Class 12: 4/13/10

A G ENERAL F RAMEWORK
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Two distinct chains in organizations:
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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
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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.

K
C
S
C
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Demand uncertainty and variability, in particular, the bullwhip effect
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Economies of scale in production and transportation
Lead time, in particular due to globalization

K
C
D
C
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Technology clock speed
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Speed by which technology changes in a particular industry
Make/Buy decisions
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Decisions on what to make internally and what to buy from outside suppliers
Product structure
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Level of modularity or integrality in a product
Modular product
 assembled from a variety of modules
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 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

I NTERACTION BETWEEN THE T WO C HAINS
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Fisher’s concept of Innovative and Functional Products
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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.

W
I
A
S
C
S
P
D
S
E
P
T
?
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Each requires a different supply chain strategy
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Development chain has to deal with the differing level of demand uncertainty

F RAMEWORK FOR M ATCHING P RODUCT
D ESIGN AND S UPPLY C HAIN S TRATEGIES
The impact of demand uncertainty and product introduction frequency on product design and supply chain strategy

D ESIGN FOR L OGISTICS (DFL)
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Product and process design that help to control logistics costs and increase service levels
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E CONOMIC T RANSPORTATION AND
S TORAGE
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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

E XAMPLES
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Ikea
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World’s largest furniture retailer
131 stores in 21 countries
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Large stores, centralized manufacturing, compactly and efficiently packed products
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Rubbermaid
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Clear Classic food containers - designed to fit 14x14” Wal-
Mart shelves

F INAL P ACKAGING
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Delay until as late as possible
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Repackaging at the cross-docking point is common for many products

C ONCURRENT /P ARALLEL P ROCESSING
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Objective is to minimize lead times
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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

T RADITIONAL M ANUFACTURING
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Set schedules as early as possible
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Use large lot sizes to make efficient use of equipment and minimize costs
Large centralized facilities take advantage of economies of scale

S TANDARDIZATION
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Recall: aggregate demand information is more reliable
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We can have better forecasts for a product family
(rather than a specific product or style)
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How to make use of aggregate data ?
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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

M ODULARITY IN P RODUCT AND P ROCESS
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Modular Product:
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Can be made by appropriately combining the different modules
It entails providing customers a number of options for each module
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Modular Process:
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Each product undergo a discrete set of operations making it possible to store inventory in semifinished form
Products differ from each other in terms of the subset of operations that are performed on them

M ODULARITY IN P RODUCT AND P ROCESS
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
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 semi-finished product is difficult

M ODULARITY IN P RODUCT AND P ROCESS
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Modular products are not always made from modular processes
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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

S
’
F
A
S
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Part standardization
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Process standardization
Product standardization
Procurement standardization

P ART S TANDARDIZATION
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Common parts used across many products.
Common parts reduce:
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 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

P ROCESS S TANDARDIZATION
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Standardize as much of the process as possible for different products
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Customizing the products as late as possible
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Decisions about specific product to be manufactured is delayed until after manufacturing is under way
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Starts by making a generic or family product
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Differentiate later into a specific end-product
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Postponement or delayed product differentiation

D ELAYED D IFFERENTIATION
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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
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 modify the order of product manufacturing steps resequenced operations result in the differentiation of specific items or products are postponed as much as possible

P OSTPONEMENT
Point of differentiation

B ENETTON B ACKGROUND
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A world leader in knitwear
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Massive volume, many stores
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Logistics
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Large, flexible production network
Many independent subcontractors
Subcontractors responsible for product movement
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Retailers
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Many, small stores with limited storage

B ENETTON S UPPLY C YCLE
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Primary collection in stores in January
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Final designs in March of previous year
Store owners place firm orders through July
Production starts in July based on first 10% of orders
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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
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Late orders as items sell out
Delivery promised in less than five weeks

B ENETTON F LEXIBILITY
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Business goals
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Increase sales of fashion items
Continue to expand sales network
Minimize costs
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Flexibility important in achieving these goals
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Hard to predict what items, colors, etc. will sell
Customers make requests once items are in stores
Small stores may need frequent replenishments

I T I S H ARD TO B E F LEXIBLE W HEN ...
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Lead times are long
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Retailers are committed to purchasing early orders
Purchasing plans for raw materials are based upon extrapolating from 10% of the orders

B ENETTON
O LD M ANUFACTURING P ROCESS
Spin or Purchase Yarn
Dye Yarn
Finish Yarn
Manufacture Garment Parts
Join Parts

B ENETTON
N EW M ANUFACTURING P ROCESS
Spin or Purchase Yarn
Manufacture Garment Parts
Join Parts
Dye Garment
Finish Garment
This step is postponed

B ENETTON P OSTPONEMENT
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Why the change?
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The change enables Benetton to start manufacturing before color choices are made
What does the change result in?
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Delayed forecasts of specific colors
Still use aggregate forecasts to start manufacturing early
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React to customer demand and suggestions
Issues with postponement
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Costs are 10% higher for manufacturing
New processes had to be developed
New equipment had to be purchased

P RODUCT S TANDARDIZATION
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Downward Substitution
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Produce only a subset of products (because producing each one incurs high setup cost)
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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 ?

P ROCUREMENT S TANDARDIZATION
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Consider a large semiconductor manufacturer
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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

O
S
S
Process
Nonmodular
Parts standardization
Modular
Process standardization
Product
Modular
Nonmodular Product standardization Procurement standardization

S
S
S
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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.

P USH -P ULL B OUNDARY
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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 pullbased system throughout the entire supply chain
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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.

S
I
N
P
D
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Traditionally suppliers have been selected after design of product or components
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However, firms often realize tremendous benefits from involving suppliers in the design process.
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Benefits include:
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 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.

T HE S PECTRUM OF S UPPLIER I NTEGRATION
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No single “appropriate level” of supplier integration
None
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Supplier is not involved in design.
Materials/subassemblies supplied as per customer specifications/design
White box
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Informal level of integration
Buyer “consults” with the supplier informally when designing products and specifications
No formal collaboration
Grey box
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Formal supplier integration
Collaborative teams between buyer’s and supplier’s engineers
Joint development
Black box
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Buyer gives the supplier a set of interface requirements
Supplier independently designs and develops the required component

A
L
D
S
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Process Steps to follow:
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Determine internal core competencies.
Determine current and future new product developments.
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Identify external development and manufacturing needs.

A PPROPRIATE L EVEL D EPENDS ON THE
S ITUATION
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Black Box
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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
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Grey Box
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If separation is not possible
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White Box
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If buyer has some design expertise but wants to ensure that supplier can adequately manufacture the component

K EYS TO S UPPLIER I NTEGRATION
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Making the relationship a success:
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Select suppliers and build relationships with them
Align objectives with selected suppliers
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Which suppliers can be integrated?
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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.

M ASS C USTOMIZATION
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Evolved from the two prevailing manufacturing paradigms of the 20th century
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Craft production and mass production.
Mass production
 efficient production of a large quantity of a small variety of goods
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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

A BSENCE OF T RADE -O FFS
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Two types meant inherent trade-offs
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Low-cost, low-variety strategy may be appropriate for some products
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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
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 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

M AKING M ASS C USTOMIZATION W ORK
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Highly skilled and autonomous workers, processes, and modular units
Managers can coordinate and reconfigure these modules to meet specific customer requests and demands

K EY A TTRIBUTES
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Instantaneous
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Modules and processes must be linked together very quickly
Allows rapid response to various customer demands.
Costless
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Linkages must add little if any cost to the processes
Allows mass customization to be a low-cost alternative.
Seamless
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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

M ASS C USTOMIZATION AND SCM
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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

SUMMARY
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Design for logistics concepts

Efficient packaging and storage

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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