Topic 3: Variety Postponement

September 2006

Agenda for the day:

1. Review assignment and lecture on postponement.2. Hewlett Packard Case

Key Ideas/Tools from Yesterday

1. Smart extrapolation method: regression analysis2. Accurate Response3. Managing uncertainty requires shorter lead times, inventory buffers and better forecasting.

The Pyramid of Supply Chain Excellence

Customer Value

Fast, Flexible Operations (Avoid

Uncertainty)

Inventory(Hedge Against

Uncertainty)

Accurate Forecasts (Reduce Uncertainty)

Effective postponement requires matching decouple points with product design.

1. Where do you locate the decouple point in the supply chain?

2. Can you redesign the product to match the decouple point?

Effective Postponement

Two Alternative Supply Chain Designs

ProductionSystem

RM ProductionSystem

RM FG

Make-to-Order Make-to-Stock

RM = raw material & part inventoriesFG = finished good inventories

Advantages:

Disadvantages:

Two Alternative Supply Chain Designs

ProductionSystem

RM ProductionSystem

RM FG

Make-to-Order Make-to-Stock

RM = raw material & part inventoriesFG = finished good inventories

• Minimizing production and transportation costs

- Finished good inventory availability

- Forecasting

- Product variety

- Product mix stability

• Minimizing supply and demand mismatch costs

- Lead time

- Raw material inventory availability

- Order variability/seasonality/capacity

- Set-up times

Primary Advantage:

Management Challenges:

Postponement is a hybrid approach Example: Assemble-to-Order

WIP Decouple Point

?? ?

?

1 2 3 4 5ComponentProduction

Sub-assembly

FinalAssembly

Retailing

Decouple point: the point at which the system changes from

make-to-stock to make-to-order• Customer name attached to order

• Inventory held to reduce lead time

Locating the decouple point

• Place decouple point after steps with:– Large scale

economies

– Long lead times

– High set-up costs

• Place decouple point before steps with:

– Variety fan-out

– High variable cost content

WIP

Examples of Decouple Points

ComponentManufacturing

Sub-Assembly

FinalAssembly

Distribution Retail

1. Isolate the variable functions/features of the product in one (or a few)physical components.

Steps to re-design the product.

2. Minimize the variable cost of the differentiating components of the product.

0 .1 0 .2 0 .3 0 .4 0 .5 0.6 0 .7 0 .8 0 .9

-5%

0

5 %

10%

15%

2 0 %

25%

30 %N =1 0 v a ria n ts o f p ro d u c t

N =2

N = 4

N =8

N = 6

Cost of Differentiating Components as Fraction of Total

Reduction inTotal Inventory

Assumptions: Fill rate = 0.98Review period = 1 weekOrder lead time = 6 weeksCoefficient of variation of demand = 1.0

(includespipeline, cycle,and safetyinventories)

3. Ensure that production/supply-chain precedence requirements allow thedifferentiating elements of the product to be added last.

Inventory-Service Crisis at HP• The Crisis: Inventory Imbalance

– excess inventory in some product options

– shortages in other product options

• Contributing Causes

– many product options due to geography

– long DC replenishment lead time

– highly uncertain market

– inflexible design: difficult to rework one option to make it another

– out of control inventory system

– uncoordinated functional interests; conflicting incentives

Longer Term Alternatives for HPAlternatives:

• Air Shipment

• European factory

• Universal model

• Lower product variety

• Forecasting methods

• Shorter review period

• More inventory

Driver:

• Leadtime

• Leadtime

• Variability

• Variability

• Variability

• Review period

• Fill rate

Effectiveness:

• Too expensive

• Volume?

• Design costs

• Lost revenue?

• Too difficult

• Transport costs

• Right trade-off?

What Happened at HP?

• Deskjet re-designed to be DC-localizable (postponement). Implementation in early 1992.

• Millions of dollars saved from inventory reduction, service improvement, and freight reduction.

• Innovative packaging won patents.• All Vancouver products now DC-localizable

(postponement).• Vancouver as showcase for “Design for

Localization/Postponement” -- Best practices spreads to other HP divisions.

HP Printers: Distributor Customization

Partial FinalAssembly

ComponentAssembly

Add LocalMaterials

WIP

Add LocalMaterials

WIP

Add LocalMaterials

WIP

Factory

US Distribution

Asian Distribution

European Distribution

Full FinalAssembly

ComponentAssembly

Factory

US Distribution

Asian Distribution

European Distribution

Before Postponement

After Postponement

Costs and Benefits of DC Localization

• Stocks of localization materials higher at DCs• Potential freight reduction • Investment to install localization capability at DCs• Quality assurance• Procurement of localization materials• Value of local “manufacturing”• Potential for other products• Customs and duties implications• Green effects

Implementation Issues• R&D resistance

– Product works, why change it?

• DC resistance– Requires new capabilities and objectives

• Additional costs– Product redesign– Increased cost of modular product– DC efficiency vs. plant efficiency– Shipping costs

Lutron: Different Views of Mass Customization

Design ManufactureComponents

Assemble

ManufactureComponents

AssembleWIP

Assemble ReworkManufactureComponents

FG

AssembleManufactureComponents

FG

Special Products

Lighting Panels

Flourescent Ballasts

Standard Products

Apple Powerbook: User Customization

Put your "personal cool" on your PowerBook 1400 Wood: Redwood burl, Corellian Birch burl, Walnut Brushed aluminium and Brushed copper Leather: black, grey boarskin, yellow, red, burgandy Blue denim

We will have BookCovers for other PowerBooks in June!

Benetton: Process Reversal

Knit &Assemble

Spin Dye

DyeSpinKnit &

Assemble

Before Process Reversal

After Process Reversal

Days

WeeksDays

Weeks

Days

Days

Tomorrow: Platform planning

Pizza Postponement Assignment is due.