Coordinated Product and Supply Chain Design

Jerry Banks

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?

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

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

DFL
Design for logistics considers the following
Economic packaging and transportation Concurrent and parallel processing Postponement/delayed differentiation

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

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 Parallel Processing Process A Process C Process B
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Process C

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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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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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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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(71.52++227.82) 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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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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