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Chapter 5 - Belk College Of Business

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Chapter 5 - Belk College Of Business Powered By Docstoc
					     OPER3208-001
Supply Chain Management
           Fall 2006
    Instructor: Prof. Setzler
Simchi-Levi, Chapters 5
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Introduction
   – The challenge in SC integration is to coordinate activities across
     the SC so that the enterprise can improve performance
       •   Reduce cost
       •   Increase service level
       •   Reduce the bullwhip effect
       •   Better utilize resources
       •   Effectively respond to changes in the marketplace

   – These challenges are only met by coordination of
       •   Production
       •   Transportation
       •   Inventory decisions
       •   Integrating the front-end of the SC (i.e., customer demand), and the
           back-end of the SC (i.e., production and manufacturing)
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Push-Based Supply Chain
  – Production and distribution decisions are based on long-term
    forecasts
     • Demand forecast for manufacturer is based on orders received from
       the retailer’s warehouse
         – As discussed in Ch 4, the variability of orders received from retailers
           and warehouses is much larger than the variability of customer
           demand—Bullwhip Effect
         – Increases in variability leads to
              » Excessive inventories (safety stock)
              » Larger and more variable production batches
              » Unacceptable service levels
              » Product obsolescence
     • It takes longer for a push-based SC to react to changes in the
       marketplace, which can lead to
         – The inability to meet changing demand patterns
         – The obsolescence of SC inventory
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Push-Based Supply Chain
  – Due to the need for emergency production
    changeovers, we often find increased
    transportation costs, high inventory levels,
    and/or high manufacturing costs
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Pull-Based Supply Chain
   – Production and distribution are demand driven so that they are
     coordinated with true customer demand rather than forecast
     demand
   – In a pure pull system, the firm does not hold any inventory and
     only responds to specific orders
   – Pull systems are attractive since they lead to
       • A decrease in lead times through the ability to better anticipate
         incoming orders from the retailers
       • A decrease in inventory at the retailers since inventory levels at
         these facilities increase with lead times
       • A decrease in variability in the system and variability faced by
         manufacturers due to lead-time reduction
       • Decreased inventory at the manufacturer due to the reduction in
         variability
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Pull-Based Supply Chain
  – These systems typically have
     • A significant reduction in system inventory level
     • Enhanced ability to manage resources
     • A reduction in system costs (when compared to an
       equivalent push-based system)

  – Pull systems are difficult to implement when lead
    times are too long
     • Unable to react to demand
  – Pull systems are more difficult to take advantage of
    economies of scale in manufacturing and
    transportation since systems are not planned far
    ahead in time
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Push-Pull Supply Chain
  – A new SC strategy that takes advantage of the best of
    the push strategy and the pull strategy
  – Some stages of the SC (usually the initial stages)
    operate as a push-based system, the remaining
    stages operate as a pull-based system
  – The interface (boundary) between the push-based
    stages and the pull-based stages is called the push-
    pull boundary
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Push-Pull Supply Chain
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Push-Pull Supply Chain
  – Example 1: Dell Computers uses the push-pull
    strategy
     • Manufacturer builds to order
     • Component inventory is managed based on forecast (push)
        – Demand for component is an aggregation of demand for all
          finished goods that use that component
        – Since aggregate forecasts are more accurate, uncertainty in
          component demand is much smaller than uncertainty in
          finished goods
             » This leads to a reduction in safety stock
     • Final assembly is in response to specific orders (pull)
     • The push-pull boundary is at the beginning of the assembly
       process
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Push-Pull Supply Chain
  – Example 2: Postponement, or delayed differentiation
     • The firm designs the product and the manufacturing process
       so that decision can be delayed as long as possible
     • The manufacturing process starts by producing a generic or
       family product
     • The portion of the SC prior to product differentiation is usually
       operated using a push-based strategy
     • Since demand for the generic product is an aggregation of
       demand for all its corresponding end-products, forecasts are
       more accurate and inventory levels are reduced
         – The portion of the SC starting from the time of differentiation is
           pull-based
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Identifying the Appropriate Supply Chain
  Strategy
  – Figure 5.2 provides a framework for matching
    SC strategies
    with products
    and industries
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Identifying the Appropriate Supply Chain Strategy
   – Everything else being equal, higher demand uncertainty leads to
     a preference for managing the SC based on realized demand: a
     pull strategy
   – Smaller demand uncertainty leads to an interest in managing the
     SC based on a long-term forecast: a push strategy
   – Everything else being equal, the higher the importance of
     economies of scale in reducing cost, the greater the value of
     aggregating demand, and the greater the importance of
     managing the SC based on long-term forecast, a push-based
     strategy
   – If economies of scale are not important
     aggregation does not reduce cost, so a
     pull-based strategy makes more sense
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Identifying the Appropriate Supply Chain
  Strategy
  – Box 1 represents industries (i.e., products) such as
    computer industry (e.g., Dell uses the pull-based
    strategy)
  – Box 3 represents product in the grocery industry such
    as beer, pasta, and soup (a push-based retail
    strategy is appropriate)
     • Demand is stable
  – Boxes 1 & 3 represent situations in
    which it is relatively easy to identify
    an efficient SC strategy
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Identifying the Appropriate Supply Chain
  Strategy
  – Boxes 2 & 4: There is a mismatch between the
    strategies suggested by the two attributes
     • Uncertainty ―pulls‖ the SC towards one strategy, while
       economies of scale ―push‖ the SC in a different direction
     • Box 4 represents products such as high-volume/fast-moving
       books and CDs.
        – Both traditional push strategies and
          innovative push-pull strategies may be
          appropriate
            » Depends on specific costs and
              uncertainties
            » Discussed further in Section 5.4
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Identifying the Appropriate Supply Chain Strategy
   – Boxes 2 & 4: There is a mismatch between the strategies
     suggested by the two attributes
      • Box 2 represents products and industries such as the furniture
        industry
          – Offers a large number of similar products distinguished by shape, color,
            fabric, etc
          – Need to distinguish between the production and the distribution
            strategies
          – Production strategy has to follow a pull-based strategy since it is
            impossible to make production decisions based on long-term forecasts
          – On the other hand, the distribution strategy
            needs to take advantage of economies of
            scale in order to reduce transportation cost
          – The SC strategy followed by furniture
            manufacturers is a pull-push strategy
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Implementing a Push-Pull Strategy
  – There are many ways to implement a push-
    pull strategy, depending on the location of the
    push-pull boundary
     • Dell locates the push-pull boundary at the
       assembly point
     • Furniture manufacturers locate the boundary at the
       production point
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Implementing a Push-Pull Strategy
   – Push strategy
       • Demand uncertainty is relatively small and managing this portion based on
         long-term forecast is appropriate
            – Service level is not an issue, so the focus can be on cost minimization
            – Low demand uncertainty and economies of scale in production and/or
              transportation
            – Long lead times and complex SC structures, including product assembly at
              various levels
            – Cost minimization is achieved by better utilizing resources such as production and
              distribution capacity while minimizing inventory, transportation, and production
              costs
   – Pull strategy
       • Uncertainty is high, and it is important to manage this portion based on
         realized demand
            – High uncertainty, and a short cycle time
            – Focus is on service level
            – High service level is achieved by deploying a flexible and responsive SC
                 » A SC that can adapt quickly to changes in customer demand
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Implementing a Push-Pull Strategy
  – Different processes need to be used in
    different portions of the SC
     • The focus in the pull part of the SC is on service
       level, order fulfillment processes are typically
       applied
     • The focus of the push part of the SC is on cost and
       resource utilization, SC planning processes are
       used to develop effective strategies for a given
       planning horizon (e.g., a few weeks, or months)
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Implementing a Push-Pull Strategy
  – Table 5-1 summarizes the characteristics of
    the push and pull portions of the SC
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Implementing a Push-Pull Strategy
   – Notice that the push portion and the pull portion of the SC
     interact only at the push-pull boundary
       • This is the point along the SC time line where there is a need to
         coordinate the two SC strategies
           – Typically through buffer inventory
               » This inventory takes a different role in each portion
               » In the push portion, buffer inventory at the boundary is part of the
                  output generated by the tactical planning process
               » In the pull portion, buffer inventory represents the input to the
                  fulfillment process
       • The interface between the push portion and the pull portion of the
         SC is forecast demand
           – Forecast demand is based on historical data obtained from the pull
             portion
           – Forecast is used to drive the SC planning process and determines the
             buffer inventory
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Demand-Driven Strategies
  – Need to integrate demand information into the
    SC planning process
     • Information is generated by applying 2 different
       processes
        – Demand Forecast: Historical demand data is used to
          develop long-term estimates of expected demand
        – Demand Shaping: The firm determines the impact of
          various marketing plans such as promotion, pricing
          discounts, rebates, new product introduction, and product
          withdrawal on demand forecasts
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Demand-Driven Strategies
  – The forecast is not completely accurate
     • An important output from the demand-forecast and
       demand-shaping processes is an estimate of the
       accuracy of the forecast
        – Forecast error
        – Measured according to its standard deviation
  – High demand forecast error has a detrimental
    impact on SC performance
     • Resulting in lost sales, obsolete inventory, and
       inefficient utilization of resources
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Demand-Driven Strategies
   – Can the firm employ SC strategies to increase forecast accuracy
     and decrease forecast error?
      • Select the push-pull boundary so that demand is aggregated over
        one or more of the following dimensions
          – Demand aggregated across products
          – Demand aggregated across geography
          – Demand aggregated across time
      • Use market analysis and demographic and economic trends to
        improve forecast accuracy
      • Determine the optimal assortment of products by store so as to
        reduce the number of SKUs competing in the same market
      • Incorporate collaborative planning and forecasting processes with
        your customers so as to achieve a better understanding of market
        demand, impact of promotions, pricing events, and advertising
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Demand-Driven Strategies
  – At the end of the demand planning process, the firm
    has a demand forecast by SKU by location
  – The next step is to analyze the SC to see if it can
    support these forecasts
     • This process is called supply and demand management
     • It involves matching supply and demand by identifying a
       strategy that minimizes total production, transportation, and
       inventory costs, or a strategy that maximizes profits
     • The firm also needs to determine the best way to handle
       volatility and risks in the SC
Chapter 5: Supply Chain Integration (Simchi-Levi)

• The Impact of the Internet on Supply Chain
  Strategies
  – The direct-business model employed by industry
    giants such as Dell Computers and Amazon.com
    enables customers to order products over the Internet
     • Allows companies to sell their products without relying on
       third-party distributors
     • Business-to-business e-commerce promises convenience
       and cost reductions
         – e-commerce is predicted to skyrocket from $43 billion in 1998
           to $1.3 trillion in 2003
Chapter 5: Supply Chain Integration (Simchi-Levi)

• The Impact of the Internet on Supply Chain
  Strategies
  – The Internet and the emerging e-business models
    have produced expectations that many SC problems
    will be resolved merely by using these new
    technology and business models
     • e-business strategies were supposed to reduce cost,
       increase service level, and increase flexibility and profits
     • In reality, these expectations have frequently gone unmet, as
       many new e-businesses have not been successful
         – The downfall of some of the highest-profile Internet businesses
           has been attributed to their logistics strategies
Chapter 5: Supply Chain Integration (Simchi-Levi)

• The Impact of the Internet on Supply
  Chain Strategies
Chapter 5: Supply Chain Integration (Simchi-Levi)

• The Impact of the Internet on Supply
  Chain Strategies
Chapter 5: Supply Chain Integration (Simchi-Levi)

• The Impact of the Internet on Supply
  Chain Strategies
Chapter 5: Supply Chain Integration (Simchi-Levi)

• The Impact of the Internet on Supply
  Chain Strategies
Chapter 5: Supply Chain Integration (Simchi-Levi)

• What is E-Business
  – E-business
     • A collection of business models and processes
       motivated by Internet technology and focusing on
       improvement of extended enterprise performance
  – E-commerce
     • The ability to perform major commerce
       transactions electronically
Chapter 5: Supply Chain Integration (Simchi-Levi)

• What is E-Business
  – E-commerce is only part of e-business
  – Internet technology is the force behind the business
    change
  – The focus in e-business is on the extended
    enterprise, intra-organizational, business-to-consumer
    (B2C), and business-to-business (B2B) transactions
  – Many companies recognize that the Internet can have
    a huge impact on SC performance
     • The Internet can help move away from traditional push
       strategies
     • Initially the move was toward a pull strategy, but eventually
       many companies ended up with a push-pull SC
Chapter 5: Supply Chain Integration (Simchi-Levi)

• The Grocery Industry
   – A typical supermarket employs a push-based strategy where inventory
     at the warehouses and stores is based on a forecast
   – Peapod
       • On-line grocer
       • Founded 11 years ago
       • Idea: establish a pure pull strategy with no inventory and no facilities
            – Customers ordered groceries, Peapod would pick the products at a nearby
              supermarket
            – There were significant service problems since stockout rates were very high
              (about 8 to 10%)
       • Peapod changed its business model to a push-pull strategy by setting up a
         number of warehouses; stockout rates are now less than 2%
            – The push part is the portion of the Peapod SC prior to satisfying customer
              demand and the pull part starts from a customer order
            – Since Peapod warehouse covers a large geographical area, clearly larger than
              the one covered by an individual supermarket, demand is aggregated over may
              customers and locations, resulting in better forecasts and inventory reduction
Chapter 5: Supply Chain Integration (Simchi-Levi)

• The Grocery Industry
  – Most on-line grocery stores have failed
     • No current on-line grocers have the density of
       customers that will allow them to control
       transportation costs
     • Response time is very short, typically within 12
       hours in a tight delivery window
     • On-line groceries
        – Low level of demand uncertainty for many products
        – High economies of scale in transportation cost
        – A Push-based strategy is more appropriate
Chapter 5: Supply Chain Integration (Simchi-Levi)

• The Book Industry
   – Barnes and Noble had a typical push supply chain
      • When Amazon.com was established about 6 years ago
          – SC was a pure pull system with no warehouses and no stock
          – Ingram Book Group supplied most of Amazon’s customer demand
               » Ingram Book can aggregate across many customers and suppliers
                 and take advantage of economies of scale
          – As volume and demand increased, two issues are clear
               » Amazon.com’s service level was affected by Ingram Book’s
                 distribution capacity, which was shared by many booksellers
               » During peak holiday demand, Amazon.lcom could not meet its
                 service level goals
               » Using Ingram Book allowed Amazon.com to avoid inventory costs
                 but significantly reduced profit margins
               » As demand increased, Amazon.com’s ability to aggregate across
                 large geographical areas allowed the company to reduce
                 uncertainties and inventory costs by itself, without using a
                 distributor
Chapter 5: Supply Chain Integration (Simchi-Levi)

• The Book Industry
  – Barnes and Noble had a typical push supply
    chain
       – Amazon.com changed its Barnes and Noble’s philosophy
          » Has several warehouses around the country where
            most of the titles are stocked
          » Inventory at the warehouses is managed based on a
            push strategy
          » Demand is satisfied based on individual requests, a
            pull strategy
Chapter 5: Supply Chain Integration (Simchi-Levi)

• The Retail Industry
  – The retail industry was late to respond to competition
    from virtual stores and to recognize the opportunities
    provided by the Internet
  – As many brick-and-mortar companies are adding an
    Internet shopping component to their offering
  – Click-and-mortar giants Wal-Mart, Kmart, Target, and
    Barnes and Noble, etc.
     • These retailers recognize the advantage they have over pure
       Internet companies
     • They already have the distribution and warehousing
       infrastructure in place
        – They have established virtual retail stores, serviced by their
          existing warehousing and distribution structures
Chapter 5: Supply Chain Integration (Simchi-Levi)

• The Retail Industry
  – Click-and-mortar firms have changed their approach
    to stocking inventory
     • High-volume, fast-moving products, whose demand can be
       accurately matched with supply based on long-term
       forecasts, are stocked in stores
     • Low-volume, slow-moving products are stocked centrally for
       on-line purchasing
        – The low-volume products have highly uncertain demand levels,
          and therefore require high levels of safety stock
        – Centralized stocking reduces uncertainties by aggregating
          demand across geographical locations, and therefore reduce
          inventory levels
        – **These retailers use a push strategy for high volume, fast-
          moving products and a push-pull strategy for low volume, slow-
          moving products
Chapter 5: Supply Chain Integration (Simchi-Levi)

• The Retail Industry
  – The move from brick-and-mortar to click-and-
    mortar is not an easy one, and may require
    skills that the brick-and-mortar companies
    don’t have
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Impact on Transportation and Fulfillment
  – The Internet and the associated new SC
    paradigms introduce a shift in fulfillment
    strategies: from cases and bulk shipments to
    single items and smaller-size shipments, and
    from shipping to a small number of stores to
    serving highly geographically dispersed
    customers
  – This shift has also increased the importance
    and the complexity of reverse logistics
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Impact on Transportation and Fulfillment
  – Table 5-2 summarizes the impact of the
    Internet on fulfillment strategies
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Impact on Transportation and Fulfillment
  – New developments in SC strategies are good news
    for the parcel and LTL industries
     • Both push-pull systems rely on individual (e.g., parcel)
       shipments rather than bulk shipments
     • Especially true in the business-to-customer area (a.k.a. B2C
       e-fulfillment)
     • Another impact of e-fulfillment on the transportation industry
       is the significant increase in reverse logistics
         – In the B2C arena, e-fulfillment means that the supplier needs to
           handle many returns, each of which consists of a small
           shipment
              » On-line retailers need to build customer trust through
                generous return terms
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Impact on Transportation and Fulfillment
  – E-fulfillment logistics requires short lead time, the
    ability to serve globally dispersed customers, and the
    ability to reverse the flow easily from B2C and C2B
     • Only parcel shipping can do all that
     • One important advantage of the parcel industry is the
       existence of an excellent information infrastructure that
       enables real-time tracking
     • The future looks promising for the parcel shipping industry
       and for those carriers and consolidators who work to modify
       their own systems in order to integrate it with their customers’
       SC
Chapter 5: Supply Chain Integration (Simchi-Levi)

•   Distribution Strategies
    –   Typically, three distinct outbound distribution
        strategies are utilized:
        1. Direct shipment
           •   Items are shipped directly from the supplier to the retail stores
               without going through distribution centers
        2. Warehousing
           •   Classic strategy in which warehouses keep stock and provide
               customers with items as required
        3. Cross-docking
           •   Items are distributed continuously from suppliers through
               warehouses to customers
           •   Warehouses rarely keep the items more than 10 to 15 hours
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Direct shipment
  – Bypass warehouses and distribution centers
  – Employing direct shipment, the manufacturer
    or supplier delivers goods directly to retail
    stores
  – The advantages
     • The retailer avoids the expenses of operating a
       distribution center
     • Lead times are reduced
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Direct shipment
   – Disadvantages:
       • Risk-pooling effects are negated because there is no central
         warehouse
       • The manufacturer and distributor transportation costs increase
         because it must send smaller trucks to more locations
   – Direct shipment is common when the retail store requires fully
     loaded trucks, which implies that the warehouse does not help in
     reducing transportation cost
       • Sometimes, the manufacturer is reluctant to be involved with direct
         shipping but may have no choice in order to keep the business
       • Also prevalent in the grocery industry, where lead times are critical
         because of perishable goods
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Cross-Docking
  – A strategy that Wal-Mart made famous
  – Warehouses function as inventory coordination points
    rather than as inventory storage points
  – Goods arrive at warehouses from the manufacturer,
    are transferred to vehicles serving the retailers, and
    are delivered to the retailers as rapidly as possible
  – This system limits inventory cost and decreases lead
    time by decreasing storage time
Chapter 5: Supply Chain Integration (Simchi-Levi)

•   Distribution Strategies
    – Few major retailers utilize one of these
      strategies exclusively
      •   Different approaches are used for different
          products, making it necessary to analyze the SC
          and determine the appropriate approach to use
          for a particular product or product family
Chapter 5: Supply Chain Integration (Simchi-Levi)

•   Distribution Strategies
    –   What are the factors that influence distribution
        strategies?
        •   Customer demand and location
        •   Service level
        •   Transportation costs
        •   inventory costs
    –   Both transportation and inventory costs depend on
        shipment size, but in opposite ways
        •   Increasing lot sizes reduces delivery frequency and
            enables the shipper to take advantage of price breaks in
            shipping volume, which reduces transportation costs
        •   Large lost sizes increase inventory cost per item because
            items remain in inventory for a longer period of time
Chapter 5: Supply Chain Integration (Simchi-Levi)

•       Distribution Strategies
    –     Demand variability also has an impact on the distribution
          strategy
          •   Demand variability has a huge impact on cost
              –   The larger the variability, the more safety stock needed
              –   Stock held at the warehouses provides protection against demand
                  variability and uncertainty, and due to risk pooling, the more
                  warehouses a distributor has, the more safety stock is needed
              –   If warehouses are not used for inventory storage, as in the cross-
                  docking strategy, or if there are no warehouses at all, as in direct
                  shipping, more safety stock is required in the distribution system
                   » This is true because in both cases each store needs to keep
                       enough safety stock
                   » This effect is mitigated by distribution strategies that enable
                       better demand forecasts and smaller safety stocks, and
                       transshipment strategies
                   » Any assessment of different strategies must also consider lead
                       time and volume requirements
Chapter 5: Supply Chain Integration (Simchi-Levi)

•   Distribution Strategies
    – Table 5-3 summarizes and compares the
      three distribution strategies
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Transshipment
  – An important option to consider when selecting SC
    strategies
     • Transshipment: The shipment of items between different
       facilities at the same level in the SC to meet some immediate
       need
     • Transshipment is considered at the retail level
     • Transshipment capability allows the retailer to meet customer
       demand from the inventory of other retailers
         – The retailer must know what other retailers have in inventory
           and must have a rapid way to ship the items either to the store
           where the customer originally tried to make the purchase or to
           the customer’s home
         – Requirements can only be met with advanced information
           systems, which allow a retailer to see what other retailers have
           in stock and facilitate rapid shipping between retailers
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Centralized versus Decentralized Control
  – Centralized Control
     • Decisions are made at a central location for the entire supply
       network
     • Objective: to minimize the total cost of the system while
       maintaining some stated service-level requirement
     • True when the network is owned by one entity
     • True when the network includes many different organizations
         – Savings, or profits, need to be allocated across the network
           using some contractual mechanism
     • Leads to global optimization
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Centralized versus Decentralized Control
  – Decentralized Control
     • Each facility identifies its most effective strategy
       without considering the impact on the other
       facilities in the SC
     • Leads to local optimization
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Centralized versus Decentralized Control
  – Centralized distribution network will be at least as
    effective as a decentralized one
  – With advances in IT, all facilities in a centralized
    system can have access to the same data
     • Single point of contract
         – Information can be accessed from anywhere in the SC and is
           the same no matter what mode of inquiry is used or who is
           seeking the information
         – Allows for sharing of information
         – Utilization of this information in ways that reduce the bullwhip
           effect and improve forecasts
         – Allow for the use of coordinated strategies across the entire SC
              » Strategies that reduce systemwide costs and improve
                 service levels
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Centralized versus Local Facilities
  – Important considerations
     • Safety stock
        – Consolidating warehouses allows the vendor to take
          advantage of risk pooling
        – The more centralized an operation is, the lower the
          safety stock levels
     • Overhead
        – Economies of scale suggest that operating a few large
          central warehouses leads to lower total overhead cost
          relative to operating many smaller warehouses
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Centralized versus Local Facilities
  – Important considerations
     • Economies of scale
        – Economies of scale can be realized if manufacturing is
          consolidated
        – Often much more expensive to operate many small
          manufacturing facilities than to operate a few large
          facilities with the same total capacity
     • Lead time
        – Lead time to market can often be reduced if a large
          number of warehouses are located closer to the market
          areas
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Centralized versus Local Facilities
   – Important considerations
      • Service
          – Depends on how service is defined
          – Centralized warehousing enables the utilization of risk pooling, which
            means that more orders can be met with a lower total inventory level
              » Shipping time from the warehouse to the retailer will be longer
      • Transportation costs
          – Directly related to the number of warehouses used
          – As the number of warehouses increases, transportation costs between
            the production facilities and the warehouses also increases because
            total distance traveled is greater, and quantity discounts are less likely
            to apply
          – Transportation costs from the warehouses to the retailers are likely to
            fall because the warehouses tend to be much closer to the market area
Chapter 5: Supply Chain Integration (Simchi-Levi)

• Centralized versus Local Facilities
  – It is possible
     • That in an effective distribution strategy, some
       products will be stored in a central facility while
       others will be kept in various local warehouses
        – e.g., very expensive products with low customer demand
          may be stocked at a central warehouse while low-cost
          products facing high customer demand may be stocked
          at many local warehouses

				
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