Economics of Product Variety
ME 546 - Designing Product Families - IE 546
Timothy W. Simpson
Professor Mechanical & Industrial
Engineering and Engineering Design
The Pennsylvania State University
University Park, PA 16802 USA
phone: (814) 863-7136
email: tws8@psu.edu
http://www.mne.psu.edu/simpson/courses/me5469
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© T. W. SIMPSON
Affordable Customization and Variety
• Must consider
cost, control,
time constraints
Custom Engineering
Customization
Contribution
• Reactive vs.
proactive modes
of customization
100 %
Change or
Modify
“Standard”
Designs and
Processes
Easy to
Customize
• Best to strive
for platforms –
Standard Parts
product and
and Modules
process – that
0%
allow you to be
Reactive
Proactive
proactive
Adapted from: Anderson, D.M., 1997, Agile Product Development
for Mass Customization, Irwin, Chicago, IL.
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© T. W. SIMPSON
Types and Cost of Variety
• External Variety
Useful variety is appreciated by the customer: useful options,
stylistic differences
 Useless variety is transparent, unimportant, and confusing to
the customer
 Example: Nissan steering wheels

• Internal Variety

Excessive and unnecessary variety of parts, features, tools,
fixtures, raw materials, processes
• Cost of Variety
Is the sum of all the costs of attempting to offer customers
variety with inflexible products that are produced in inflexible
factories and sold through inflexible channels
 Includes cost of customizing, excess parts, procedures, and
processes, excess operations costs

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Variety Cost
With increased
market variety,
mass production
causes a high
cost of variety,
whereas mass
customization
keeps the variety
cost low (that is
provided it is
proactively
undertaken)
PENNSTATE
MP
High
Variety
Cost
MC
Low
Low
High
Market Variety
Adapted from: Anderson, D.M., 1997, Agile Product Development for
Mass Customization, Irwin, Chicago, IL.
© T. W. SIMPSON
Key Drivers of Variety Cost
• Lot Size (Batch Size)

Determined by setup: large setups encourage large lot size
• WIP Inventory
Usually at least one batch of parts before and after every
workstation
 The larger the batch size, the higher the WIP inventory

• Floor Space
Increase with increasing batch size
 Due to internal transportation costs, floor space, aisles, etc.

• Recurring Quality Costs

“Pipeline Effect”: Recurring errors that affect the number of
parts needing to be scrapped or reworked from recurring
defects downstream
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© T. W. SIMPSON
Key Drivers of Variety Cost
Effect of Lot Size on Various
Costs (Galsworth, 1994)
• These costs
usually increase
with increasing
lot size
Cost
• WIP Inventory
has largest
impact
1
PENNSTATE
Lot Size
© T. W. SIMPSON
Key Drivers of Variety Cost
Machinery & Setup Costs based
on Lot Size (Galsworth, 1994)
• Machinery Utilization

The cost of less than
100% utilization
Cost
• Setup
Includes physical setup,
design changes, part
distribution, additional
testing
Machinery
100% Utilization
1
• Cost decreases with
increasing lot size
Setup Labor
• Counters previous trend
1
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Lot Size
© T. W. SIMPSON
Variety Cost Components
• Inventory
Carrying costs: Sum of all costs for interest, taxes,
depreciation, handling, floor space, etc.
 Raw materials: Grows in an attempt to overcome deficiencies
 WIP: Many operators hold inventory “just in case”
 Finished goods: Located at distributors, dealers, in house

• Inventory Related
Administration: Admin labor to order, receive, document,
store, retrieve, distribute, reorder
 Floor Space: “Inventory expands to fill the space available”
 Obsolescence/Deterioration: Sit in warehouse too long, run
risk of uselessness
 Transportation: Large bins, forklifts, wide aisles all due to
large batch size

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© T. W. SIMPSON
Variety Cost Components
• Setup
Labor cost: change a production operation from one part to
another, test new setup
 Measured from last part of previous batch to first good part of
new batch
 Kitting: gathering all parts necessary to build a batch of
products

• Model Changeovers

Includes opportunity cost of lost output plus the cost of new
equipment, tooling, and labor
• Materials
MRP: Materials Requirements Planning
 BOM: Bills of Materials, one needed for each different product
 Internal parts distribution
 Purchasing: Cost of buying many low-volume parts

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Variety Cost Components
• Operations
Tooling/dies/fixtures
 Ramp delays: Slow introduction of product

• Customization/Configuration
Plant labor
 Engineering: Often done without prior product line planning

• Marketing
Product line management
 Missed opportunities: Wrong amount product at wrong time
 Forecasting errors: Cause product shortages

• Quality
• Service

Cost of excess service due to excessive parts and procedures
• Flexibility
Achieved through flexible info and manufacturing systems
 Actually an investment, not a cost

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© T. W. SIMPSON
Assessing Direct Costs of Product Variety
• Assessing the direct costs of variety are easy (DFM)
DFM is good for assessing direct costs associated with the
design and production of a single product
 The resulting product is not “optimum” but has reduced
manufacturing costs as a result of applying DFM

• What are examples of direct costs involved with
product variety?

Capital equipment

Assembly costs

Manufacturing costs

Supplier/vendor costs

Material costs

Training

Component costs

Drawing fabrication

Labor costs
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© T. W. SIMPSON
Assessing Indirect Costs of Product Variety
• Indirect costs are not always understood or easy to
capture, e.g.,
logistics of managing variety
 quality
 capacity change due to set-ups
 raw material inventory

part documentation
 work-in-process inventory
 finished goods inventory
 post-sales service

• Furthermore, assessing indirect costs is not easy
• Design for Variety (DFV) defines three indices to assess
indirect costs of offering product variety:
Commonality
 Differentiation Point
 Set-Up Cost

PENNSTATE
Source: (Martin & Ishii, 1998)
© T. W. SIMPSON
Evolution of Design for Variety (DfV) Methodology
• Ishii, K., Juengel, C. and Eubanks, C. F., 1995, September 17-20, "Design for Product Variety: Key
to Product Line Structuring," Design Theory and Methodology - DTM'95, Boston, MA, ASME, Vol.
83-2, pp. 499-506.
• Martin, M. and Ishii, K., 1996, August 18-22, "Design for Variety: A Methodology for Understanding
the Costs of Product Proliferation," Design Theory and Methodology - DTM'96 (Wood, K., ed.),
Irvine, CA, ASME, Paper No. 96-DETC/DTM-1610.
• Martin, M. V. and Ishii, K., 1997, September 14-17, "Design for Variety: Development of
Complexity Indices and Design Charts," Advances in Design Automation (Dutta, D., ed.),
Sacramento, CA, ASME, Paper No. DETC97/DFM-4359.
• Fujita, K. and Ishii, K., 1997, September 14-17, "Task Structuring Toward Computational
Approaches to Product Variety Design," Advances in Design Automation (Dutta, D., ed.),
Sacramento, CA, ASME, Paper No. DETC97/DAC-3766.
• Fujita, K., Akagi, S., Yoneda, T. and Ishikawa, M., 1998, September 13-16, "Simultaneous
Optimization of Product Family Sharing System Structure and Configuration," ASME Design
Engineering Technical Conferences - Design for Manufacturing, Atlanta, GA, ASME, Paper No.
DETC98/DFM-5722.
• Fujita, K., Sakaguchi, H. and Akagi, S., 1999, September 12-15, "Product Variety Deployment and
Its Optimization Under Modular Architecture and Module Commonalization," ASME Design
Engineering Technical Conferences - Design for Manufacturing, Las Vegas, NV, ASME, Paper No.
DETC99/DFM-8923.
• Martin, M. and Ishii, K., 2000, September 10-13, “Design for Variety: A Methodology for
Developing Product Platform Architectures,” ASME Design Engineering Technical Conferences Design for Manufacturing, Baltimore, MD, ASME, Paper No. DETC2001/DFM-14021.
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Commonality Index (CI)
• Commonality Index (CI) measures how well the design
utilizes standardized parts
CI  1  v
u  max p j
n
 p j  max p j
j1
• u = # of unique parts
• p = # of parts in model j
• vn = total amount of variety offered
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© T. W. SIMPSON
Differentiation Index (DI)
• Differentiation Index (DI) measures where the point of
differentiation occurs within the process flow
n
DI 
 div iai
i1
n
nd1v n  ai
i1
•
•
•
•
•
•
Reflects to what extent the
product structure has moved
away from the worst case
scenario
Indicates worst possible case
wherein all variety is determined in
the first process and all the costs
are incorporated at that point
vi = # of different products exiting process i
n = # of processes
vn = final # of varieties offered
di = average throughput time for process i to sale
d1 = average throughput time from beginning of production to sale
ai = value added at process i
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Manufacturing Postponement
• The concept of “postponement” is a form of DFM that is
applicable when producing families of products
• Postponement is defined as “redesigning the product
or production process so that the point of differentiation
is delayed as much as possible”

a.k.a. delayed product differentiation (DPD), product
differentiation postponement (PDP), design for localization
• General postponement strategies:
Component and Process Standardization
 Modular Product Design
 Process Restructuring
 Design for Logistics

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© T. W. SIMPSON
General Postponement Strategies
• Component and Process Standardization
allow facilities to perform identical operations
 reduces complexity of operations
 increases flexibility of WIP inventory usage

• Modular Product Design
allows for easier assembly
 integration can be performed at later points

• Process Restructuring
Postponement of operations (postpone operations downstream)
 Reversal of operations (re-order adjacent operations)

• Design for Logistics

designing products for cheaper transportation, with smaller
packaging to reduce freight costs
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© T. W. SIMPSON
Standardization (HP)
Mono Printer
PCA
FA&T
Customization
Color Printer
PCA
FA&T
Customization
No Delayed Product Differentiation
Mono Printer
PCA
FA&T
Color Printer
Customization
With Delayed Product Differentiation
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© T. W. SIMPSON
Reversal
of Operations
(Benetton)
Process Restructuring:
Reversal
of Operations
Red Sweater
dye
knit
distribution
Blue Sweater
dye
knit
distribution
No Delayed Product Differentiation
Red Sweater
dye
distribution
Blue Sweater
knit
dye
distribution
With Delayed Product Differentiation
PENNSTATE
© T. W. SIMPSON
Process Restructuring: Postponement of Operation
Postponement of Operations (Sherwin-Williams)
Color A
Pigment Mixing /
Shipping
Distribution
Color B
Paint Base
Pigment Mixing /
Shipping
Distribution
No Delayed Product Differentiation
Color A
Pigment Mixing/
Distribution
Paint Base
Color B
Shipping
Pigment Mixing/
Distribution
With Delayed Product Differentiation
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© T. W. SIMPSON
Process Sequence Graphs before DPD
• Instrument
panels at
TENKO
before
applying
DPD
Source (Martin & Ishii, 1997)
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© T. W. SIMPSON
Process Sequence Graph after DPD
Postponing points of differentiation
to the later stages improves the
economies of scale of early ones
Source (Martin & Ishii, 1997)
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© T. W. SIMPSON
Set-Up Index (SI)
• Set-up Index (SI) provides an indirect measure of how
switchover costs contribute to the overall costs of the
product
n
 v ic i
SI  iv1
n
 Cj
j1
• vi = # of different products exiting process i
• ci = cost of set-up at process i
• Cj = total cost (material, labor, and overhead) of jth product
PENNSTATE
© T. W. SIMPSON
Indirect Costs of Providing Variety
Relationship of Indices to Indirect Costs
PENNSTATE
LOGISTICS
Drawing maintenance
Supplier maintenance
Expediting
Documentation
Information technology
Management complexity
MATERIAL
Volume discounts
Material handling
LABOR
Setups
Training
Learning curve losses
QUALITY
Incorrect parts in assembly
Wrong processes used for subassembly
Wrong test or inspection process
HOLDING
Raw material, WIP
FGI
Field service inventory
End of life buy
CI
X
X
X
X
X
X
X
X
X
DI
X
SI
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
© T. W. SIMPSON