Developing Successful B2B Relationships

described how the Internet enables a new supply chain paradigm, a push-pull paradigm that replaces the traditional push model. In the past, most companies operated by forecasting long-term demand, mass-producing inventories of product to fulfill the anticipated demand and then "pushing" the inventories on to the customer. The disadvantage of the push model is that production decisions are based on forecasts, not actual customer demand, which means that companies often end up with too much inventory or the wrong inventory. In contrast, the pull model is based on accurate demand, because it uses explicit demand signals from the customer. But companies traditionally were not able to respond quickly enough to that demand signal. The Internet, however, enables a new push-pull boundary. In this new push-pull model, parts inventory is replenished according to forecasts but assembly is based on customer demand. The push-pull system combines the best of both approaches, giving the accuracy of the pull system with the speed and stock availability of the push model. Companies have traditionally used a push model to manage their supply chain-making or stocking products with the expectation of "pushing" those products onto their customers. But, this push model is renowned for creating erratic flows in the supply chain. For example, consumer package goods giant Procter & Gamble noted the problem of erratic variations in its supply chain when it studied the flow of baby diapers. The rate at which babies use diapers is fairly constant. Yet, when retailers placed orders for diapers, their ordering patterns for diapers were slightly erratic, containing small variations in order volume that did not reflect the steady rate of consumption of diapers. P&G distributors filled these slightly erratic orders. The ordering patterns of the distributors, however, were even more erratic than those of the retailers. Furthermore, looking at its own production operations, P&G found that its patterns of production were even more erratic than the already erratic patterns of distributors' orders. This phenomenon of amplified variations as one moves up the supply chain is commonly called the "bullwhip effect." The bullwhip effect is a natural, but unfortunate, consequence of the push model of supply chain management. In the push model, the participants in an supply chain each order, produce, and distribute goods in the hopes of selling product according to a forecast-pushing the product on to the customer. Each participant in the supply chain creates their own long-term …