufficient or excessive capacities
poor customer service

Uncertain and costly production
high costs for corrections (expedited shipments and
overtime)

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What are the causes and solutions
for Bullwhip Effect?

2. Pull and Push System

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Pull Strategy
-

Coordinate production and distribution based on actual needs and orders
Receiving orders – Sourcing – Producing/assembling – Delivering
Meet the requirement of market, quick response and high quality service
Reduce stagnant capital, increase inventory turnover.
Strict requirements: flexible organization, scientific production
management, integrated information system, on time

Characteristics of products
and market

- Production and distribution
based on forecasting.
- Low volatile demand
- Low customized
- High Economies of scale

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- Production and distribution
based on real demand
- High volatile demand
- Customized products
- Low Economies of scale

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Characteristics of
Supply chain

Objective

Push system

Pull system

Minimize cost

Maximize cus service

High

Complex level
Focus

Low

Resource Allocation

Responsiveness

Process

Supply chain planning

Order processing

Storage

Many

Few

Order time

Short

Long

Adaptive level

Pull

Slow adaption

High
 Non-stable demand
 Low economies of
scale
 Customization

Push

 Stable market
 Low economies of
scale

 Non-stable
demand
 Large scale
market

 Stable market
 High economies of scale

 Standardized products
and processes

Low
Low
Pull

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Fast and flexible

High
Push

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PUSH OR PULL

14-Sep-21

- Make to order
Many time per day, at the Assembly line

Supplier’s
warehouse

Dell’s production
department

Customers

Suppliers

- Buying based on
demand forecast

All components are attached to the orders
No finish product is assembled before the order comes
-

Dell’s production department only stores a small amount of components and they comes
before few hours
The responsiveness of Dell depends directly on supplier’s competence
Absolute synchronization between production and sales, keep the supply chain always
balanced and smooth

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Why is there such a
change?

Push and Pull Strategy

Define the

boundary

- Push and pull Coordination: take the advantages of 2
strategies
- The first part of the chain: Push
- Store components based on long term forecasting
- Semi – products are assemble to modules
- The last part of the chain: Pull
- Assemble based on real demand
- Complete products after receiving orders
Forecasting
the customer
demand
Push strategy

Raw
material

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Pull –
push
Boundar
y

Real demand orders
Pull strategy

Receiving orders point
of time

End
users

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MTS

MTO

less volatility

Customization

ATO

ETO

Customers

Suppliers

Standardization

more volatility

Receiving Order point of time

3. Supply Chain Design
 Supply chain strategy must be aligned with overall
corporate strategies
 Supply chain performance goals must be stated in
operational terms: projected market coverage, sales
and service support, sale volume, profitability,
inventory turns, cash to cash cycle times and return
on investment.
 Supply chain strategies: intensity of distribution,
use of direct or indirect channels, services of
intermediaries in each geographic area and
implementation plans

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3. Supply Chain Design

Phase 1: Understanding end customer
Phase 2: Choosing best SC’s strategy
Phase 3: Scoping the SC’s structure

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Phase 1: understand the need of customer
The customer is the ultimate judge of the supply
chain’s performance
Organizations must understand the nature of their
products and be able to devise a supply chain
strategy that best fits their customers’ needs or
demands
Primarily functional or primarily innovative
products

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Customer service objectives
The level of product availability
The speed and consistency of the customer’s
order cycle
The communication that takes place between
seller and customer.

Availability
Inventory availability within a specified order

cycle time.
KPI: number of total order shipped completed
within a specified time period as a percentage of
total order received.
Reflecting the customer’s view of customer
service. And the product’s importance to the
customer and the customer importance to the
company

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Order cycle
The elapses between the customer’s order
placement and the time product is received.
Speed and consistency of the order cycle are
prime factors in SC design
Most customers prefer consistent service to fast
service.
The former allows them to plan inventory levels
to a greater extent than is possible with a fast
but highly variable order cycle

Communication
Firm’s ability to supply timely information to
the customer regarding such factors as: order

status, order tracking, back-order status, order
confirmation, product substitution, product
shortages, and product information requests.
Automated information system usually results
in fewer errors in shipping, picking, packing,
labeling and documentation.

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Phase 2: Selecting a supply chain strategy
A supply chain strategy can be defined as a
strategy required to manage the integration of
all the supply chain activities through
improved supply chain relationships in order to
achieve a competitive advantage for the supply
chain (Hines, 2004: 5)
Supply chain strategies may be designed to be
more efficient and/or to be more responsive

Requirement in design a supply chain
Suitable Strategies
Simplicity
Consistency
Throughout from the
origin to the destination

Suitable Strategies
Adapt to important priorities
in competitive strategy

Supply chain makes the
Cost
difference

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Competition Strategy

SC’ Strategy
SC’ structure
Efficiecy

Effective

Responsi
-veness

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Simplicity
Postponement >< Delay ???
Postponement makes SC:

More Flexible
Reduce cost due to reduce the
complexity

Postponement ways:
Manufacturing Postponement
Logistics Postponement

Consistency
Objectives
Application and process
Data and IT system
High Reliability
Collaboration

Throughout from the origin to the destination
Process and IT are integrated inside and outside the
firm to the customers and main suppliers
Production capacity and inventory are optimized
throughout the SC
Performance indicators and qualitative objectives
are shared throughout the SC

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Efficient (or lean) supply chains
 An efficient (or lean) supply chain is a set of
organizations directly linked by flows of
information, products and finances that work
collaboratively to reduce cost and waste
 Non-value-added
activities
should
be
eliminated, scale economies should be pursued
and optimization techniques should be deployed
to get the best capacity utilization in production
and distribution
 Lean supply chains are thus appropriate for and
match functional products

Responsive (or agile) supply chains
The focus of agile supply chains is on time
compression and quick response and on
eliminating the barriers to quick response
Supply chain agility is the ability of the supply
chain as a whole to rapidly align the network and
its operations to the dynamic and turbulent
requirements of customers’ demands
Agile supply chains are relevant for innovative
products

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Supply chain strategies
Efficient Supply
chain

Responsive Supply
chain

Main goal
Distribution
strategy
Operation
management
Inventory
management
Response time
Supplier selection
New product
design

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Competition
Strategies

Innovation

Strategies and Structure of SC
SC supports to introduce new product
Outsource, expand the size quickly
Suppliers join in designing product process
Product and operational procedures standardization

Cost

Integrating and controlling supply source

Quality

Quality management

Service

Integrating process and customer system
Market Segmentation

Product Origin Traceability

SC’ Strategy

Simplicity
Product standardization

Reduce the number of suppliers
Process Standardization
Establishing general process
applied to all member in SC
Postponement variety of
products at the end stage
Shell supplied inventories automatically to Bayer
Bayer does not need to order
Bayer does not fear of shortage of bunker
E - payment
solution for inventory management

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A combination of lean and agile supply chains
Hybrid (or ‘leagile’) supply chains exploit
the benefits of both lean and agile supply
chains
The decoupling point is the point in the
product ow stream to which the customer’s
order penetrates and where real time data and
forecast- driven activities meet
What is the organisation’s position in terms
of the decoupling point?
Which supply chain strategy should be

adopted by the organisation?

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