Lecture 9-10

Pull and Push Systems

Dr. Zhang Mengdi
Assistant Professor
[email protected]
Learning Objectives

§ What is a push strategy? A pull strategy? A push–pull strategy?

§ When should the firm use push? pull? or push–pull? What are the
key drivers when selecting the appropriate strategy?
§ What does it take to implement a push–pull strategy? What is the
impact? What would it cost?
§ What is the impact of the Internet on the supply chain strategy
employed by the traditional retailers and the online stores? In
particular, what is the impact on distribution and fulfillment
strategies?
Introduction

§ The challenge in supply chain integration is to coordinate

activities across the supply chain so that the enterprise can
improve performance
§ These challenges are met not only by coordinating production,
transportation, and inventory decisions, but, by integrating the
front end of the supply chain, customer demand, to the back end,
the production and manufacturing portion of the supply chain
§ The availability of information plays an important role in supply
chain integration
 Introduction
§Performance factors:
Ø reduce cost, increase service level, reduce the bullwhip effect, better
utilize resources, and effectively respond to changes in the market
place.
§Challenges can be met by integrating:
Ø the front-end, customer demand,
Ø to the back-end, production and manufacturing portion of the supply
chain.
§Various supply chain integration strategies:
Ø Push, pull, push–pull strategy.
Ø Matching products and industries with supply chain strategies.
Ø Demand-driven supply chain strategies.
Ø The impact of the Internet on supply chain integration.
Push, Pull, Push-Pull Systems

§ Traditional supply chain strategies are often categorized as

push or pull strategies

§ In the last few years, a number of companies have employed

a hybrid approach, the push–pull supply chain paradigm
Push-Based Supply Chains
§ In a push-based supply chain, production and distribution decisions are based
on long-term forecasts. The manufacturer bases demand forecasts on orders
received from the retailer’s warehouses. This causes it to take much longer
for the supply chain to react to the changing marketplace
§ This can lead to…
ØThe inability to meet changing demand patterns
ØThe obsolescence of supply chain inventory
§ Orders from the retailer have higher variability, which leads to…
ØExcessive inventories due to the need for large safety stocks
ØLarger and more variable production batches
ØUnacceptable service levels
ØProduct obsolescence
Bullwhip Effect in Push-Based Supply Chains

§ Leads to inefficient resource utilization

§ Planning and managing are much more difficult.
§ Not clear how a manufacturer should determine production
capacity? Transportation capacity?
Ø Peak demand?
Ø Average demand?
§ Results:
Ø Higher transportation costs
Ø Higher inventory levels and/or higher manufacturing
costs
Ø more emergency production changeovers
Pull-Based Supply Chains

§ In a pull-based supply chain, production and distribution are

demand-driven so that they are coordinated with true customer
demand. The firm does not hold any inventory and only
responds to specific orders
§ This leads to…
Ø A decrease in lead times
Ø A decrease in inventory at the retailers
Ø A decrease in variability in the system
Ø Decreased inventory at the manufacturer
§ In a pull-based supply chain, we typically see a significant
reduction in system inventory level
Implementation of Pull-Based
Systems

§Often difficult to implement

Ø when lead times are long
§ impractical to react to demand information.
Ø more difficult to take advantage of economies of scale
§Advantages and disadvantages of push and pull
supply chains:
Ø new supply chain strategy that takes the best of both.
Ø Push–pull supply chain strategy
Push-Pull Strategy

§ Some stages of the supply chain operated in a push-based manner

Ø typically the initial stages

§ Remaining stages employ a pull-based strategy.

§ Interface between the push-based stages and the pull-based stages is

the push–pull boundary.

ØThis is where when the firm switches from managing the supply chain
using one strategy, typically a push strategy, to managing it using a
different strategy, typically a pull strategy
Push–Pull Supply Chain Timeline
General Strategy

§Make a part of the product to stock – generic product

§The point where differentiation has to be introduced is

the push-pull boundary

§Based on extent of customization, the position of the

boundary on the timeline is decided
Identifying the Appropriate Strategy
§ Generally speaking
Ø Low economies of scale call for a pull strategy
Ø High economies of scale call for a push strategy
Ø Low demand uncertainty call for a push strategy
Ø High demand uncertainty calls for a pull strategy
§ Everything else being equal…
Ø Higher demand uncertainty leads to a preference for managing the supply chain
based on realized demand
Ø Smaller demand uncertainty leads to an interest in managing the supply chain
based on a long-term forecast
Ø The higher the importance of economies of scale in reducing cost, the greater
the value of aggregating demand, and thus the greater the importance of
managing the supply chain based on long-term forecast
Ø If economies of scale are not important, a pull-based strategy makes more sense
Matching Strategies with Products

Push-pull supply chains

Box I
• Industries that are characterized by high uncertainty
and by situations in which economies of scale in
production, assembly, or distribution are not
important
• Dell computers
• Our framework suggests that a pull-based supply
chain strategy is appropriate for these industries and
products
Box III
• Products that are characterized by low demand uncertainty and
high economies of scale
• For example, products you would find in a grocery store
• Demand for these products is quite stable
• Reducing transportation cost by shipping full truckloads is critical
for controlling supply chain cost
• A pull strategy (N/A)
Boxes I and III

• Boxes I and III represent situations in which it is relatively

easy to identify an efficient supply chain strategy
• Boxes II and IV have a mismatch between the strategies
suggested by the two attributes, uncertainty and the
importance of economies of scale
 Box IV
• Products characterized by low demand uncertainty, indicating a push-based
supply chain, and low economies of scale, suggesting a pull-based supply chain
strategy
Ø i.e. Includes many apparel products like white shirts
• The supply chain strategy is a hybrid, push-pull strategy, but we distinguish
between products by considering another product feature
• Specifically, we split products in this box to two categories: high-margin and
low-margin products
• High-margin products are risky products
• Hence, the supply chain strategy is implemented so that the push-pull
boundary is upstream
• Low-margin products are less risky
• The push-pull boundary is closer to market demand
Box II
• Represents products and industries for which uncertainty in demand is high
while economies of scale are important in reducing production and/or delivery
costs
Ø i.e. The furniture industry
• These are bulky products with high delivery costs
• The production strategy has to follow a pull-based strategy since it is
impossible to make production decisions based on long-term forecasts
• The distribution strategy needs to take advantage of economies of scale in order
to reduce transportation cost
• The supply chain strategy followed by furniture manufacturers is a pull–push
strategy where production is done based on realized demand, a pull strategy,
whereas delivery is according to a fixed schedule, a push strategy.
Impact of Demand Uncertainty and
Economies of Scale
§Demand Uncertainty:
Ø Higher demand uncertainty leads to a preference for pull
strategy.
Ø Lower demand uncertainty leads to an interest in managing
the supply chain based on a long-term forecast: push strategy.
§Economies of scale:
Ø The higher the importance of economies of scale in reducing
cost
§ The greater the value of aggregating demand
§ The greater the importance of managing the supply chain based on long-
term forecast, a push-based strategy.
Ø Economies of scale are not important
§ Aggregation does not reduce cost
§ A pull-based strategy makes more sense.
Implementing a Push–Pull Strategy

§ The push portion and the pull portion of the supply chain
interact only at the push–pull boundary

§ This is the point along the supply chain timeline where there is a
need to coordinate the two supply chain strategies
Interactions of the Two Portions
§ Only at the push-pull boundary
§ Typically through buffer inventory
§ Different role for the inventory in each portion
Ø In the push portion, buffer inventory is part of the output generated by
the tactical planning process
Ø In the pull system, it represents the input to the fulfillment process.

§ Interface is forecast demand

Ø Forecast based on historical data obtained from the pull portion
Ø Used to drive the supply chain planning process and determine the
buffer inventory.
Impact of the Push-Pull Strategy
§Push portion
Ø Low uncertainty
Ø Service level not an issue
Ø Focus on cost minimization.
Ø Long lead times
Ø Complex supply chain structures
Ø Cost minimization achieved by:
§ better utilizing resources such as production and distribution
capacities
§ minimizing inventory, transportation, and production costs.
Ø Supply Chain Planning processes are applied.
Impact of the Push-Pull Strategy

§Pull portion
Ø High uncertainty
Ø Simple supply chain structure
Ø Short cycle time
Ø Focus on service level.
Ø Achieved by deploying a flexible and responsive supply
chain
Ø Order-fulfillment processes are applied
Characteristics of the Push and Pull
Portions of the Supply Chain

Portion Push Pull

Objective Minimize cost Maximize service level

Complexity High Low

Focus Resource allocation Responsiveness

Lead time Long Short

Processes Supply chain planning Order fulfillment

The Impact of Lead Time

§Longer the lead time, more important it is to

implement a push based strategy.

§Typically difficult to implement a pull strategy when

lead times are so long that it is hard to react to
demand information.
Impact of Lead Time
Impact of Lead Time
§Box A
Ø Items with short lead time and high demand uncertainty
Ø Pull strategy should be applied as much as possible. i.e. PC
industry
§Box B
Ø Items with long supply lead time and low demand uncertainty.
Ø Appropriate supply chain strategy is push. i.e. Grocery industry
Impact of Lead Time
§Box C
Ø items with short supply lead time and highly predictable demand.
Ø Continuous replenishment strategy
§ Suppliers receive POS data
§ They use these data to prepare shipments at previously agreed-upon
intervals
§ A pull strategy at the production and distribution stages and push at the
retail outlets.
§Box D
Ø Items with long lead times are long and unpredictable demand
§ Inventory is critical in this type of environment
§ Requires positioning inventory strategically in the supply chain
Demand-Driven Strategies
§Requires integrating demand information into the
supply chain planning process
Ø Demand forecast:
§ Use historical demand data to develop long-term estimates of expected
demand
Ø Demand shaping:
§ Firm determines the impact of various marketing plans such as
promotion, pricing discounts, rebates, new product introduction, and
product withdrawal on demand forecasts.
§ The accuracy of the forecast is measured using forecast error,
measured according to its standard deviation
§ High demand forecast error has a detrimental impact on supply
chain performance
Supply Chain Strategies to Increase
Forecast Accuracy

§ Select the push–pull boundary so that demand is aggregated

across products, geography, or time

§ Use market analysis and demographic and economic trends

§ 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
After the Forecast
§ 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 supply chain and see if it can
support these forecasts

§ This involves matching supply and demand by identifying a

strategy that minimizes total production, transportation, and
inventory costs, or a strategy that maximizes profits

§ Called balancing supply and demand

Wish to Identify
§ The best way to allocate marketing budgets and associated supply
and distribution resources

§ The impact of deviations from forecast demand

§ The impact of changes in supply chain lead times

§ The impact of competitors’ promotional activities on demand and

supply chain strategies
The Impact of the Internet on Strategies
§ The influence of the Internet and e-commerce on business practice has been
tremendous

§ Expectation that increasing use of the internet would solve a lot of the business
problems

§ Changes are happening rapidly

§ The Internet allows companies to sell their products without relying on third-party
distributors

§ Many of the problems in the internet-based businesses were related to logistics

strategies

§ E-business strategies were supposed to reduce cost, increase service level, and
increase flexibility and profits
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: ability to perform major commerce

transactions electronically.
Key Observations
§E-commerce is only part of E-business.
§Internet technology is the force behind the business
change.
§Focus on the extended enterprise
Ø Business-to-consumer (B2C)
§ “direct to customer,”
§ Retail activities over the Internet, and includes products,
insurance, banking, and so forth.
Ø Business-to-business (B2B)
§ Conducted over the Internet predominantly between businesses.
§ Includes:
• electronic sourcing (the so-called eSourcing)
• reverse auctions
• collaboration with suppliers and vendors to achieve common goals.
Grocery Industry
§ Typical supermarket employs a push-based strategy
§ Peapod was built on pure pull strategy with no inventory
and no facilities.
Ø Significant service problems with high stockout rates
Ø Changed to a push–pull strategy by setting up a number of warehouses
Ø Warehouse covers a large geographical area
§ Aggregated demand
§ Other challenges:
Ø Reducing transportation costs
Ø Short response time
Ø Low customer density
§ Products have low demand uncertainty
Ø high economies of scale in transportation cost
Ø push-based strategy is more appropriate.
Book Industry
§ Initial model of Amazon.com a pure pull system with no
warehouses and no stock.
Ø Ingram Book Group supplied most of Amazon’s customer demand.
§ As volume and demand increased:
Ø Amazon.com’s service level was affected by Ingram Book’s distribution
capacity
Ø Using Ingram Book in the first few years allowed Amazon.com to avoid
inventory costs but significantly reduced profit margins.
§ As demand increased distributor no longer required.
§ Current Amazon.com:
Ø Several warehouses around the country where most of the titles are
stocked.
Ø Inventory at the warehouses is managed using a push strategy
Ø Demand satisfied based on individual requests, a pull strategy.
§ Slow moving low volume books and CDs are not stocked at
Amazon distribution centers
Ø Amazon orders those when demand arrives.
General Retail Industry
§Late to respond to competition from virtual stores
and to recognize the opportunities provided by the
Internet.
§Brick-and-mortar companies are adding an
Internet shopping component to their offering.
Ø Already have the distribution and warehousing
infrastructure
§Click-and-mortar firms
Ø High-volume, fast-moving products stocked in stores
§ Push strategy
Ø Low-volume, slow-moving products are stocked centrally
§ Push-Pull strategy
Traditional Fulfillment Versus e-Fulfillment

Traditional fulfillment E-fulfillment

Supply chain strategy Push Push–pull

Shipment Bulk Parcel

Reverse logistics Small part of the business Important and highly

complex
Delivery destination Small number of stores Large number of
geographically dispersed
customers
Lead times Relatively long Relatively short
Summary

§ Implementation of push-pull strategies and demand-driven

strategies have helped many companies to improve
performance, reduce costs, increase service levels.
§ Companies need to:
Ø Identify the appropriate supply chain strategy for individual
products.
Ø Case for no physical infrastructure or inventory is tenuous
Ø Push–pull strategy
§ advocates holding inventory
§ although it pushes the inventory upstream in the supply chain.