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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 1980s, 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

• Worlds largest furniture retailer
• Swedish company
• Company owned stores
• 143 in 22 countries
• Franchise stores
• 20 in 13 countries/territories
• US9.6 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 14x14 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 US0.77
• Shipping the same weight in bags costs about
  US20.00

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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 Version
Office Depot Version
Best Buy 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 firms 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(71.52227.82)
• 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 to reach 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
• Dells 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 Dec01
• 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 ordersno 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 US3.9 billion/year maker of
  industrial bearings

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The flexible factory

• Timken committed US150 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 modules 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

• Managements success
• Depends on how effectively it can develop,
  maintain, and creatively combine the links
  between modules in different ways to meet
  different customers 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 doesnt 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, MM Mars began selling customized MM
  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

• PG
• 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
  US7/box
• But customers found that the taste was far short
  of their descriptions
• PG offered designer coffee at US10 per bag
• But customers couldnt define their own tastes

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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

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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 US35
• Customized for US54

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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