Coordinated Product and d Supply Chain Design

A General Framework

Two distinct chains in organizations:

The supply chain which focuses on the flow of physical products from suppliers through manufacturing and distribution all the way to retail outlets and customers, and The development chain which focuses on new product introduction and involves product architecture, make/buy decisions, earlier supplier , strategic g partnering, p g, supplier pp footprint p involvement, and supply contracts.

Key Characteristics of Supply Chain

Demand uncertainty and variability, in particular, the bullwhip effect

E onomie of scale Economies le in production p od tion and nd transportation t n po t tion Lead time, , in particular p due to globalization g

Key y Characteristics of Development Chain

Technology clock speed

Speed by which technology changes in a particular industry Decisions on what to make internally and what to buy from outside suppliers pp Level of modularity or integrality in a product Modular product

M k /B d Make/Buy decisions i i

Product structure

assembled from a variety of modules each module may have several options Bulk of manufacturing can be completed before the selection of modules and assembly into the final product takes place

Interaction between Two Chains

Functional products characterized by:

slow technology clock speed, speed low product variety, variety and typically low profit margins

Innovative products characterized by:

fast technology clock speed and short product life cycle, high product variety, and relatively high margins.

What Is the Appropriate Supply Chain Strategy and Product Design Strategy for Each Product Type?

Each requires a different supply chain strategy D Development l t chain h i has h to t deal d l with ith the th differing diff i level of demand uncertainty

Framework for Matching Product Design and Supply Chain Strategies

The impact of demand uncertainty and product introduction frequency on product design and supply chain strategy

Physically Efficient vs. Market-Responsive

Physically Efficient Process Market-Responsive Process Supply predictable Respond quickly to demand efficiently at the unpredictable demand to lowest possible cost minimize stockouts, forced markdowns, and obsolete inventory Maintain high average utilization rate Generate high turns & lower inventory cost Shorten lead time at low cost Select primarily for cost and quality Deploy excess buffer capacity for flexibility Deploy significant buffer stock of all stock items Invest in ways to reduce l d time lead i Select primarily for speed, flexibility, and quality

Primary purpose Manufacturing focus Inventory strategy Lead-time focus Approach to choosing suppliers Product-design strategy

Maximize performance at Use modular design to minimum product cost postpone product differentiation

Efficiency-Responsiveness F Framework k of f Supply S l Ch Chain i

Functional Product Effic cient Supp ply Chain n Resp ponsive Supp ply Chain n Innovative Products

Match h

Mismatch i h

Mismatch

Match

Design for Logistics (DFL)

Product and process design that help to control logistics costs and increase service levels

Economic packaging and transportation Concurrent and parallel processing Standardization

Economic Transportation & Storage

Design products so that they can be efficiently packed

& stored

Design packaging so that products can be consolidated

at cross docking points

Design products to efficiently utilize retail space Cheaper to transport:

redesign for less storage space, stack easily, ship in bulk

Concurrent/Parallel Processing

Achieved by redesigning products so that several manufacturing steps can take place in parallel

Objective is to minimize lead times M d l i /D Modularity/Decoupling li is i key k to implementation i l i Enables different inventory levels for different parts

Delayed Differentiation / Postponement

Aggregate demand information is more accurate than disaggregate data:

Re-sequencing: modify the order of product manufacturing

steps

Commonality, Modularity, Standardization

Modularity in Product & Process

Modular Product:

Can be made by appropriately combining the different modules It entails providing customers a number of options for each module

M d l P Modular Process:

Each product undergo a discrete set of operations making it possible to store inventory in semi semi-finished finished form Products differ from each other in terms of the subset of operations that are performed on them

Modular products are not always made from modular processes

Standardization
Aggregate demand information is more reliable

We can have h better b forecasts f for f a product d family f l (rather ( h than a specific product or style) How to make use of aggregate data ? Designing the product and manufacturing processes so that decisions about which specific product is being manufactured (differentiation) can be delayed until after manufacturing is under way

Swaminathan s Four Approaches Swaminathans to Standardization

Part standardization Process standardization P d t standardization Product t d di ti Procurement standardization

Part Standardization

Common parts used across many products. Common parts reduce:

inventories due to risk pooling costs due to economies of scale

Excessive part commonality can reduce product differentiation May be necessary to redesign product lines or families to achieve hi commonality lit

Process Standardization

Standardize as much of the process as possible for different products

Customizing the products as late as possible

Starts by making a generic or family product

CASE: Benetton Background

A world leader in knitwear Massive volume volume, many stores Logistics

Large, flexible f production network Many independent subcontractors Subcontractors responsible for product movement

Retailers

M Many, small ll stores t with ith limited li it d storage t

CASE: Benetton Supply Cycle

Primary collection in stores in January Final designs in March of previous year Store owners place firm orders through July Production starts in July based on first 10% of orders A g st - December August Decembe sto stores es adj adjust st o orders de s (colo (colors) s) 80%-90% of items in store for January sales Mini collection based on customer requests designed in January for Spring sales To refill hot selling items

Late orders as items sell out Delivery promised in less than five weeks

CASE: Benetton Flexibility

Business goals

Increase sales of fashion items Continue to expand sales network Minimize costs

Flexibility important in achieving these goals

Hard to predict what items, colors, etc. will sell Customers make requests once items are in stores Small stores may need frequent replenishments

CASE: It Is Hard to Be Flexible When...

Lead times are long Retailers are committed to purchasing early orders Purchasing plans for raw materials are based upon extrapolating from 10% of the orders

CASE: Benetton Old Manufacturing Process

Spin or Purchase Yarn Dye Yarn Finish Yarn Manufacture Garment Parts Join Parts

CASE: Benetton New Manufacturing Process

Spin or Purchase Yarn Manufacture Garment Parts Join Parts Dye Garment Finish Garment This step is postponed

CASE: Benetton Postponement

Why the change?

The change enables Benetton to start manufacturing just before color choices are made

What does the change result in?

Delayed forecasts of specific colors Still use aggregate forecasts to start manufacturing early React to customer demand and suggestions

Issues with postponement

Costs are 10% higher for manufacturing New processes had to be developed New equipment had to be purchased

Product Standardization

Downward Substitution

Produce d only l a subset b of f products d (because (b producing each one incurs high setup cost) Guide customers to existing products Substitute products with higher feature set for those with lower feature set Which products to offer, how much to keep, how to optimally substitute ?

Procurement Standardization

Consider a large semiconductor manufacturer

The wafer fabrication facility produces highly customized integrated circuits Processing equipment that manufactures these wafers are very expensive with long lead time and are made to order Although there is a degree of variety at the final product level, each wafer has to undergo a common set of operations The firm reduces risk of investing in the wrong equipment by pooling demand across a variety of products

Operational Strategies for Standardization

Selecting Standardization Strategy

Process & Product are modular process standardization :

will help to maximize effective forecast accuracy and minimize inventory costs.

P d ti Product is modular, d l b but t Process P is i not t part standardization:

it is not possible to delay differentiation.

Process is modular but Product is notprocurement

standization : may decrease equipment expenses.

Neither Process nor Product is modularproduct

standardization

Important Considerations

Changes suggested in the strategies may be too expensive to implement

Redesign related costs should be incurred at the beginning of the product life cycle

Benefits cannot be quantified in many cases:

increased flexibility, more efficient customer service, decreased market response times

Important Considerations

Re-sequencing causes:

level of inventory in many cases to go down per unit value of inventory being held will be higher

Tariffs and duties are lower for semi semi-finished finished or nonnon configured goods than for final products

Completing the manufacturing process in a local distribution center may y help p to lower costs associated with tariffs and duties.

Mass Customization

Evolved from the two prevailing manufacturing paradigms of the 20th century

Craft production and mass production. production efficient production of a large quantity of a small variety of goods High priority on automating and measuring tasks M h i ti organizations Mechanistic i ti with ith rigid i id controls t l involves highly skilled and flexible workers Often craftsmen Organic organizations which are flexible and changing

Mass production

Craft production

Absence of Trade-Offs

Two types meant inherent trade-offs

Low-cost, low-variety strategy may be appropriate for some products For others others, a higher-cost, higher-cost higher-variety higher-variety, more adaptable strategy was more effective

Development of mass customization implies it is not always necessary to make this trade trade-off off Mass customization

delivery y of a wide variety y of customized g goods or services quickly q y and efficiently at low cost captures many of the advantages of both the mass production and craft production systems not appropriate for all products gives firms important competitive advantages helps to drive new business models

Making Mass Customization Work

Highly skilled and autonomous workers, processes, and d modular d l units it

Managers g can coordinate and reconfigure g these modules to meet specific customer requests and demands

Key Attributes: Mass Customization

Instantaneous

Modules & processes must be linked together very quickly Allows rapid response to various customer demands. Linkages must add little if any cost to the processes Allows mass customization to be a low-cost alternative. Linkages and individual modules should be invisible to the customer Collections of modules must be formed with little overhead. Communication must work instantly

Costless

Sea ess Seamless

Frictionless

Supplier Integration into New Product Development

Traditionally suppliers have been selected after design of product or components However, firms often realize tremendous benefits from involving suppliers in the design process. Benefits include:

a decline in purchased material costs an increase in purchased material quality a decline in development time and cost an increase i in i final fi l product d t technology t h l levels. l l

Keys to Supplier Integration

Making the relationship a success:

Select suppliers and build relationships with them Align objectives with selected suppliers

Which suppliers can be integrated?

Capability to participate in the design process Willingness to participate in the design process Ability to reach agreements on intellectual property and confidentiality issues issues. Ability to commit sufficient personnel and time to the process. Co-locating personnel if appropriate Sufficient resources to commit to the supplier integration process.

Back to the HP Case

HP management considered postponement as an option Ship unlocalized printers to European DC and localize them after observing b i the th local l l demand d d At 98% service level, safety stock dropped from 3.8 weeks supply to 2.6 weeks supply on the average Annual savings around $800,000 Value of inventory in transit (and hence insurance costs) goes down Some of the localization material can be locally y sourced ( (cheaper) p ) European DC had to be modified to facilitate localization. Printer needed to be redesigned. All Vancouver products now DC-localizable DC localizable (postponement). One of the best of such practices.

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