Push Vs Pull Promotion Strategy

Demo Class at
DIMAT, Raipur, C.G.
Assistant Professor. Satrujit Batobyal
Tel: 09665949757 E-mail: satrujit.dsrcbm@gmail.com
1

A new Supply Chain Paradigm

A shift from a Push System...
Production decisions are based on forecast

to a Push-Pull System

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

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 Doesnt work in all cases
4

Push-Pull Supply Chains

The Supply Chain Time Line

Suppliers

Customers

PUSH STRATEGY Low Uncertainty Long lead times

PULL STRATEGY High Uncertainty Short lead times Push-Pull Boundary

5

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.
6

Consider Two PC Manufacturers:

Build to Stock
Forecast demand Buys components Assembles computers Observes demand and meets demand if possible.

Build to order
Forecast demand Buys components Observes demand Assembles computers Meets demand

A traditional push system

A push-pull system

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
8

What is the Best Strategy

Demand uncertainty (C.V.)

Pull

I
Computer

II

IV

III
Delivery cost Unit price

Push

L L H

Pull

Push

Economies of Scale 9

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.
10

Selecting the Best SC Strategy

Low uncertainty but low value of economies of scale (high volume books and cds)
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?
11

Characteristics and Skills

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

Customers

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.
13

Locating the Push-Pull Boundary

the location of the push-pull boundary for various companies and industries
reduce inventory holding cost

14

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

15

5.6.1 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

16

Direct-to-Consumer:Cost Trade-Off
Cost Trade-Off for BuyPC.com
$20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 0 5 10 15 Number of DC's

Cost ($ million)

Total Cost Inventory Transportation Fixed Cost

Industry Benchmarks: Number of Distribution Centers

Pharmaceuticals Food Companies Chemicals

Avg. # of WH

14

25
- Low margin product - Service very important - Outbound transportation expensive relative to inbound

- High margin product - Service not important (or easy to ship express) - Inventory expensive relative to transportation

Sources: CLM 1999, Herbert W. Davis & Co; LogicTools

18

5.6.2 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%
19

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?

20

Less than 300,000 shoppers

Number of customers Webvan Peapod HomeGrocer.com NetGrocer.com ShopLink.com Streamline.com 21000 140000 50000 60000 3 30 0 3 40 0 Average order $7 1 $1 2 0 $1 1 0 $7 0 $9 8 $1 0 0 Delivery charges $4.95 for < $50 free for > $50 $7.95 per order $9.95 < $75 free fo r > $ 7 5 $2.99 for < $50 $4.99 for > $50 $25 monthly $3 0

21 Source: D. Ratliff

5.6.3 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

22

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?

23

E-Fulfillment Requires a New Logistics Infrastructure

Traditional Supply Chain Supply Chain Strategy Shipment Type Inventory Flow Reverse Logistics Destination Lead Times Push Bulk Unidirectional Simple Small Number of Stores Depends

e-Supply Chain Push-Pull Parcel Bi-directional Highly Complex Highly Dispersed Customers Short

24

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

25

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

26

5.7 Distribution Strategies

Warehousing Direct Shipping

No DC needed Lead times reduced smaller trucks no risk pooling effects

Cross-Docking
27

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 ????
28

What accounts for Wal-Marts 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-Marts cost of sales significantly and made it possible to offer everyday low prices to their customers.
29

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.
30

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

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.
32

Distribution Strategies
Strategy Attribute Risk Pooling Transportation Costs Holding Costs Demand Variability No Warehouse Costs Reduced Inbound Costs No Holding Costs Delayed Allocation Delayed Allocation Direct Shipment Cross Docking Inventory at Warehouses Take Advantage Reduced Inbound Costs

33

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

34

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

35

The Enterprise Fulfillment and Development Supply Chains

Product Architecture Make/Buy Early Supplier Involvement Strategic Partnerships Suppliers Selection Supply Contracts

Development Supply Chain

Plan/Design

Source

Supply

Produce

Distribute

Sell

Fulfillment Supply Chain

What is the Right Supply Chain Strategy for your Product?

Products Characteristic
H

Product Introduction Frequency

Product Architecture
PC/Fashion Responsiveness Pull Systems Dynamic Pricing

Innovative

Cell Phone engines Push Systems Efficiency

Pasta/Diapers Efficiency Push System

Modular B

Furniture/Tires Push-Pull Lead Time Reduction

Functional

L L

A
Push

D
H

Integral
Demand Uncertainty 37

Supply Chain Strategy

Pull

The Development Supply Chain Industry clock speed

Innovative vs Functional products

Core competencies
Make vs. Buy

Product Design
Postponement, Standardization, Packaging
38