How Dell, and Amazon.com Succeed in their supply chain?

Consider a PC manufacturer. Typically a PC manufacturer builds to stock and thus makes all production and distribution decisions based on forecast. This is a typical push system. In a push/pull strategy, the manufacturer will build to order. This implies that component inventory is managed based on forecast, but the final assembly is made in response to a specific customer request. So, the push part is part of the manufacturer’s supply chain prior to assembly, while the pull part is the part of the supply chain that starts with assembly and is based on actual customer demand. Dell Computers is an excellent example of the impact the push / pull system has on supply chain performance.

The book industry is a good example of the evolution of supply chain strategies from push to pull and then to push /pull. Barnes and Noble, for example, has a typical push supply chain. When Amazon.com started about four years ago, its supply chain was a pure pull system — with no warehouses and no stock. Actually, Ingram Books filled orders to meet customer demand. But this arrangement simply did not work well. Today, Amazon.com has seven warehouses around the country where it stocks most of the titles it sells. Thus, inventory at the warehouses is managed based on a push strategy (based on forecast) while demand is satisfied based on individual request, a pull strategy.

The online grocery industry is another excellent example. When Peapod was founded 11 years ago, the idea was to establish a pure pull strategy with no inventory and no facilities. When a customer ordered groceries, Peapod would pick up the products at a nearby supermarket. Unfortunately, stock-out rates at the supermarkets were very high. In the last few years, Peapod changed its business model to a push / pull strategy, adding a number of warehouses; stockout rates are now less than 2%. Of course, in this industry there are other challenges, especially reducing transportation costs. The problem is that no online grocer has the geographic density of customers that will allow them to control transportation costs and therefore compete with traditional supermarkets.

So, this sounds as though online distributors need to have an infra s t r u c t u re of, ye s, good old warehouses and distribution centers around the country or world.

Precisely, In that respect, brick-and-mortar to click-and-mortar companies (those that have added an Internet shopping to their services) have a huge advantage over the pure Internet companies.

They already have distribution and warehousing infrastructure in place. Wal-Mart, K-Mart, Target and Barnes and Noble, as a few examples, have all established virtual retail stores, serviced by their existing warehousing and distribution structures. As a result of going online, click-and-mortars have now changed their approaches to stocking their various warehouses. High volume products or products for which the demand can be matched with supply, are stocked locally in the stores, while low volume products are stocked centrally for online purchasing.

(Source: http://slevi1.mit.edu/docs/psd.pdf) by Penny Guyer is editor of Parcel Shipping &
Distribution and is manager of Mail and Shipping Services at the Massachusetts Institute of Technology)