- Supply Chain Management Tutorial
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Supply Chain Management - Integration
Supply chain integration can be defined as a close calibration and collaboration within a supply chain, mostly with the application of shared management information systems. A supply chain is made from all parties that participate in the completion of a purchase, like the resources, raw materials, manufacturing of the product, shipping of completed products and facilitating services.
There are different levels of supply chain integration. We will understand this with the help of an example of a computer manufacturing company. The initial step in integration shall include choosing precise merchants to supply certain inputs and ensuring compliance for them for supplying certain amount of inputs within the year at a set cost.
This assures that the company has the appropriate materials required to produce the expected output of computers during the year. In the meanwhile, this computer company may sign a bond with a large supplier of circuit boards; the bond expects it to deliver a precise quantity at precise times within a year and fix a price that will be effective during the bond year.
If we move to a higher level, the next step would be to integrate the companies more closely. The circuit board supplier may construct a plant close to the assembly plant and may also share production software. Hence, the circuit board company would be able to see how many boards are required in the upcoming month and can construct them in time, as the company requires them in order to meet its sales demand.
Further higher level is referred as vertical integration. This level starts when the supply chain of a company is actually owned by the company itself. Here, a computer company may buy the circuit board company just to ensure a devoted supply of elements.
In a push-based supply chain, the goods are pushed with the help of a medium, from the source point, e.g., the production site, to the retailer, e.g., the destination site. The production level is set in accordance with the previous ordering patterns by the manufacturer.
A push-based supply chain is time consuming when it has to respond to fluctuations in demand, which can result in overstocking or bottlenecks and delays, unacceptable service levels and product obsolescence.
This system is based on the deliberation of customer’s demand. It tries to push as many products into the market as possible. As a result, the production is time consuming because the producer and the retailer struggle to react to the changes in the market. Forecast or prediction plays an important role in the push system.
Optimum level of products can be produced through long term prediction. This deliberative nature of the push system leads to high production cost, high inventory cost as well as high shipment cost due to the company’s desire to halt products at every stage.
Thus, in the push view of supply chain integration, the manager of a firm may sometimes fail to satisfy or cope with the fluctuating demand pattern. This system leads to high inventory and high size of batches.
Here, the companies focus more on minimizing the cost of supply chain and neglect the responsiveness. This system models challenges along with demand management and transportation management.
The pull-based supply chain is based on demand-driven techniques; the procurement, production and distribution are demand-driven rather than predicting. This system doesn’t always follow the make-to-order production. For example, Toyota Motors Manufacturing produces products yet do not religiously produce to order. They follow the supermarket model.
According to this model, limited inventory is kept and piled up as it is consumed. Talking about Toyota, Kanban cards are used to hint at the requirement of piling up inventory.
In this system, the demand is real and the company responds to the customer demands. It assists the company in producing the exact amount of products demanded by the clients.
The major drawback in this system is that in case the demand exceeds than the amount of products manufactured, then the company fails to meet the customer demand, which in turn leads to loss of opportunity cost.
Basically in the pull system, the total time allotted for manufacturing of products is not sufficient. The production unit and distribution unit of the company rely on the demand. From this point of view, we can say that the company has a reactive supply chain.
Thus, it has less inventories as well as variability. It minimizes the lead time in the complete process. The biggest drawback in pull based supply chain integration is that it can’t minimize the price by ranking up the production and operations.
Differences in Push and Pull System
The major differences between push and pull view in supply chain are as follows −
In the push system, the implementation begins in anticipation of customer order whereas in the pull system, the implementation starts as a result of customer’s order.
In the push system, there is an uncertainty in demand whereas in pull system, the demand remains certain.
The push system is a speculative process whereas the pull system is a reactive process.
The level of complexity is high in the push system whereas it is low in the pull system.
The push based system concentrates on resources allocation whereas the pull system stresses on responsiveness.
The push system has a long lead time whereas the pull system has a short lead time.
The push system assists in supply chain planning whereas the pull system facilitates in order completion.
To conclude, the push based supply chain integrations works with an objective of minimizing the cost whereas the pull based supply chain integration works with an objective to maximize the services it provides.
Push & PUll System
Mostly we find a supply chain as merger of both push and pull systems, where the medium between the stages of the push-based and the pull-based systems is referred as the push–pull boundary.
The terms push and pull were framed in logistics and supply chain management, but these terms are broadly used in the field of marketing as well as in the hotel distribution business.
To present an example, Wal-Mart implements the push vs. pull strategy. A push and pull system in business represents the shipment of a product or information between two subjects. Generally, the consumers use pull system in the markets for the goods or information they demand for their requirements whereas the merchants or suppliers use the push system towards the consumers.
In supply chains, all the levels or stages function actively for the push and the pull system. The production in push system depends on the demand predicted and production in pull system depends on absolute or consumed demand.
The medium between these two levels is referred as the push–pull boundary or decoupling point. Generally, this strategy is recommended for products where uncertainty in demand is high. Further, economies of scale play a crucial role in minimizing production and/or delivery costs.
For example, the furniture industries use the push and pull strategy. Here the production unit uses the pull-based strategy because it is impossible to make production decisions on the basis on long term prediction. Meanwhile, the distribution unit needs to enjoy the benefits of economy of scale so that the shipment cost can be reduced; thus it uses a push-based strategy.
The demand-driven strategies were first developed to understand the impact of inactivity and collection, as information fertilizes the supply chain from the source of demand to the suppliers.
Within a mentioned supply lead time, normally the manufacturers manufacture sufficient goods to satisfy the needs of their clients predicted. But this is only somewhat accurate at the granular level at which inventory decisions are made.
Anyways, when the actual demand varies from the demand predicted, the first thing to be done is to adjust the supply levels needed in accordance with each step of the supply chain. But because of time delay between changing demands and its detection at several at points along the supply chain, its impact is amplified, resulting in inventory shortages or excesses.
The inventory levels of the companies are disturbed because of the overcompensation done by the companies either by slowing down or speeding up production. These fluctuations prove to be a costly and inefficient affair for all participants.
Basically, the demand-driven strategies or the demand-driven supply chain is completely based on the demand as well as the supply part of marketing. So it can be uniquely organized in terms of the demand side and supply side initiatives.
The demand-side initiatives concentrate on efficient methods to acquire the demand signal closer to the source, observe the demand to sense the latest and most accurate demand signal and shape the demand by implementing and following promotional and pricing strategies to gear up demand in accordance with business objectives.
On the other hand, the supply side initiatives mostly need to do with reducing reliance on the prediction by developing into an agile supply chain accompanied by faster response when absolute demand is known.
All the strategies discussed above are addressed under the demand-driven strategy, but we a company following all of them is rare. In fact, we can conclude that companies concentrate on different markets on the basis of features of the market and industry.