Chapter 11
Coordinated Product and Supply
Chain Design
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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.
2
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
3
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
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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.
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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
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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
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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
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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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Examples
• Ikea
– 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
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Final Packaging
• Delay until as late as possible
• Repackaging at the cross-docking point is
common for many products
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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
FIGURE 11-4: Concurrent processing
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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
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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
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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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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
• 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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Swaminathan’s Four Approaches to
Standardization
•
•
•
•
Part standardization
Process standardization
Product standardization
Procurement standardization
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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
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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
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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
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Postponement
Point of differentiation
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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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Benetton
Old Manufacturing Process
Spin or Purchase Yarn
Dye Yarn
Finish Yarn
Manufacture Garment Parts
Join Parts
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Benetton
New Manufacturing Process
Spin or Purchase Yarn
Manufacture Garment Parts
Join Parts
Dye Garment
This step is postponed
Finish Garment
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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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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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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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Operational Strategies for Standardization
Product
Process
Modular
Nonmodular
Parts standardization
Nonmodular
Product standardization
Modular
Process standardization
Procurement
standardization
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.
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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
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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 nonconfigured goods than for final products
– Completing the manufacturing process in a local
distribution center may help to lower costs associated with
tariffs and duties.
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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.
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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?)
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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.
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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.
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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
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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.
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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
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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.
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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
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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
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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
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Key Attributes
• Instantaneous
– 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
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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
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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
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