Chapter 11. Coordinated Product and Supply Chain Design

Chapter 11
Coordinated Product and Supply
Chain Design
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.
Key Characteristics of Supply Chain
• Demand uncertainty and variability, in
particular, the bullwhip effect
• Economies of scale in production and
• Lead time, in particular due to globalization
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
Interaction between the Two Chains
• Fisher’s concept of Innovative and Functional
– 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.
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
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
11.2 Design for Logistics (DFL)
• Product and process design that help to
control logistics costs and increase service
– Economic packaging and transportation
– Concurrent and parallel processing
– Standardization
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
• 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
Final Packaging
• Delay until as late as possible
• Repackaging at the cross-docking point is
common for many products
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
The Network Printer Example
FIGURE 11-4: Concurrent processing
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
• 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
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
• 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
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
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
Swaminathan’s Four Approaches to
Part standardization
Process standardization
Product standardization
Procurement standardization
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
• May be necessary to redesign product lines or
families to achieve commonality
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
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
Point of differentiation
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
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
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
It Is Hard to Be Flexible When...
• Lead times are long
• Retailers are committed to purchasing early
• Purchasing plans for raw materials are based
upon extrapolating from 10% of the orders
Old Manufacturing Process
Spin or Purchase Yarn
Dye Yarn
Finish Yarn
Manufacture Garment Parts
Join Parts
New Manufacturing Process
Spin or Purchase Yarn
Manufacture Garment Parts
Join Parts
Dye Garment
This step is postponed
Finish Garment
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
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 ?
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
Operational Strategies for Standardization
Parts standardization
Product standardization
Process 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
• 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.
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
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.
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
• Standardization strategies can combine push and pull
– 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.
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?)
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
• Some of the localization material can be locally sourced
• 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.
11.3 Supplier Integration into New Product
• 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.
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
Appropriate Level Depends on the Situation
• Process Steps to follow:
– Determine internal core competencies.
– Determine current and future new product
– Identify external development and manufacturing
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
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
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
– 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
Absence of Trade-Offs
• Two types meant inherent trade-offs
– Low-cost, low-variety strategy may be appropriate for some
– 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
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
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
• Frictionless
– Networks or collections of modules must be formed with little
– Communication must work instantly
Mass Customization and SCM
• Many of the advanced SCM approaches and techniques
essential if mass customization is to be successfully
• 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
• Postponement can play a key role in implementing mass
• Design for logistics concepts
– Efficient packaging and storage
– Certain manufacturing steps can be completed in
– Standardization
• Integrating suppliers into the product design and
development process
• Advanced supply chain management facilitating
mass customization