1. Chapter 9 Design for Supply Chain Management

2. The Manufacturing Environment
Rapid Changes
New products rapidly introduced
Short, unknown product life cycles
High Variety of Products
Long Production Lead Times
Increasing storage and transportation costs
Difficult to forecast demand

3. The Goals of the Manufacturing Organization
Responsiveness
Competitive pricing
Efficiency
Customer service
Conflicting Goals!

4. Why Do These Goals Conflict?
Forces for keeping low inventory
inventory expensive
low salvage values
Forces for keeping high inventory
long lead times
customer service is important
demand is hard to predict
reduction in transportation quantity

5. Design For Logistics
Product and process design key cost drivers of product cost
Design for Manufacturing used design to decrease manufacturing costs
Major supply chain costs include transportation costs, inventory costs, distribution costs

6. Design For Logistics
Design for Logistics uses product design to address logistics costs
Key Concepts of Design for Logistics
Economic packaging and transportation
Concurrent/Parallel Processing
Standardization

7. 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

8. 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

9. 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

10. The Network Printer Example
Board
Printer
Customer
(Europe)
Stage 1
(Europe)
Stage 2 +
Integration (Far East)
Stage 1
(Europe)
Board
Printer
Stage 2
(Far East)
Customer
(Europe)
Integration (Europe)
Plastics,
motors, etc.

11. Standardization Shortening lead times is not always possible
How else can inventory levels be reduced and forecast accuracy improved?
Standardization of products and processes
Product commonality
Process commonality

12. 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

13. 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

14. Modularity in Product and Process
Are modular products always made from modular processes?

15. 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

16. Types of Standardization
Part Standardization
Common parts are used across many processes
Product redesign might be necessary
Process Standardization
Standardizing as much of the process as possible, making a generic or family product
Delaying differentiation
Called “Delayed differentiation”, “Postponement”

17. Postponement: Example
Demand for black t-shirts
50% probability 100
50% probability 200
Same for white t-shirts
Production alternatives
Produce 150 of each color ahead of time
Produce 300 which can be dyed after demand is observed

18. Postponement: Example
First Alternative
25% probability -- short 50 of each
25% probability -- extra 50 of each
50% probability -- short 50 of one, extra 50 of the other
Second Alternative
50% probability -- no shortage or extra

19. Postponement: Key Concepts
Delay differentiation of products in the same family as late as possible
Enables the use of aggregate forecasts
Enables the delay of detailed forecasts
Reduces scrapped or obsolete inventory, increases customer service
May require new processes or product design with associated costs

20. Postponement Considerations
Tradeoff increased product cost with decreased inventory
Need to decide where to postpone - the push-pull boundary
Position in product lifecycle is factor in postponement strategies
Inventory value may increase
Consider tariffs and duties

21. Hewlett-Packard: LaserJets
LaserJets are manufactured in Japan
Previously, the printers had two different power supplies (110, 220 volts)
Differentiation had to happen immediately
An improved design enables a single power supply to work for both voltages.
5% Cost Savings

22. Hewlett-Packard Disk Drives Manufacturing Process Redesign
HP’s disk drive division supplied several customers
tests
Customer 1
PCB
Insertion
Customer 2
Customer 3
Coupon
Insertion
PCB insertion postponed
PCB
Insertion
Customer 1
Customer 2
common tests
Customer 3
tests

23. 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

24. 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

25. 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

26. 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
How to be flexible?
Postponement

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

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

29. 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

30. 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

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. A Framework for Standardization
Part
Standardization
Process
Standardization
Modular
Maximize component commonality across products
Delay customization as
late as possible
Product
Product
Standardization
Procurement
Standardization
Non-Modular
Carry a limited number of products in inventory
Leverage equipment and part
commonality across products
Non-Modular
Modular
Process

33. HP DeskJet Case: Background
High volume, high speed manufacturing in Vancouver
Many different models, all completed in Vancouver
Three distribution centers
North American
Asian
European
Manufacturing time one week
Transportation lead times:
Europe: 4-5 weeks US
At distribution centers, simple standardized process

34. HP DeskJet Case: Analysis
Problems
High inventory levels
Inventory imbalance in Europe
Causes
Uncertainty about correct inventory levels
Many geographic options (localization)
Long lead times
Uncertain market
Difficulty at getting divisions to work together
What are HP’s options?

35. HP DeskJet Case: Options
Short Term
Rationalize safety stock
Long Term
Air shipment
European factory
More inventory
Better forecasting
DC localization

36. Safety Stock Rationalization: Example Europe AB
Recall: Safety Stock = z  STD * LT

37. Evaluating Alternatives
Air Shipment
Expensive
European Factory
Not sufficient volume
Better Forecasting
How?
More Inventory
More problems
DC Localization
What will savings be?

38. Evaluating DC Localization
In DC localization, risk pooling can be used to reduce total inventory while maintaining service levels
To evaluate inventory, compare total safety stock held if individual localized units are held in inventory or if generic units are held
Other costs must also be evaluated

39. Evaluating DC Localization

40. DC Localization Safety Stock Reduction Other benefits
Current 19,089 units (3.55 weeks)
With localization 12,792 units (2.4 weeks)
Other benefits
Lower value of transit inventory
Freight reductions
Local presence of “manufacturing”
Customs implications
Local procurement of localization materials
But there are costs
Product redesign
DC modifications

41. Implementation R&D Support DC Support New packaging Capital investment
“The product is working, so why bother?”
DC Support
“Not our core competency”
New packaging
Capital investment

42. Results Successful implementation Millions saved
Service levels increased
Packaging won awards
Best practice spread to other HP divisions

43. Supplier Integration
Competitive forces are driving firms to integrate suppliers into product development
Spectrum of Supplier Integration
None
White Box – Informal integration
Grey Box – Formal integration, with collaborative teams
Black Box – Interface requirements are given, product is returned

44. Supplier Integration What approach is appropriate?
Determine internal competencies
Determine product development needs
Identify external development and manufacturing needs
If future products have components that require external expertise and can be separated from other components, a black box approach makes sense.
If components cannot be separated, a grey box approach makes sense.
If some expertise can be found in house, a white box approach might make sense.

45. The “Bookshelf” Approach
Monitor the development of new technologies
Follow suppliers that have developed expertise
When appropriate, integrate these new technologies
This balances the advantages and disadvantages of being on the cutting edge:
No need to gain experience with the technology, because suppliers are doing this for you.
Can introduce the technologies when needed.

46. Mass Customization
The delivery of a wide variety of customized goods at low cost
The key is modular products and processes, so that customer requests can be met
According to Pine, companies need to evolve towards “modular companies”, with managers ensuring that modules are compatible.
Consider National Bicycle

47. Mass Customization and Supply Chain Management
An advanced supply chain is essential
This is particularly true when “modules” extend beyond a single company.
Consider
Postponement for regional customization
The value of strategic partnerships and supplier integration
Dell