1. Coordinated Product and Supply Chain Design
Chapter 11
Coordinated Product and Supply Chain Design

2. 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.

3. 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

4. Key Characteristics of Development Chain
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 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

5. Interaction between the Two Chains
Fisher’s concept of Innovative and Functional Products
Functional 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.

6. 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

7. 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

8. 11.2 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

9. 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

10. Examples Ikea Rubbermaid World’s largest furniture retailer
131 stores in 21 countries
Large stores, centralized manufacturing, compactly and efficiently packed products
Rubbermaid
Clear Classic food containers - designed to fit 14x14” Wal-Mart shelves

11. Final Packaging Delay until as late as possible
Repackaging at the cross-docking point is common for many products

12. Concurrent/Parallel Processing
Objective is to minimize lead times
Achieved 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

13. The Network Printer Example
FIGURE 11-4: Concurrent processing

14. Traditional Manufacturing
Set schedules as early as possible
Use large lot sizes to make efficient use of equipment and minimize costs
Large centralized facilities take advantage of economies of scale

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

16. 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

17. 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

18. Modularity in Product and Process
Modular products are not always made from modular processes
Bio-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

19. Swaminathan’s Four Approaches to Standardization
Part standardization
Process standardization
Product standardization
Procurement standardization

20. 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

21. 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

22. 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

23. Postponement
Point of differentiation

24. 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

25. 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

26. 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

27. 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

28. Benetton Old Manufacturing Process
Spin or Purchase Yarn
Dye Yarn
Finish Yarn
Manufacture Garment Parts
Join Parts

29. Benetton New Manufacturing Process
Spin or Purchase Yarn
Manufacture Garment Parts
Join Parts
Dye Garment
This step is postponed
Finish Garment

30. 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

31. Product Standardization
Downward Substitution
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 ?

32. 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

33. Operational Strategies for Standardization
Process
Nonmodular
Modular
Product
Parts standardization
Process standardization
Product standardization
Procurement standardization

34. 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.

35. Important Considerations
Strategies designed to deal with demand uncertainty and/or inaccurate forecasts
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

36. Important Considerations
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.

37. 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.

38. Back to the HP Case
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 stock
Too many localization options
Uncertainty in local markets
Some options
Air shipment
A factory in Europe
Improve forecasting practices (how?)

39. Back to the HP Case 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 $800,000
Value of inventory in transit (and hence insurance costs) goes down
Some 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.

40. 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.

41. 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

42. 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.

43. Appropriate Level Depends on the Situation
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

44. 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.

45. 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

46. 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

47. 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

48. Key Attributes Instantaneous Costless Seamless Frictionless
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

49. 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

50. SUMMARY Design 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