The Supply Chain Cycle and The Location of The Push/pull Boundary

The interface between the push based and pull based stages of the supply chain is
sometimes called the push/pull boundary. The boundaries vary from company to company
based upon their supply chain strategies.
In Amazon’s case, they outsource inventory management since over 50% of Amazon’s sales
are from 3rd Party sellers and in-source logistics in order to have direct control over when
orders are delivered to customers. Their delivery options are a strategic differentiator and a
major critical success factor.
In support of the delivery options, depending on the product, Amazon order fulfillment
either taps into:
· its 3rd party supplier network, following a pull strategy to fill orders, or
· its vast network of warehouses that are sized and placed near cities and main
metropolitan areas using a push strategy to stock the warehouses.
§ Amazon relies on regional forecasts by product class to manage warehouse stock levels.
§ The warehouses are organized into five storage areas or zones, which group products
within the region based on customer order patterns.
o Its library prime storage stores books and magazines.
o Next, its pallet prime storage stores full-case products that have very high demand.
o Next, case flow prime storage stores high-demand products picked in less-than-case
quantities.
o Its reserve storage accommodates irregularly shaped and low-demand products.
o Finally, its random storage area stores smaller, moderate-demand items.
Two processes involved in the pull strategy are order management and last mile delivery.
Two processes involved in the push strategy are forecasting and inventory management.
The supply chain cycle and the location of the push/pull

boundary.
Explanation:
A full supply chain process that includes purchasing, producing,
distribution, replenishment and customer fulfillment takes place when a
customer orders a book from the bookstore.
For every supply chain, the push/pull boundary divides push processes
from pull processes. The bookstore push/pull boundary exists between the
order process for the customer and the processes of purchase,
manufacture, and replenishment.
The customer order cycle is a pull process since the customer order cycle
performs all operations only after the customer has arrived. The remaining
processes are all push process before the customer arrives.
Sourcing is the set of business processes required to purchase goods and services. Managers
must first decide whether each task will be performed by a responsive or efficient source and
then whether the source will be internal to the company or a third party. Sourcing decisions
should be made to increase the size of the total surplus to be shared across the supply chain.
Outsourcing to a third party is meaningful if the third party raises the supply chain surplus
more than the firm can on its own. In contrast, a firm should keep a supply chain function in-
house if the third party cannot increase the supply chain surplus or if the risk associated with
outsourcing is significant. For example, W.W. Grainger outsources package delivery to a
third party because it is very expensive to build this capability in-house. In contrast, Grainger
owns and operates its warehouses because there is sufficient scale to justify this choice.
Sourcing decisions should aim to provide the appropriate level of responsiveness at the
lowest cost.
Sourcing-Related Metrics Sourcing decisions have a direct impact on the cost of goods sold
and accounts payable. The performance of the source also affects quality, inventories, and
inbound transportation costs. A manager should track the following
sourcing-related metrics that influence supply chain performance:
• Days payable outstanding measures the number of days between when a supplier
performed
a supply chain task and when it was paid for.
• Average purchase price measures the average price at which a good or service was
purchased
during the year. The average should be obtained by weighting each price by the
quantity purchased at that price.
• Range of purchase price measures the fluctuation in purchase price during a specified
period. The goal is to identify if the quantity purchased correlated with the price.
• Average purchase quantity measures the average amount purchased per order. The goal
is to identify whether a sufficient level of aggregation is occurring across locations when
placing an order.
• Supply quality measures the quality of product supplied.
• Supply lead time measures the average time between when an order is placed and when
the product arrives. Long lead times reduce responsiveness and add to the inventory the
supply chain must carry.
• Percentage of on-time deliveries measures the fraction of deliveries from the supplier
that were on time.
• Supplier reliability measures the variability of the supplier’s lead time as well as the
delivered quantity relative to plan. Poor supplier reliability hurts responsiveness and adds
to the amount of inventory the supply chain must carry.
Coordination and Information Sharing Supply chain coordination occurs when all
stages of a supply chain work toward the objective of maximizing total supply chain
profitability based on shared information. Lack of coordination can result in a significant loss
of supply chain surplus. Coordination among different stages in a supply chain requires each
stage to share appropriate information with other stages. For example, if a supplier is to
produce the right parts in a timely manner for a manufacturer in a pull system, the
manufacturer must share demand and production information with the supplier. Information
sharing is thus crucial to the success of a supply chain.

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