McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 11

Coordinated Product and Supply Chain

Design

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11.1 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 involvement, strategic partnering, supplier footprint and supply contracts.

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Key Characteristics of Supply Chain

Demand uncertainty and variability, in particular, the bullwhip effect

Economies of scale in production and transportation

Lead time, in particular due to globalization

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Technology clock speed Speed by which technology changes in a particular

industry Make/Buy decisions

Decisions on what to make internally and what to buy from outside suppliers

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

assembled from a variety of moduleseach module may have several optionsBulk of manufacturing can be completed before the

selection of modules and assembly into the final product takes place

Key Characteristics of Development Chain

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Interaction between the Two Chains

Fisher’s concept of Innovative and Functional ProductsFunctional products characterized by:

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.

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What Is the Appropriate Supply Chain Strategy and Product

Design Strategy for Each Product Type?

Each requires a different supply chain strategy

Development chain has to deal with the differing level of demand uncertainty

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Framework for Matching Product Design and Supply Chain Strategies

FIGURE 11-3: The impact of demand uncertainty and product introduction frequency on product design and supply chain strategy

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11.2 Design for Logistics (DFL)

Product and process design that help to control logistics costs and increase service levelsEconomic packaging and transportationConcurrent and parallel processingStandardization

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Economic Transportation and Storage

Design products so that they can be efficiently packed and stored

Design packaging so that products can be consolidated at cross docking points

Design products to efficiently utilize retail space

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Examples Ikea

World’s largest furniture retailer131 stores in 21 countriesLarge stores, centralized manufacturing,

compactly and efficiently packed productsRubbermaid

Clear Classic food containers - designed to fit 14x14” Wal-Mart shelves

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Final Packaging

Delay until as late as possibleRepackaging at the cross-docking point is

common for many products

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Concurrent/Parallel ProcessingObjective is to minimize lead timesAchieved by redesigning products so that

several manufacturing steps can take place in parallel

Modularity/Decoupling is key to implementation

Enables different inventory levels for different parts

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The Network Printer Example

FIGURE 11-4: Concurrent processing

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Traditional Manufacturing

Set schedules as early as possibleUse large lot sizes to make efficient use of

equipment and minimize costsLarge centralized facilities take advantage

of economies of scale

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Recall: aggregate demand information is more reliable

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 Designing the product and manufacturing

processes so that decisions about which specific processes so that decisions about which specific product is being manufactured (differentiation) can product is being manufactured (differentiation) can be delayed until after manufacturing is under waybe delayed until after manufacturing is under way

Standardization

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Modularity in Product and Process

Modular Product: Can be made by appropriately combining the different

modules It entails providing customers a number of options for

each module

Modular Process: Each product undergo a discrete set of operations

making it possible to store inventory in semi-finished form

Products differ from each other in terms of the subset of operations that are performed on them

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Modularity in Product and Process

Semiconductor wafer fabrication is modular since the type of chip produced depends on the unique set of operations performed

Oil refining is not modular since it is continuous and inventory storage of semi-finished product is difficult

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Modularity in Product and Process

Modular products are not always made from modular processesBio-tech and pharmaceutical industries make

modular products but use non-modular processes; many products are made by varying the mix of a small number of ingredients

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Swaminathan’s Four Approaches to Standardization

Part standardization Process standardization Product standardization Procurement standardization

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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 commonality

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Process Standardization Standardize as much of the process as possible

for different products Customizing the products as late as possible Decisions about specific product to be

manufactured is delayed until after manufacturing is under way Starts by making a generic or family product Differentiate later into a specific end-product

Postponement or delayed product differentiation

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Delayed Differentiation May be necessary to redesign products

specifically for delayed differentiation May be necessary to resequence the

manufacturing process to take advantage of process standardization

Resequencing modify the order of product manufacturing steps resequenced operations result in the differentiation of

specific items or products are postponed as much as possible

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Point of differentiation

Postponement

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Benetton Background

A world leader in knitwear Massive volume, many stores Logistics

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

Retailers Many, small stores with limited storage

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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 August - December stores adjust orders (colors) 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

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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

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It Is Hard to Be Flexible When...Lead times are longRetailers are committed to purchasing

early ordersPurchasing plans for raw materials are

based upon extrapolating from 10% of the orders

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BenettonOld Manufacturing Process

Spin or Purchase Yarn

Dye Yarn

Finish Yarn

Manufacture Garment Parts

Join Parts

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BenettonNew Manufacturing Process

Spin or Purchase Yarn

Manufacture Garment Parts

Join Parts

Dye Garment

Finish Garment

This step is postponed

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Benetton Postponement Why the change?

The change enables Benetton to start manufacturing 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

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Product StandardizationDownward Substitution

Produce only a subset of products (because producing each one incurs high setup cost)

Guide customers to existing productsSubstitute products with higher feature set for

those with lower feature setWhich products to offer, how much to keep,

how to optimally substitute ?

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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

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Operational Strategies for Standardization

Process

Nonmodular Modular

Product

Modular Parts standardization Process standardization

Nonmodular Product standardization Procurement standardization

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Selecting the Standardization Strategy

If process and product are modular, process standardization will help to maximize effective forecast accuracy and minimize inventory costs.

If the product is modular, but the process is not, it is not possible to delay differentiation. However, part standardization is likely to be effective.

If the process is modular but the product is not, procurement standardization may decrease equipment expenses.

If neither the process nor the product is modular, some benefits may still result from focusing on product standardization.

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Important ConsiderationsStrategies designed to deal with demand

uncertainty and/or inaccurate forecastsChanges suggested in the strategies may

be too expensive to implementRedesign related costs should be incurred at

the beginning of the product life cycleBenefits cannot be quantified in many cases:

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

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Resequencing 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-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.

Important Considerations

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Push-Pull Boundary Pull-based systems typically lead to:

reduction in supply chain lead times, inventory levels, and system costs

making it easier to manage system resources Not always practical to implement a pull-based

system throughout the entire supply chain Lead times may be too long May be necessary to have economies of scale in

production or transportation. Standardization strategies can combine push

and pull systems Portion of the supply chain prior to product

differentiation is typically a push-based supply chain Portion of the supply chain starting from the time of

differentiation is a pull-based supply chain.

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Long lead times, high inventory levels, imbalance of inventory

Localization (labeling and manuals, power supply, plug) One cause of imbalance (too much inventory for printers

localized for one market, too little inventory for another market)

Significant uncertainty on how to set safety stockToo many localization optionsUncertainty in local markets

Some optionsAir shipmentA factory in EuropeImprove forecasting practices (how?)

Back to the HP Case

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HP management considered postponement as an option

Ship “unlocalized” printers to European DC and localize them after observing 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 $800,000Value of inventory in transit (and hence insurance

costs) goes downSome of the localization material can be locally

sourced (cheaper)European DC had to be modified to facilitate

localization. Printer needed to be redesigned.All Vancouver products now DC-localizable

(postponement). One of the best of such practices.

Back to the HP Case

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11.3 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 in final product technology levels.

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The Spectrum of Supplier Integration No single “appropriate level” of supplier integration None

Supplier is not involved in design. Materials/subassemblies supplied as per customer

specifications/design White box

Informal level of integration Buyer “consults” with the supplier informally when designing

products and specifications No formal collaboration

Grey box Formal supplier integration Collaborative teams between buyer’s and supplier’s engineers Joint development

Black box Buyer gives the supplier a set of interface requirements Supplier independently designs and develops the required

component

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Appropriate Level Depends on the Situation

Process Steps to follow:Determine internal core competencies. Determine current and future new product

developments. Identify external development and

manufacturing needs.

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Black Box If future products have components that require

expertise that the firm does not possess, and development of these components can be separated from other phases of product development, then taking

Grey Box If separation is not possible

White Box If buyer has some design expertise but wants to

ensure that supplier can adequately manufacture the component

Appropriate Level Depends on the Situation

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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 commit sufficient personnel and time to the

process. Co-locating personnel if appropriate Sufficient resources to commit to the supplier

integration process.

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11.4 Mass Customization Evolved from the two prevailing manufacturing

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

Mass production efficient production of a large quantity of a small

variety of goods High priority on automating and measuring tasks Mechanistic organizations with rigid controls

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

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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 effective

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

Mass customization delivery of a wide variety of customized goods or

services quickly 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

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Making Mass Customization Work

Highly skilled and autonomous workers, processes, and modular units

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

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Key Attributes Instantaneous

Modules and 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 Allows mass customization to be a low-cost

alternative. Seamless

Linkages and individual modules should be invisible to the customer

Frictionless Networks or collections of modules must be formed

with little overhead. Communication must work instantly

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Mass Customization and SCM Many of the advanced SCM approaches and

techniques essential if mass customization is to be successfully implemented

IT critical for effective SCM is also critical for coordinating different modules

Concepts like strategic partnerships and supplier integration essential for the success of mass customization.

Postponement can play a key role in implementing mass customization

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SUMMARYDesign for logistics concepts

Efficient packaging and storage Certain manufacturing steps can be

completed in parallel Standardization

Integrating suppliers into the product design and development process

Advanced supply chain management facilitating mass customization