Coordinated Product and Supply

Chain Design
Jerry Banks

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 Case Study: HP
• Founded in 1939
• Corporate headquarters in Palo Alto, Calif.
• 88,000 employees worldwide (as of
October 31, 2001)
• More than 540 sales and support offices and
distributorships worldwide in more than
120 countries.
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 CASE: HP Deskjet Printer
• Study the case (30 minutes) in groups of four
• Then, answer the following questions:
– How much uncertainty is present in the demand
data?
– What is the impact of the many different
localization options?
– What is the impact of long lead times in
forecasting?

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 CASE: HP Deskjet Printer
• Answer the following questions:
– What is the impact of long lead times in setting
safety stocks?
– What is the effect of uncertainty in demand on
the many local markets?
– What is the impact of maintaining cooperation
with the various HP divisions?

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 DFM
• Manufacturing engineering used to be the
last stop in the product engineering process
• On one side were the researchers and
designers who developed products that
worked
• On the other side were the manufacturing
engineers that had to determine how to
manufacture the design inexpensively

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 DFM
• In the 1980’s, it was finally realized that
product and process design were cost
drivers
• That was the beginning of design for
manufacturing

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 SCM
• In the past few years, it has been further
recognized that taking logistics and supply
chain management concerns into the
product and process design could result in
even more efficiencies
• We will discuss ways to accomplish this

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 DFL
• Design for logistics considers the following
– Economic packaging and transportation
– Concurrent and parallel processing
– Postponement/delayed differentiation

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Economic packaging and transportation

• Design products so that they can be

efficiently packed and stored
– Transportation will be cheaper
• Especially if delivery trucks ‘cube out’ before they
‘volume out’

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 Ikea
• World’s largest furniture retailer
• Swedish company
• Company owned stores
– 143 in 22 countries
• Franchise stores
– 20 in 13 countries/territories
• US$9.6 billion in sales
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 Ikea
• Growth attributed to ‘reinventing the
furniture business’
– Typically
• Furniture sales were split between department stores
and small locally owned shops
• Customer placed an order with delivery two months
later

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 Ikea
• Changed the way that furniture stores do
business
– Displays all of its 10,000 products in large
warehouse-like spaces in out-of-town locations
• Accomplished by designing products that
can be packed compactly in kits
– Customers assemble them at home

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 Ikea
• Kits are easy and cheap to transport
– Products can be manufactured in a small
number of factories
– Shipped cheaply to stores around the world
• Firm can sell quality furniture at
competitive prices

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 Other reasons to design for
compactness
• Retailers want products that take up less
storage space
• Retailers want products that stack easily
• Example
– Garbage cans at Home Depot

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 Rubbermaid
• Designed Clear Classics food storage
containers to fit 14”x14” shelves at Wal-
Mart

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 Bulk shipping
• Complete final packaging at the warehouse
or the retailer
• Bulk products can be shipped more easily

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 Example
• Hawaiian sugar industry switched to bulk
transportation after WWII
– Shipping a bulk ton of sugar costs US$0.77
– Shipping the same weight in bags costs about
US$20.00

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 Delay packaging until sale
• Grains, nuts, cookies, etc. allow consumers
to package as much as they want

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 Concurrent and Parallel
Processing
• Modifying the manufacturing process to
control logistics costs
• Steps that were previously performed in
sequence can be completed at the same time
– Lowers manufacturing lead times
– Lowers inventory costs

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 Parallel Processing
• Modularity is the key

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 Parallel Processing

Serial Processing

Process A Process B Process C

Parallel Processing

Process A
Process C
Process B
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 Postponement
• Delayed differentiation
• Aggregate demand information is more
accurate than disaggregate data
– Better information for shoes than a specific
style of shoe
– But, aggregate information is usually not of
much use

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 Postponement
• However, using postponement, aggregate
data can be useful
• Design the product so that decisions can be
delayed until after manufacturing is under
way
• Delayed product differentiation

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 Postponement
• First discussed in 1950
• Only since 1990 have logistics researchers
been defining and studying the concept
• Since 1995 many industries have adopted
postponement as a strategy

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PCs are often customized

Generic PC

Wal-Mart Office Depot Best Buy

Version Version Version

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Technology advances have
shortened life cycles

The annual cost of holding inventory of PCs or printers

may approach 50% of the product cost since products
lose value every day and old products must be deeply
discounted or sold through alternative channels.

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 Five types of postponement
• Zinn and Bowersox, in their ‘classic’ 1988
paper analyzed five types of postponement
– Labeling
– Packaging
– Assembly
– Manufacturing
– Time

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 Labeling
• What type of firm might be interested in
labeling as a postponement type?
– A firm selling a product under several brand
names

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 Packaging
• What type of firm might be interested in
packaging as a postponement type?
– A firm selling a product under several package
sizes

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 Assembly
• What type of firm might be interested in
assembly as a postponement type?
– A firm selling a product whose cube is greatly
reduced if shipped unassembled

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 Manufacturing
• What type of firm might be interested in
manufacturing as a postponement type?
– A firm selling a product that has high sales
fluctuations

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 Time
• What type of firm might be interested in
time as a postponement type?
– Firms with high value products

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 Delayed product differentiation
• Techniques
– Resequencing
– Commonality
– Modularity
– Standardization

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 Resequencing
• Modifying the order of product
manufacturing steps postponing those that
differentiate the product as much as
possible

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 Benneton
• Sweater manufacturer
– Fashions change rapidly
– Lead time for stores was 7 months
– Manufacturing process
• Acquiring yarn, dyeing yarn, finishing yarn,
manufacturing garment parts, joining the parts into a
sweater
• Note that dyeing occurs early in the process

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 Benneton
• Move the dyeing process until after the
sweater is completed
• Then, yarn purchasing and manufacturing
plans could be based on aggregate forecasts
for product families
• For a 10% increase in manufacturing cost,
even greater benefits were achieved

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 Commonality
• It may be necessary to redesign product
lines or families to achieve commonality in
order to implement a postponement strategy

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 AutoMod
• The commercial version and the student
version of the software are the same except
that there is a limit on the number of entities
in the student version

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 Completion at the DC
• In some cases, the final manufacturing steps
can be completed at the DC instead of at the
factory
• Advantage is that DCs are much closer to the
demand than the factories
– Products can be differentiated closer to the demand
– Increases the firm’s ability to respond to rapidly
changing markets

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 Modularity
• Differentiation takes place at the retailer
after the sale
• Examples
– Color printer is a B/W printer with an added
color kit
– Dealer installed options when a car is
purchased
• Running boards and luggage racks on a SUV

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 Standardization
• Replace a family of products by a standard
product
– Build in possible options
• Example
– Laptop power supply can accept 110 or 220
volts
– So, it can be used in Europe with a plug adapter

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 Concerns about DFL
• Can the costs be justified?
– Product and packaging redesign
– Retooling of assembly lines
– Added manufacturing capability at DCs

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 Concerns about DFL
• Can the savings be quantified?
– Increased flexibility
– Better customer service
– Decreased response time

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 Concerns about DFL
• Inventory costs change
– Much of the wool in the Benneton example will
be held in the form of sweaters
– Their value is much higher than dyed wool

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 Concerns about DFL
• Tariffs and duties may be lower for WIP
than for final products
• Completing the process at the DC can lower
costs for tariffs and duties

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 Push-pull boundary
• Push systems
– Production is based on long-term forecasts
• Pull systems
– Production is demand driven
– Usually reduce supply chain lead times,
inventory levels, and system cost

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 Pull systems
• Not always possible to implement pull
system throughout the entire supply chain
– Lead times may be too long
– May be necessary to take advantage of
economies of scale
• Prior to product differentiation the system is
push based
• Then, it becomes pull based
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 Push-pull boundary
• The point of differentiation
• Benneton
– Differentiation occurs when the sweater is dyed

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 Case Analysis
• Inventory problem in the European DC
• HP faces long delivery lead times of 4 to 5
weeks from its production facility in
Vancouver, WA
• Manufacturing takes about one week in
Vancouver

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 Case Analysis
• HP is concerned about inventory levels and inventory
imbalance in Europe
• Problem is customization for local markets
– Localization
– Addition of labeling and documentation in the
correct language
– Customizing the power supply
– Customization takes place in Vancouver many
weeks before the products arrive in Europe

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 Case Analysis
• Imbalance
– The European DC often finds that it has too
many PCs customized for certain markets, and
too few for other markets

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 Case Analysis
• Causes
– Significant uncertainty about how to set the
correct inventory level
– The many different localization options make
inventory difficult to manage
– Long lead times lead to difficulty in forecasting
and safety stock

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 Case Analysis
• Causes
– Uncertainty in the many local markets makes
forecasting difficult
– Maintaining cooperation between the various
HP divisions is challenging

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 Case Analysis
• Cause
– Significant uncertainty about how to set the
correct inventory level
• Possible solutions
– Air shipments from Vancouver
– Build a European factory
– Hold more inventory at the European DC
– Improve forecasting capabilities

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 Case Analysis
• Significant problems with these solutions
– Air shipments
• Expensive
– European factory
• Volume is too low to justify it
– More inventory in Europe
• More inventory just compounds the current
inventory problem

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 Case Analysis
• Significant problems with these solutions
– Improve forecasts
• How?

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 Case Analysis
• Another option
– Postponement
• Ship ‘unlocalized’ printers to the European DC
• Localize them after observing demand

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 Case Analysis
• How much savings can occur?
• Compute required safety stock for each of
the customized products

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 Case Analysis
• For Product A
– For a 98% service level, z = 2.05
– Safety Stock = z * STD * SQRT(L)
– STD = 15.6
– Assume L = 5 weeks
– Safety Stock = 2.05 * 15.6 * SQRT(5) = 71.5
– Weeks of Safety Stock = 71.5/9.8 = 7.4

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 Case Analysis
• For Generic
– Avg Monthly Demand = 42.3 +…+306.8 =
23108.6
– Std Dev Week Dem = SQRT(71.52+…+227.82)
– Compute Safety Stock and Weeks of Safety
Stock as previous
– Illustrates that aggregate demand has a smaller
variance than sum of individual demands
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 Case Analysis
• Computation of savings
– Carrying cost = 30%
– Item value is $400
– Savings = .30 x (20640.0-13802.6) x $400 =
$820,488

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 Case Analysis
• Other savings
– Value of inventory in transit is reduced, thereby
reducing insurance
– Localization materials can be locally sourced
reducing costs and meeting ‘local content’
requirements

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 Case Analysis
• Other costs
– Product and packaging have to be redesigned so
that localization can be delayed

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 Case Analysis
• HP did implement such a strategy with
great success

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 Supplier integration
• Selection of appropriate suppliers for
components of a new product
• Previously after completion of design

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 Supplier integration
• Firms can receive benefits from involving
suppliers in the design process
– Reduced material cost
– Increased materials quality
– Decline in development time and cost
– Decline in manufacturing cost

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 Supplier integration
• To reduce cycle time, focus on core
competency
– Outsource other business requirements

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 Spectrum of supplier integration
• None
• White box
• Grey box
• Black box

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Spectrum of supplier integration
• None
– Supplier is not involved in design
– Materials and subassemblies are supplied
according to customer specifications and design

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Spectrum of supplier integration
• White box
– Informal
– Buyer ‘consults’ with the supplier informally
when designing products and specifications

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Spectrum of supplier integration
• Grey box
– Formal supplier integration
– Collaborative teams between buyer and
supplier
– Joint development

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Spectrum of supplier integration
• Black box
– Buyer provides interface requirements to the
supplier
– Supplier independently designs and develops
the required component

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Spectrum of supplier integration
• Black box may not be the appropriate level
• Firms must develop that level which is most
appropriate to their situation
• What is best for your firm?
• How can you decide what is the best level?

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 Spectrum of supplier integration
• First steps
– Determine your core competencies
– Determine current and future new product
developments
– Identify external developments and
manufacturing needs

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Spectrum of supplier integration
• If future products have components which
require expertise that the firm does not
possess
• And, development can be separated from
other phases
• Then, black box approach makes sense

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 Spectrum of supplier integration
• If separation is not possible
• Then, grey box

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 Spectrum of supplier integration
• If the buyer has some design expertise
• But wants to ensure that the supplier can
adequately manufacture the component
• Then white box may be appropriate

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 Ensure that the relationship is a success

• Select suppliers and build relationships

• Align objectives with selected suppliers

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 Requirements of the supplier
• Capability to participate in the design process
• Willingness toreach agreements on
intellectual property and confidentiality
issues
• Ability to commit sufficient personnel
• Sufficient resources to commit to the supplier
integration process

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 Overall performance improvements
achieved through supplier integration
• Median improvements reported from survey of
124 responding companies (MSU, 1997)
• Purchased material cost
– 15%
• Purchased material quality
– 20%
• Development time
– 20%
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 Overall performance improvements
achieved through supplier integration
• Development cost
– 15.0%
• Functionality/Features/Technology
– 10.0%
• Product Manufacturing Cost
– 10%

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 Mass customization
• Evolved from two concepts
• Craft production
• Mass production

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 Mass customization
– Craft production
• Highly skilled and flexible workers
• Highly differentiated goods
• Organic organizations
– Trained through apprenticeships and experience
– Very difficult to control quality
– Mass production
• Efficient production of a large quantity of goods
• Mechanistic firms
– Management places a high priority on automating and measuring
tasks

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 Mass customization
• Involves the delivery of a wide variety of
customized goods or services quickly and
efficiently at low cost
• Captures advantages of both mass
production and craft production

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 Dell Computer
• Dell Computer became a dominant player
in the PC industry by mass customization
• Dell never builds a computer until the order
has been placed
• This allows for customers to specify unique
requirements
• Their website is a large source of orders

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 Dell Computer
• The order-taking system interfaces with
their supply chain control system
• Insures that inventory is at the proper level
so that the order can be built to customer
requirements
• Dell stores very little inventory
• Dell’s suppliers are close to the assembly
locations
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 Dell Computer
• Dell orders parts on a just-in-time basis
• Dell provides exactly what the customer
wants very quickly
• Dell minimizes parts obsolescence in a
rapidly changing industry

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 Dell Computer
• Doing the right things
– Driven by advanced information systems
• Takes many orders over the web
• Manages inventory
– Strategic partnerships have been established with key
suppliers to ensure that new computers and networking
devices are compatible
– Uses the concept of postponement to achieve mass
customization

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 Dell Computer
• “Dell aims to dominate consumer market
with new focus,” AJC, 26 Dec’01
• Dell launched an aggressive price war with
its new pre-configured SmartStep at $599

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 Dell Computer
• It is straying beyond some of its much-
lauded core philosophies
– From JIT made-to-order machines to pre-
configured machines
– Cautiously dipping its toe into retailing
• Placed kiosks in shopping malls in Nashville and
Dallas for taking orders…no inventory
• Testing to see if the concept works

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 The flexible factory
• Shift from mass production to flexible
plants that make each product to order
• Small runs of high-margin products
• Timken Co. is a master at this game
– Timken is a US$3.9 billion/year maker of
industrial bearings

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 The flexible factory
• Timken committed US$150 million to build a
sophisticated factory that can manufacture small
batches of goods without refitting machine tools
between runs
– Central to this flexibility is a growing library of digital
3D models of components
• Shop floor associates pull up the digital designs, tweak them,
and get the CNC instructions into the networked machines in
15 to 30 minutes
• Took four hours previously

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 Doing it right
• Needed
– Highly skilled and autonomous workers,
processes, and modular units, so that managers
can coordinate and reconfigure these modules
to meet specific customer requests and
demands

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 Doing it right
• Needed
– Each module must continually strive to upgrade
its capabilities
• A module’s success depends on how effectively,
quickly, and efficiently it completes its task, and
how good it is at expanding its capabilities

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 Doing it right
• Management’s success
– Depends on how effectively it can develop,
maintain, and creatively combine the links
between modules in different ways to meet
different customer’s requests
– Depends on the creation of a work environment
that encourages the development of a variety of
different modules

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 Key attributes
• Instantaneous
– Modules and processes must be linked together
very quickly
– This allows for rapid response to various
customer demands

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 Key attributes
• Costless
– The linkages must add little if any cost to the
process
– This allows mass customization to be a low
cost alternative

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 Doing it right
• Seamless
– The linkages and individual modules should be
invisible to the customer
– So customer service doesn’t suffer

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 Doing it right
• Frictionless
– Networks or collections of modules must be
formed with little overhead
– Communication must work instantly
• Without taking time for team building which is so
necessary in many environments

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“A mass market of one,” BW, 12/2/02
• In 1997, M&M Mars began selling
customized M&M candies
• Any color combination desired
• But, the minimum order was 4o pounds
• Chocolate lovers wanted smaller portions
• So, they began selling 8 ounce and 5 pound
bags at three times the regular price
• Sales are doubling every year
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“A mass market of one,” BW, 12/2/02
• Lots of items are being tailored to
individual needs
• A mass market of oneThe web makes it
possible
– “Have it your way”

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“A mass market of one,” BW, 12/2/02
• P&G
– Lets shoppers design cosmetics at
www.reflect.com
• Rockwell Collins lets fighter pilots tailor
their goggles
• Finding customers is the easy part
– Retooling the factory to handle it is hard

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“A mass market of one,” BW, 12/2/02
• Many flops
– General Mills launched www.mycereal.com at
US$7/box
• But customers found that the taste was far short of
their descriptions
– P&G offered designer coffee at US$10 per bag
• But customers couldn’t define their own tastes

103
“A mass market of one,” BW, 12/2/02
• Successes are emerging
– Clothing , golf clubs, hockey sticks
– Branches Hockey
• Lets customers pick from 26 options
– Length of stick, blade pattern, etc.
– Orders go into a digital cutting systems
– Results in 5 days
– Premium charge is 39%
– Revenues up 25% in the past year

104
“A mass market of one,” BW, 12/2/02
• Successes are emerging
– Clothing , golf clubs, hockey sticks
– Lands End
• Introduced customized chinos and jeans sold online
– Now represent 40% of sales of those items
– Off the rack for US$35
– Customized for US$54

105
“A mass market of one,” BW, 12/2/02
• Customized loans online
– Many hidden advantages
• A mother lode of data provided by applicants

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End

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