Coordinated Product dand

Supply Chain DesignSupply Chain Design

A General Framework

Two distinct chains in organizations: The supply chain which focuses on the flow of 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 productproduct introduction and involves product architecture, make/buy decisions, earlier supplier involvement, strategic partnering, supplier footprint , g p g, pp pand supply contracts.

Key Characteristics of Supply Chain

Demand uncertainty and variability, in particular, the

bullwhip effect

E onomie of le in p od tion nd t n po t tion Economies of scale in production and transportation

Lead time, in particular due to globalization, p g

Key Characteristics of yDevelopment Chain

Technology clock speed Speed by which technology changes in a particular industry

M k /B d i i Make/Buy decisions Decisions on what to make internally and what to buy from

outside supplierspp

Product structure Level of modularity or integrality in a product Modular product

assembled from a variety of modules each module may have several options 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 low product variety and typically slow technology clock speed, low product 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 DesignChain Strategy and Product Design

Strategy for Each Product Type?

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

Framework for Matching Product Design and Supply Chain StrategiesDesign and Supply Chain Strategies

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

Physically Efficient vs. Market-ResponsivePhysically Efficient Process

Market-Responsive Process

Supply predictable Respond quickly to

Primary purpose

Supply predictable demand efficiently at the lowest possible cost

Respond quickly to unpredictable demand to minimize stockouts, forced markdowns, and obsolete inventory

Manufacturing focus Maintain high average utilization rate

Deploy excess buffer capacity for flexibility

Inventory strategy Generate high turns & lower inventory cost

Deploy significant buffer stock of all stock items

Lead-time focus Shorten lead time at low Invest in ways to reduce l d icost lead time

Approach to choosing suppliers

Select primarily for cost and quality

Select primarily for speed, flexibility, and quality

Product-design strategy Maximize performance at minimum product cost

Use modular design to postpone product differentiation

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

Functional Product Innovative Products

h i h

Functional Product Innovative Products

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Match Mismatch

cientply C

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Mismatch Match

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Design for Logistics (DFL)

Product and process design that help to

control logistics costs and increase servicecontrol logistics costs and increase service

levels

Economic packaging and transportation

Concurrent and parallel processing Concurrent and parallel processing

Standardization

Economic Transportation & Storage

Design products so that they can be efficiently packed

& stored& stored

Design packaging so that products can be consolidated

at cross docking points

Design products to efficiently utilize retail space

Cheaper to transport: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 li i k i l i Modularity/Decoupling is key to implementation

Enables different inventory levels for different parts Enables different inventory levels for different parts

Delayed Differentiation /Delayed Differentiation / Postponement

Aggregate demand information is more accurate than

disaggregate data:disaggregate data:

Re-sequencing: modify the order of product manufacturing

steps

Commonality,

Modularity,

Standardization 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-finished formpossible to store inventory in semi 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

h b f f d f l ( h We can have better forecasts for a product family (rather 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

Swaminathans Four ApproachesSwaminathan s Four Approaches to Standardization

Part standardization

Process standardization

P d t t d di ti Product standardization

Procurement standardization

Part Standardization

Common parts used across many products.

Common parts reduce: Common parts reduce:

inventories due to risk pooling

costs due to economies of scale costs due to economies of scale

Excessive part commonality can reduce product differentiationdifferentiation

May be necessary to redesign product lines or families to hi litachieve commonality

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 many stores Massive volume, many stores

Logistics

f Large, flexible production network

Many independent subcontractors

Subcontractors responsible for product movement Subcontractors responsible for product movement

Retailers

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

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 Decembe sto es adj st o de s (colo s) August - December stores adjust orders (colors) 80%-90% of items in store for January sales Mini collection based on customer requests designed in 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: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 Purchasing plans for raw materials are based upon

extrapolating from 10% of the orders

CASE: BenettonCASE: BenettonOld Manufacturing Process

Spin or Purchase Yarn

Dye Yarn

Finish Yarn

Manufacture Garment Parts

Join Parts

CASE: BenettonCASE: BenettonNew Manufacturing Process

Spin or Purchase Yarn

Manufacture Garment Parts

Join Parts

Dye Garment This step is postponed

Finish Garment

CASE: Benetton Postponement Why the change?

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

What does the change result in?Delayed forecasts of specific colors 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

d l b f d (b Produce only a subset of products (because 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 forOperational Strategies for Standardization

Selecting Standardization Strategy

Process & Product are modular process standardization : will help to maximize effective forecast accuracy and minimizewill help to maximize effective forecast accuracy and minimize

inventory costs.

P d t i d l b t P i t Product is modular, but Process is not 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 implementto 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 timesmarket 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 finished or non Tariffs and duties are lower for semi-finished or non-

configured goods than for final products

Completing the manufacturing process in a local distribution

center may help to lower costs associated with tariffs and duties. y p

Mass Customization Evolved from the two prevailing manufacturing

paradigms of the 20th centuryCraft production and mass production Craft production and mass production.

Mass production efficient production of a large quantity of a small variety of efficient production of a large quantity of a small variety of

goods High priority on automating and measuring tasks

M h i ti i ti ith i id t l Mechanistic organizations with rigid controls

Craft production involves highly skilled and flexible workers involves highly skilled and flexible workers Often craftsmen Organic organizations which are flexible and changing

Absence of Trade-Offs Two types meant inherent trade-offs

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

effective

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

Mass customization delivery of a wide variety of customized goods or services quickly and y y g q y

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,

d d l itprocesses, and modular units

Managers can coordinate and reconfigure g 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. Costless

Linkages must add little if any cost to the processes Linkages must add little if any cost to the processes

Allows mass customization to be a low-cost alternative. SeamlessSea ess

Linkages and individual modules should be invisible to the customer

Frictionless Frictionless Collections of modules must be formed with little overhead. Communication must work instantly

Supplier Integration into NewSupplier 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

i i fi l d t t h l l l an increase in final product technology levels.

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 Ability to reach agreements on intellectual property and confidentiality 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

b i th l l d dobserving the local demand 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 sourced (cheaper)y ( p ) European DC had to be modified to facilitate localization. Printer

needed to be redesigned. All Vancouver products now DC-localizable (postponement). One of All Vancouver products now DC localizable (postponement). One of

the best of such practices.

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