Design for Supply Chain Management Phil Kaminsky [email protected] David Simchi-Levi Philip...

Design for Supply Chain Management

Phil [email protected]

David Simchi-Levi

Philip Kaminsky

Edith Simchi-Levi

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

The Manufacturing Environment

Rapid Changes– New products rapidly introduced– Short, unknown product life cycles

High Variety of Products Long Production Lead Times Increasing storage and transportation costs Difficult to forecast demand


The Goals of the Manufacturing Organization

Responsiveness Competitive pricing Efficiency Customer service


Why Do These Goals Conflict?

Forces for keeping low inventory– inventory expensive– low salvage values

Forces for keeping high inventory– long lead times – customer service is important– demand is hard to predict– reduction in transportation quantity


Design For Logistics

Product and process design key cost drivers of product cost

Design for Manufacturing used design to decrease manufacturing costs

Major supply chain costs include transportation costs, inventory costs, distribution costs


Design For Logistics

Design for Logistics uses product design to address logistics costs

Key Concepts of Design for Logistics– Economic packaging and transportation– Concurrent/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 space


Examples

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


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 parts


The Network Printer Example

Stage 1(Europe) Stage 2 +

Integration (Far East)

Customer(Europe)

Board Printer

Stage 1(Europe)

Integration (Europe)

Customer(Europe)

Board

Printer

Plastics, motors, etc.

Stage 2(Far East)


Standardization

Shortening lead times is not always possible How else can inventory levels be reduced

and forecast accuracy improved? Standardization of products and processes

– Product commonality– Process commonality


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 module 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



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



Are modular products always made from modular processes?



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


Types of Standardization

Part Standardization– Common parts are used across many processes– Product redesign might be necessary

Process Standardization– Standardizing as much of the process as possible,

making a generic or family product– Delaying differentiation– Called “Delayed differentiation”, “Postponement”


Postponement: Example

Demand for black t-shirts– 50% probability 100– 50% probability 200

Same for white t-shirts Production alternatives

Produce 150 of each color ahead of timeProduce 300 which can be dyed after demand

is observed


Postponement: Example

First Alternative– 25% probability -- short 50 of each– 25% probability -- extra 50 of each– 50% probability -- short 50 of one, extra 50 of the other

Second Alternative– 25% probability -- short 50 of each– 25% probability -- extra 50 of each– 50% probability -- no shortage or extra


Postponement: Key Concepts

Delay differentiation of products in the same family as late as possible

Enables the use of aggregate forecasts Enables the delay of detailed forecasts Reduces scrapped or obsolete inventory,

increases customer service May require new processes or product

design with associated costs


Postponement Considerations

Tradeoff increased product cost with decreased inventory

Need to decide where to postpone - the push-pull boundary

Position in product lifecycle is factor in postponement strategies

Inventory value may increase Consider tariffs and duties


Hewlett-Packard: LaserJets

LaserJets are manufactured in Japan Previously, the printers had two different

power supplies (110, 220 volts) Differentiation had to happen immediately An improved design enables a single power

supply to work for both voltages. 5% Cost Savings


Hewlett-Packard Disk DrivesManufacturing Process Redesign

HP’s disk drive division supplied several customers

Customer 1

Customer 2

Customer 3

PCB Insertion

tests

Customer 1

Customer 2

Customer 3

PCB Insertion

tests

CouponInsertion

common tests

PCB insertion postponed


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

orders Purchasing plans for raw materials are

based upon extrapolating from 10% of the orders


BenettonOld Manufacturing Process

Spin or Purchase Yarn

Dye Yarn

Finish Yarn

Manufacture Garment Parts

Join Parts


BenettonNew Manufacturing Process

Spin or Purchase Yarn

Manufacture Garment Parts

Join Parts

Dye Garment

Finish Garment

This step is postponed


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


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


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 ?


A Framework for Standardization

Modular

Non-Modular

Non-Modular Modular

Leverage equipment and partcommonality across products

Carry a limited number of products in inventory

Maximize component commonality across products

Delay customization as late as possible


HP DeskJet Case: Background

High volume, high speed manufacturing in Vancouver Many different models, all completed in Vancouver Three distribution centers

– North American– Asian– European

Manufacturing time one week Transportation lead times:

– Europe: 4-5 weeks– US

At distribution centers, simple standardized process


HP DeskJet Case: Analysis

Problems– High inventory levels– Inventory imbalance in Europe

Causes– Uncertainty about correct inventory levels– Many geographic options (localization)– Long lead times– Uncertain market– Difficulty at getting divisions to work together

What are HP’s options?


HP DeskJet Case: Options

Short Term– Rationalize safety stock

Long Term– Air shipment– European factory– More inventory– Better forecasting– DC localization


Safety Stock Rationalization:Example Europe AB

Recall: Safety Stock = z STD * LT

Mean Weekly Demand 3656 Monthly / 4.33Std. Dev 2703 Monthly/(4.33).5

Lead Time 5

Std. Dev of DemandPeriod

6044 2703*(5).5

Safety Factor 1.9 98% serviceSafety Stock 11483 1.9*6044


Evaluating Alternatives

Air Shipment – Expensive

European Factory – Not sufficient volume

Better Forecasting– How?

More Inventory– More problems

DC Localization– What will savings be?


Evaluating DC Localization

In DC localization, risk pooling can be used to reduce total inventory while maintaining service levels

To evaluate inventory, compare total safety stock held if individual localized units are held in inventory or if generic units are held

Other costs must also be evaluated


Evaluating DC Localization

AVG STD SafetyStock

Weeksof SS

A 42 32 66 6.75

AA 420 204 416 4.25

AB 15830 5625 11,484 3.11

AQ 2301 1169 2395 4.48

AU 4208 2205 4517 4.62

AY 307 103 211 2.96

Total 23109 19089 3.55

Generic 23109 6244 12792 2.38


DC Localization

Safety Stock Reduction– Current 19,089 units (3.55 weeks)– With localization 12,792 units (2.4 weeks)

Other benefits– Lower value of transit inventory– Freight reductions– Local presence of “manufacturing”– Customs implications– Local procurement of localization materials

But there are costs– Product redesign– DC modifications


Implementation

R&D Support– “The product is working, so why bother?”

DC Support– “Not our core competency”

New packaging Capital investment


Results

Successful implementation Millions saved Service levels increased Packaging won awards Best practice spread to other HP divisions


Supplier Integration

Competitive forces are driving firms to integrate suppliers into product development

Spectrum of Supplier Integration– None– White Box – Informal integration– Grey Box – Formal integration, with

collaborative teams– Black Box – Interface requirements are given,

product is returned


Supplier Integration

What approach is appropriate?– Determine internal competencies– Determine product development needs– Identify external development and manufacturing needs

If future products have components that require external expertise and can be separated from other components, a black box approach makes sense.

If components cannot be separated, a grey box approach makes sense.

If some expertise can be found in house, a white box approach might make sense.


The “Bookshelf” Approach

Monitor the development of new technologies Follow suppliers that have developed expertise When appropriate, integrate these new

technologies This balances the advantages and disadvantages

of being on the cutting edge:– No need to gain experience with the technology,

because suppliers are doing this for you.– Can introduce the technologies when needed.


Mass Customization

The delivery of a wide variety of customized goods at low cost

The key is modular products and processes, so that customer requests can be met

According to Pine, companies need to evolve towards “modular companies”, with managers ensuring that modules are compatible.

Consider National Bicycle


Mass Customization and Supply Chain Management

An advanced supply chain is essential This is particularly true when “modules”

extend beyond a single company. Consider

– Postponement for regional customization– The value of strategic partnerships and supplier

integration– Dell

Design for Supply Chain Management Phil Kaminsky [email protected] David Simchi-Levi Philip...

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