Design for Supply Chain Management

Phil Simchi-Levi Kaminsky David kaminsky@ieor.berkeley.edu Philip Kaminsky Edith Simchi-Levi

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
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The Goals of the Manufacturing Organization

Responsiveness
Competitive Efficiency Customer

pricing

service

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2003 Simchi-Levi, Kaminsky, Simchi-Levi

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
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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
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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

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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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2003 Simchi-Levi, Kaminsky, Simchi-Levi

Examples
Ikea

Worlds 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

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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
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The Network Printer Example

Board Stage 1 (Europe) Stage 2 + Integration (Far East) Printer Customer (Europe)

Stage 1 (Europe) Stage 2 (Far East)

Board Printer Customer (Europe) Integration (Europe)

Plastics, motors, etc.

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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

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2003 Simchi-Levi, Kaminsky, Simchi-Levi

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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2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 semifinished product is difficult

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Modularity in Product and Process

Are

modular products always made from modular processes?

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2003 Simchi-Levi, Kaminsky, Simchi-Levi

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

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2003 Simchi-Levi, Kaminsky, Simchi-Levi

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

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2003 Simchi-Levi, Kaminsky, Simchi-Levi

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
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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
25% probability -- short 50 of each 25% probability -- extra 50 of each 50% probability -- no shortage or extra

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2003 Simchi-Levi, Kaminsky, Simchi-Levi

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
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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
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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
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Hewlett-Packard Disk Drives Manufacturing Process Redesign

HPs

disk drive division supplied several customers

PCB Insertion

tests

Customer 1 Customer 2 Customer 3

Coupon Insertion

PCB insertion postponed

PCB Insertion

Customer 1 Customer 2 Customer 3

common tests
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tests

2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 long Retailers are committed to purchasing early orders Purchasing plans for raw materials are based upon extrapolating from 10% of the orders

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Old Manufacturing Process

Spin or Purchase Yarn

Benetton

Dye Yarn Finish Yarn

Manufacture Garment Parts Join Parts
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New Manufacturing Process

Spin or Purchase Yarn

Benetton

Manufacture Garment Parts Join Parts

Dye Garment Finish Garment
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This step is postponed

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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2003 Simchi-Levi, Kaminsky, Simchi-Levi

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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2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 ?

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A Framework for Standardization

Modular
Maximize component commonality across products Delay customization as late as possible

Non-Modular
Carry a limited number of products in inventory Leverage equipment and part commonality across products

Non-Modular

Modular

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2003 Simchi-Levi, Kaminsky, Simchi-Levi

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

2003 Simchi-Levi, Kaminsky, Simchi-Levi

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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 HPs options?

2003 Simchi-Levi, Kaminsky, Simchi-Levi

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HP DeskJet Case:
Options
Short

Term
Term

Rationalize safety stock

Long

Air shipment European factory More inventory Better forecasting DC localization

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Safety Stock Rationalization: Example Europe AB

Recall: Safety Stock = z STD * LT

Mean Weekly Demand Std. Dev Lead Time Std. Dev of Demand Period Safety Factor Safety Stock 3656 2703 5 6044 1.9 11483 2703*(5).5 98% service 1.9*6044 Monthly / 4.33 Monthly/(4.33).5

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Evaluating Alternatives

Air Shipment
Expensive

European Factory
Not sufficient volume

Better Forecasting
How?

More Inventory
More problems

DC Localization
What will savings be?
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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
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Evaluating DC Localization
AVG A AA AB AQ AU AY 42 420 15830 2301 4208 307 STD 32 204 5625 1169 2205 103 6244 Safety Stock 66 416 11,484 2395 4517 211 19089 12792 Weeks of SS 6.75 4.25 3.11 4.48 4.62 2.96 3.55 2.38

Total 23109 Generic 23109

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DC Localization

Safety Stock Reduction

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

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Implementation
R&D

Support

The product is working, so why bother?

DC

Support

Not our core competency

New

packaging Capital investment

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2003 Simchi-Levi, Kaminsky, Simchi-Levi

Results
Successful

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

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2003 Simchi-Levi, Kaminsky, Simchi-Levi

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
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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.
2003 Simchi-Levi, Kaminsky, Simchi-Levi

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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.
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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
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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
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