Manufacturing Strategies: Push And Pull Systems

1. Introduction to the topic

This paper illustrates the ins and outs of manufacturing strategies. The push and the pull strategies are compared by Dell and HP Company as a test.

HP’s core business is made of three business groups stated below.

The Personal Systems Group: business and consumer PCs, mobile computing devices and workstations

The Imaging and Printing Group: inkjet, LaserJet and commercial printing, printing supplies, digital photography and entertainment

The Technology Solutions Group: business products including storage and servers, managed services and software

Regarding our paper we will focus on the Personal Systems Group, namely the consumer mobile computers (laptops).

HP still uses the push system to bring notebooks on the market. This paper investigates the changes of the HP notebook manufacturing system if HP changes its strategy from push to pull. Dell will be the model for HP to change from Push to Pull.

A push strategy is referred to a system where a consumer does not request the product to be developed. It is rather “pushed at” the end-user by promotion.

A pull strategy refers to a system where a consumer requests the product and pulls it through the delivery channel.

2. Working paper objective

The main objective of this paper is to figure out the differences between push and pull manufacturing strategies. A comparison of these strategies will be done; the advantages and disadvantages of applying them will be given. In the case of HP a recommendation will be given on whether it should keep the push system or apply a pull system in launching the notebooks. The recommendation will be based on the findings of analysis on the supply, purchasing and distribution processes.

By means of existing secondary resources this research will be made possible.

3. Personal objectives

The main objective is to have a clear in-depth understanding of push and pull manufacturing strategies in an actual situation.

Moreover, it’s an opportunity to improve our skills of working in a team and to improve the capability of doing research.

4. Problem Definition

HP which uses the push strategy to create consumer demand for its laptop production has decided to change its strategy to a pull strategy like Dell.

Regarding the change from push to pull there are a lot of issues to consider. A structural change in different departments is essential.

In our report we will analyze the impacts concerning supply, purchasing and distribution in comparison to Dell’s pull strategy.

What will be the main changes on the supplier’s side in relation to the changes from push to pull of HP?

What will change in HP’s purchasing (of its suppliers) strategy after incorporating a pull engine in its supply chain?

What are the most important and significant changes from push to pull in distribution?

What will change in HP’s inventory control strategy after incorporating a pull strategy?

Chapter 2: Literature Review

2.1 Chapter Introduction

Chapter several reveals in short the logistical concepts and theories which are useful in finding answers to our research questions. A short definition followed by a description will be given. We will also analyse and motivate how these concepts can be applied to HP strategic changes from push-to pull system in comparison to Dell.

2.2 Used literature review

2.2.1.1 The concept of Supply Chain Management (SCM)

The main mission of SCM is the integration of decisions within and between companies within a chain. Information flows, financial flows and goods flows have to be integrated from a multi-company point of view.

As defined by Stevens (1989), “the supply chain is the connected series of activities which is concerned with planning, co-ordinating and controlling material, parts and finished goods from suppliers to the customer. The objective of the supply chain is to synchronise the requirements of the customer with the flow of material from suppliers in order to effect a balance between what are often seen as the conflicting goals of high customer service, low inventory investment and low unit cost. The design and operation of an effective supply chain is of fundamental importance to every company.”1 (See Appendix A 2.1 Steps toward an integrated supply chain)

2.2.1.2 Motivation why this concept could support this report

Regarding a company using a push-based supply chain, products are pushed through the channel, from the production side up to the retailer. The manufacturer sets production at a level in accord with historical ordering patterns from retailers.

Compared to a pull-based supply chain, production and distribution are demand driven so that they are coordinated with actual customer orders. (See Appendix A 2.2.1 push-driven supply chain, 2.2.2 pull-driven supply chain)

On account of this, a lot of activities within the supply chain have to be changed for implementing a pull-strategy.

Based on our report this wil be our major concept while analyzing some activities of the supply chain.

2.2.2.1 The concept of Supplier Relationship Management (SRM)

Supplier relationship management is a comprehensive approach to managing an enterprise’s interactions with the organizations that supply the goods and services it uses.

The goal of supplier relationship management (SRM) is to improve and make the processes between an enterprise and its suppliers more effective.

SRM includes both business practices and software. It practices create a common frame of reference to enable effective communication between an enterprise and suppliers who may use quite different business practices and terminology. As a result, SRM increases the efficiency of processes associated with acquiring goods

and services, managing inventory, and processing materials.

1 Van Goor, Ploos van Amstel, 2003, European distribution ans supply chain logisitcs, p.53

2.2.2.2 Motivation how this SRM concept could support this research

Due to a pull manufacturing system flexibility and adaptability between suppliers and manufactures are inevitable. To meet customer requirements a close collaboration is required. It is obvious, that HP has to adopt this approach. It is up to us to find out what are the changes HP went through using the theory of SRM.

2.2.3.1 The concept of Just in Time (JIT)

Just-in-time’ is a management philosophy and not a technique.

It originally referred to the production of goods to meet customer demand exactly, in time, quality and quantity, whether the `customer’ is the final purchaser of the product or another process further along the production line. JIT should improve profits and return on investment by reducing inventory levels, reducing variability, improving product quality, reducing production and delivery lead times. It should also reduce other costs such as those associated with machine setup and equipment breakdown.

2.2.3.2 Motivation how this concept of Just-in-Time could support this research

Since Just In Time system is ought to meet customer requirements, we would like to find out how this system is engaged in the pull system. In a nutshell, we will analyse how HP applied the JIT system into the new strategy.

2.2.4.1 The concept of lead time and safety stock level

A conventional definition of lead time in the supply chain management is the time from the moment the supplier receives an order to the moment it ships it in the absence of finished goods or intermediate inventory centre. It is the time that it takes to actually manufacture the order without any inventory other than raw materials or supply parts.

At the same time of managing ordering and delivery lead time, safety stock level is also need to be considered in the management of supply chain. It is costly to run out of stock and on another hand, inventory represents costs that obviously need to be minimized. It has to be balanced between higher costs and high risk.

2.2.4.2 Motivation how the concept could support this research

Shortening the lead time is a necessary action to be taken in a pull system. Since it is a customer demand driving system, response to customer needs has to be relatively quick. And during that process, reduce ordering and delivery lead time is the way to higher production efficiency, lower the inventory level, and to provide better services.

Through it is a ultimate goal of pull system that to have no inventory during the whole distribution process, but in many case, it is needed to have certain level of inventory of key items or the parts and products that is not frequently ordered. The size of safety stock depends on the importance of the particular item to the process, the value of the investment, and the availability of substitutes on the short notice. These aspects which are involved need to be considered during application of change push to pull system.

2.2.5.1 The concept of Demand Management

Demand management a concept concerned with how a company integrates information from and about its customers, internal and external to the company, into the manufacturing planning and control system. It includes activities that range from determining or estimating the demand from customers. These demands are then converted through specific customer orders, into promised delivery dates, to helping balance demand with supply. Information gathered facilitates in making demand forecasts and therefore determine specific product requirements.

2.2.5.2 Motivation how the concept could support this research

The fact that HP is changing its strategy from push to pull system will have impact to its demand management. It is therefore important to find out what changes will occur. In a push system products are pushed through the supply chain to consumers. What will happen if it is customers who push their demands instead? How is this going to affect forecast management? Hence, how is HP going to tackle demand management in a pull system?

2.2.6.1 The concept of inventory management

Inventory management is a key component of supply-chain management because inventory decisions are often a starting point for other business activities such as warehousing, transportation and materials handling.

Effective inventory management plays a crucial role in the smooth and efficient running of any organization.

One point is that different organizational functions can have different inventory management objectives. If one organization wants to ensure that sufficient inventory is available for customer demand in order to avoid potential stockout situation another organization would seek to minimize the costs associated with holding inventory.

Reducing excess inventory and investing in the right inventories leads to better customer service, better inventory turnover and a healthier bottom line.

2.2.6.2 Motivation how this concept could support this research

If HP/Compaq is changing their manufacturing strategy to a pull system it would be necessary for their suppliers to think about how to manage the inventory.

Regarding the demand of HP/Compaq in a pull system they require only the parts they really need for manufacturing. So having the right parts at the right time in stock has to be one of the most important things for the suppliers of HP/Compaq.

2.2.7.1 The Concept of Customer Relationship Management

Customer relationship management comprises all efforts aimed at supporting, developing and maintaining successful and loyal customer relations.

Customer relationship management ( CRM) is a tool which enables the capacity of gathering information on customers. Hence, it enables a business to anticipate the customer’s wishes and needs. Above all, customers have access to the data they need and therefore maintain contact with the company. Thus, Both parties have to contribute to this relationship which result in mutual benefits.

2.2.7.2 Motivation how this concept could support this research

HP is changing its approach of doing business. By using a pull system approach, HP core business is customer focused. Therefore it is important to figure out the changes in customer relations. With the help of CRM tool an overview of the new situation is given.

2.2.8.1 The concept of Electronic Business (E-Business)

E-Business relies on an automated information system. “E-Business methods enable companies to link their internal and external data processing systems more efficiently and flexibly, to work more closely with suppliers and partners, and to better satisfy the needs and expectations of their customers.”2

E-business involves business processes compassing the complete value chain: electronic purchasing and supply chain management, handling customer service, processing orders electronically, and cooperating with business partners. Special technical standards for e-business enable the exchange of data between companies.

2.2.8.2 Motivation how this concept could support this research

The internet has influenced all our lives. Its effects have been particularly rapid and striking on companies and the way they operate.

Nowadays, a large number of companies are using the Internet to communicate with trading partners. They also handle commercial and financial transactions via the internet. It creates opportunities for modernizing the existing business processes and making management more efficient. For this reason we will analyze the importance of e-business in a pull-strategy.

2.2.9.1 The concept of E-Commerce

E-Commerce which involves purchasing and selling via the Internet is part of E-Business. It is described as ‘doing business electronically [involves] all activities in pre-sales, sales and after-sales that are carried out electronically’ by Van der Zee et al (1999).3

The e-commerce process includes:

Electronic presentation of goods and services

Online order taking and invoicing

Automated order status information

Online payment and transaction handling

2 http://en.wikipedia.org/wiki/Electronic_business

3 Van Goor, Ploos van Amstel, 2003, European distribution ans supply chain logisitcs, p.397

2.2.9.2 Motivation how the concept of E-Commerce could support this research

The possibility of offering goods and services via the internet is having a strong impact on business.

For HP/Compaq offering their customers a webpage on which they can make their

own laptop configuration it could be necessary for HP/Compaq to extend their already existing e-commerce strategy.

2.2.10.1 The concept of Electronic Procurement

Electronic procurement (E-Procurement) is the use of electronic tools and systems to increase efficiency and reduce costs during each stage of the purchasing process.

Furthermore, it smooths the way to new purchasing markets, partnerships, new clients, new suppliers and even completely new opportunities for companies to service new markets with new products and services. Supporting the end-to-end supply chain along the electronic highway enables companies to build innovative relationships with suppliers, customers and providers of logistical services by means of an intensive exchange of data relating to stocks, orders and planning.

To make the concept of e-procurement full applicable, suppliers, intermediates and purchasers need to agree on standards to which all parties are willing to conform.

E-procurement is expected to be integrated with the trend toward computerized supply chain management.

2.2.10.2 Motivation why this concept could support this research

Automation has become a common aspect of the procurement process. Business is conducted electronically on a large scale, particularly in the B2B environment.

A pull strategy is customer driven which requires a fast and realible response to customer needs. Therefore, we will analyze the importance of e-procurement in the purchasing process by using a pull strategy.

2.2.11.1 The concept of material commonality

Material Commonality determines if there is material commonality between the new product and other products. If there is commonality, the company may decide to reuse parts for the new design, meaning parts that were designed into other products would be used in the new product as well.

Component reuse often lowers cost and saves time because parts and suppliers have already been qualified.

2.2.11.2 Motivation why this concept could support this research

It is the main goal of logistics which is to decrease the cost, whatever it is in push system or pull system. Material Commonality is the more efficient way to use material. It can reduce more cost through reasonable reusing material. HP will decrease the amount of purchasing, reduce the cost, and avoid the waste of resources, if HP can implement material commonality very well when it changes from push system to pull system.

2.2.12.1 The concept of Reverse Logistics

Reverse Logistics is a supply chain that is dedicated to the reverse flow of products and materials for returns, repair, remanufacture, and/or recycling.

It is the logistics process of removing new or used products from their initial point in a supply chain, such as returns from consumers, over stocked inventory, or outdated merchandise and redistributing them using disposition management rules that will result in maximized value at the end of the items original useful life. A reverse logistics operation is considerably different from forward logistics. It must establish convenient collection points to receive the used goods from the final customer or remove assets from the supply chain so that more efficient use of inventory/material overall can be achieved.

2.2.12.2 Motivation why this concept could support this research

Another component seen in reverse logistics is the well-known newsboy problem. It becomes clear that goods – as well as their components – can cause major costs of unsold items, for reasons varying from seasonality to perishability. In the world of computers the latter is quite applicable. Components can furthermore be worth almost as much as the product itself; HP printers’ ink cartridges for example are altogether worth as much as, or perhaps even more, a somewhat older or standard model.

Reverse logistics deals with a part of this problem by re-using components, in order to lower order cost, cost of materials and cost of testing, as it appears to in many cases that used parts often work better than new parts.

This concept can provide us insight in how the company deals with its costs, which eventually can be observed in the prices of its products, with the amount produced and – not to forget – how much is ordered from the supplier.

2.2.13.1 The concept of Material Management

Material management also referred to production logistics or industrial logistics involves the efficient movement of raw materials and parts through the production process. From the supplier’s perspective it is referred to the distribution logistics or physical distribution. It involves the process of distributing the right materials and right parts to the manufacturer production process.

2.2.13.2 Motivation why this concept could support this research

This concept is very essential in the manufacturing process. The manufacture increases performance by managing well the flow of materials. This means that if HP neglects this aspect it jeopardize its performance and added value. Its very important to know what kind of materials are to be purchased and how are these proceeded in the production process. Therefore, for this research, this aspect of material management will help us to depict the differences between a push driven and pull driven manufacturing strategy.

2.3 Chapter conclusion

Up to now we presented you the most necessary concepts and theories concerning to our topic of manufacturing strategies.

The next chapter is going to be the methodology in which we will explain the process of our research project such as what kind of research methods were used.

Chapter 3 Methodology

3.1 Chapter Introduction

This chapter describes the process of our research project. It describes the research method used and why they were particularly chosen for this paper.

3.2 Research Design

3.2.1 Sequential research steps plus subsequent objective and research method

Steps

Research

Objective

1. Define the problem

Literature review

To understand and present a focused problem

2. Chose a company &product

Existing example such as HP

To create an actual case

To apply theory into practice

3. Construct preliminary research questions

Fish bone diagram

To define research questions and sub question which relate to the problem

4. Define the preliminary research objective

3 steps: Goal-means-focus or constraints

To get direction for the research paper, writing experience

5. Find secondary sources

Literature Review

Find secondary sources to validate the research questions and to provide answers to the research questions

6. Deconstruct and evaluate the secondary sources

Able to answer the research questions and the related sub questions

3.2.2 Research methods discussed

3.2.2.1 Literature review

A Literature review is a body of text that aims to review the critical points of current knowledge on a particular topic. Its ultimate goal is to bring the reader up to date with current literature on a topic and forms the basis for another goal, such as the justification for future research in the area.

3.2.2.2 Fishbone model

The design of the diagram looks much like the skeleton of a fish. The fishbone diagram is an analysis tool that provides a systematic way of looking at effects and the causes that create or contribute to those effects. Because of the function of the fishbone diagram, it may be referred to as a cause-and-effect diagram.

NOT ALL PRODUCTS BE ORDERED IN A PULL WAY

What is the main difference in HP’s and Dell’s purchasing (of its suppliers) strategies with there push and pull engine?

What is the main difference on the supplier’s side in relation to the push and pull of HP and Dell?

What is the advantage of pull purchasing strategy(Dell) than push purchasing strategy(HP) in ordering cost?

What is the advantage of pull purchasing strategy(Dell) than push purchasing strategy(HP) in supply chain with regard to material commonality¼Ÿ

What is the advantage of pull purchasing strategy(Dell) than push purchasing strategy(HP) in supply chain with regard to E-procurement¼Ÿ

Which company has an extension of variety of product components?

What is the difference on supplier lead times?

What are the most important and significant differences in push and pull in distribution?

What will be improved in the approach of managing inventory for the suppliers in HP considering Dell’s.

How is the Customer Relationship Management affected? Are there any essential differences for the suppliers?

What is the differences on the distribution chain of laptops?

What is the major difference in the role of e-commerce within the distribution channel?

What is the difference on materials flow in terms of the physical supply by changing the manufacturing strategy?

3.2.2.3 Three steps model

The three steps method is used to define the preliminary research objective of the report. The method is divided in 3 steps. The first step is the defined goal of the research in which we would like to give recommendations about the process related to the change from a push to a pull strategy. The second step -the means- are the secondary sources found and used to answer our research questions. For the last step -the focus- we chose different departments of HP/Compaq to focus on the reorganizations which have to be made in applying the new strategy.

3.2.3 Research methods motivated

3.2.3.1 Literature review

Regarding our research paper, the literature review has helped to acquire in-depth knowledge of important concepts in relation to our topic. Moreover, it will provide the reader of this paper with useful and necessary information to understand the paper easily.

3.2.3.2 Fishbone model

The fishbone model has helped discover possible effects, referred to research questions in this paper. These effects resulted from strategic changes ( the pull system) which in the fishbone diagram was the root cause problem.

3.2.3.3 Three steps model

The three steps model will help to research in a structured way. Dividing the research in several steps makes it easier to work on it and the final paper is easier to read.

3.3 Chapter conclusion

In this chapter we pointed out the first ideas about our research and how to structure them. In chapter 4 we are going to present the results of our research.

Chapter 4 Research results

Chaper introduction

In this chapter we will present our research questions and the answers found. First of all there will be a short overview of the current situation related to every research question. Followed by the desired situation where the problem has been solved referring to the concepts and theories we presented in chapter 2.

What is the main difference on the supplier’s side in relation to the push and pull of HP and Dell?

What is the difference on supplier lead times?

HP is truly focused on the Push way in the PC market. It means they always follow the method which is “make to stock”. Therefore, when HP offers materials that will be a big number of quantities. In order to ensure the mass production, HP must input enough materials or components before. Dell probably does the same although Dell uses a Pull way in the PC market. Because the method of supply chain of dell is “buy to plan” and “make to order”. Buy to plan means it is order depend on the offer. But the components purchasing is not start after the company receive offers, the purchasing is ahead of the offers. Hereby, buy to plan is a push process and make to order is a pull process, the combine point is the Supplier Logistic Centre of Dell. It likes a components buffer; it usually set up nearby the factory of Dell. When the factory receives offers, they can get components to produce immediately. As this reason, Dell also has to input a large number of materials and components before the producing. Overall, the lead times of both Dell and HP are similar in most of cases.

Which company has an extension of variety of product components?

Generally, Dell has an extension of variety of product components. As we know, Dell can provide all kinds of PC combinations to the customers. And different customers have different requirements. That means Dell has to store enough variety components in order to satisfy their customer needs. However, HP has a different situation. The components they input is follow the plan. For instance, HP plans to manufacture four types of PCs this year, they only needs to input the components which will be used in those four types of PCs.

How is the Customer Relationship Management affected? Are there any essential differences for the suppliers?

Customer Relationship Management comprises all efforts aimed at supporting, developing and maintaining successful and loyal customer relations.

Customer relationship management (CRM) is a tool which enables the capacity of gathering information on customers. Hence, it enables a business to anticipate the customer’s wishes and needs. Above all, customers have access to the data they need and therefore maintain contact with the company. Thus, both parties have to contribute to this relationship which results in mutual benefits.

HP is changing its approach of doing business. By using a pull system approach, HP core business is customer oriented. Therefore it is important to figure out the changes in customer relations. With the help of CRM tool an overview of the new situation is given.

By anticipating the customer’s wishes and needs, there are some different players for the suppliers such as:

Customer Facing Operations – The people and the technology support of processes that affect a customer’s experience at the frontline interface between the customer and the organization. This can include face to face, phone, IM, chat, email, web and combinations of all media. Self-service kiosk and web self-service are doing the job of vocals and they belong here.

Internal Collaborative Functional Operations – The people and technology support of processes at the policy and back office which ultimately affect the activities of the Customer Facing Operations concerning the building and maintaining of customer relationships. This can include IT, billing, invoicing, maintenance, planning, marketing, advertising, finance, services planning and manufacturing.

External Collaboration functions – The people and technology support of processes supporting an organization and its cultivation of customer relationships that are affected by the organization’s own relationship with suppliers/vendors and retail outlets/distributors. Some would also include industry cooperative networks, e.g. lobbying groups, trade associations. This is the external network foundation which supports the internal Operations and Customer facing Operations.

Customer Advocates and Experience Designers – Creative designers of customer experience that meet customer relationship goals of delivering value to the customer and profit to the organization (or desired outcomes and achievement of goals for non-profit and government organizations)

Performance Managers and Marketing Analysts – Designers of Key Performance Indicators and collectors of metrics and data so as to execute/implement marketing campaigns, call campaigns, Web strategy and keep the customer relationship activities on track. This would be the milestones and data that allow activities to be coordinated, that determine if the CRM strategy is working in delivering ultimate outcomes of CRM activities: market share, numbers and types of customers, revenue, profitability, intellectual property concerning customers preferences.

Customer and Employee Surveyors and Analysts – Customer Relationships are both fact driven and impression driven – the quality of an interaction is as important as the information and outcome achieved, in determining whether the relationship is growing or shrinking in value to the participants.

What will be improved in the approach of managing inventory for the suppliers in HP considering Dell’s.

Inventory management