Coordinated Product and Supply Chain

Design
Product and process designers to do things
differently for the benefit of the overall supply
chain

We have to find ways to achieve cross-functional

cooperation
Basic Concepts

Component Commonality : Use of the same

component in multiple applications

Modularity : Design of a product with distinct

functional parts and standard interfaces

Universality : Design of components or products

to suit every conceivable need
Modular vs Integral Design

The opposite of modular design is integral design ;

design in which every element or component is
uniquely designed to match a particular physical
and/or electronic interfaces of many other
components
Before implementing the concept of modularity and
commonality GE offered 650,000 product
permutations.
After the product redesign, GE offered 185 models
and reduced the number of SKUs from 800 to
350.
 How does modularity help supply chain ?

It may enable you to hold component/module

inventory further upstream (lowering inventory
throughout the supply chain) in the supply chain
and still allow for rapid final assembly.

Modular design may actually improve both labour

and capital productivity due to a more efficient
production process.

It is very convenient for post-sales service.

Universality

One-size-fits-all
100% commonality creates universality

Universality can be difficult to achieve unless the

number of options required or the cost of
providing them is low.
Some Examples

Software
Full Install options
made easier because of falling cost-per-megabyte
of disk storage
Pay per use or Pay per function
Different designers can choose different fonts to
install,while the manufacturer only has to deliver one
identical CD-ROM to each customer
Multiple Languages
Customer can customize (multiple languages are
loaded)
 UPS (Universal Power Supply)
Detects household voltage and automatically
switches between 110 volts to 220 volts.
It costs more but benefits outweigh the additional
cost

DaimlerChrysler :
Created 56 component groups to study
opportunities to design common components for
multiple uses
Framework for Costs and Benefits

We must know cost of implementing such design

changes and the benefits they can provide.

Supply chain improvements involving

commonality, modularity or universality produce
higher product costs (may be higher material
costs)

These costs are captured in the accounting

system and hence quite visible
Example:

A redesigned UPS, compared to separate 110-volts

and 220-volts power supplies could have the
following additional costs:

Redesign costs (one-time expense) : Rs.

20,00000.00
Incremental material cost per unit : Rs. 25.00
Incremental labour cost per unit : Rs. 10.00
Redesign costs may include the following :

Engineering/mechanical redesign
Updating the bill of materials (BOM)
Training of sales and repair personnel
Seeking and certifying new suppliers for new components
Testing and certification for country safety regulations
Updating product manuals and sales brochures
Redesigning packaging materials
Scrapping of obsolete component inventory

Thus designing for universality early would be preferable

 Benefits
A less overall complexity in manufacturing products for
different needs or markets

Lower SKU count

Lower inventories, simpler inventory control

Fewer parts shortages

Cisco estimates that they will save $ 91.5 million by these

redesigns
Benefits of Design Changes

Benefit A : A less overall complexity in manufacturing

products for different needs or markets
Suppose an automobile company had just two levels of
options (standard and deluxe) and 30 product
features (e.g. radio,airbags,climate
control,wheels,transmissions etc)
The number of different possible unique automobiles
one could produce would be:
2 to the power 30 = 1,073,741,824 possible cars!

What happens when the options per feature increases to

3 or 4 ?
If you provide variety in sets

All standard options are grouped together into

Standard automobile and all deluxe options are
grouped together into a Deluxe automobile

The number of different automobile company could

produce is just two

There would be drastic simplification of the systems

needed for order entry, production control, parts
control etc.
 Standard cost accounting system wont highlight
this reduction in cost;

It will show up in what accountants call favourable

manufacturing cost variance

Activity-Based Costing may be useful in estimating

the benefits of reduced complexity in
manufacturing
 Benefit-B : Lower SKU Count

The following activities become simpler or easier to

manage:
Production planning and scheduling

Finished goods inventory control and allocation

Product catalogs

Product pricing
Example of Unilever

Acquired Diversey Corporation in 1996 and together

the number of product offerings exceeded 12,000

After analysis of the fundamental properties ,

product lines were simplified with only 2000
newly defined products

Only ABC can reflect the cost advantages

 Benefit-C : Lower inventories,simpler inventory
control

Recall our Zipper example ?

Three separate colour zipper were replaced by a

common black zipper that would satisfy all three
needs.

Safety stock was reduced by 24%

 Benefit-D- Fewer parts shortages (higher service
level)

Reduction in inventory leads to improvement in

service level
Postponement

Postponement is a powerful strategy that applies

commonality,modularity and universality

Postponement is delaying the point of product

differentiation into specific (but related) SKUs

This may also be called risk pooling

Example : The HP Deskjet Printer
Postponement

Point of differentiation
Back to the HP Case
Long lead times, high inventory levels, imbalance
of inventory
Localization (labeling and manuals, power
supply, plug)
One cause of imbalance (too much inventory for
printers localized for one market, too little
inventory for another market)
Significant uncertainty on how to set safety
stock
Too many localization options
Uncertainty in local markets
Some options
Air shipment
A factory in Europe
Improve forecasting practices (how?)
Back to the HP Case
HP management considered postponement as an
option
Ship unlocalized printers to European DC and
localize them after observing the local demand
At 98% service level, safety stock dropped
from 3.8 weeks supply to 2.6 weeks supply on
the average
Annual savings around $800,000
Value of inventory in transit (and hence
insurance costs) goes down
Some of the localization material can be
locally sourced (cheaper)
European DC had to be modified to facilitate
localization. Printer needed to be redesigned.
All Vancouver products now DC-localizable
(postponement). One of the best of such
Postponement Costs and Benefits (Deskjet Printer)

Costs : Cost associated with redesign as explained

before

Also , performing factory-like functions at a

Distribution Center may be more costly in terms
of operational and labour costs.

Costs involved in sourcing localized components ,

testing etc.
 Benefits :

Reduced Inventory

Improved Service Level

A Simpler Manufacturing Process

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
Benetton-Old Manufacturing Process

Spin or Purchase Yarn

Dye Yarn

Finish Yarn

Manufacture Garment Parts

Join Parts
Benetton-New Manufacturing Process

Spin or Purchase Yarn

Manufacture Garment Parts

Join Parts

Dye Garment This step is postponed

Finish Garment
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
Packaging Postponement

Postponement can also be used in packaging

Postponement via Software

A good example is ECUs (Electronic Control Units)

in modern cars which controls engine sensors,
ignition circuitry, door locks etc.

Relatively few varieties of ECUs.

Differentiation comes from the software

programmed into them

GM faced the problem of shortages of ECUs and

also mismatch of ECUs during assembly
 GMs Solution

Pursue a software based postponement strategy

Company decided to purchase generic , flash-

programmable ECUs from suppliers and provide
the flash programming capability in their plants to
add the appropriate software just before
assembly.
Benefits of software postponement strategy
identified by GM
Supplier Benefits
A simpler supply chain (one generic ECU)
Lower inventory levels (fewer distinct
components being produced)
Simplified material handling because ECUs are
not differentiated yet
Improved quality control,because only generic
ECUs are being produced
Reduced Bullwhip Effect due to aggregated ECU
demand being more stable than SKU-level
demand
 GM Benefits
Lower inventories due to risk pooling effects

Higher quality of manufacturing due to fewer component

selection errors

Reduced cost of sequencing components

Faster Engineering Change Order (ECO) implementation

since GM controls the process , not suppliers

Lower purchasing costs from suppliers (large orders of

one SKU)
 Post-Sales Service Benefits

Less Inventory (parts centers only stock one

generic ECU instead of many)

Faster response to quality issues, because software

can be loaded at dealers and service locations

Faster response to customer requests on future

product features (if addressed via software
reprogramming)
Process Design for Postponement

Taking a closer look at how they build and distribute

products can improve supply chain.
Not all SC improvements involve product redesign.
Re-sequencing Production Operation

Changing the Push-Pull Point

Administrative Postponement
 Supplier Integration into New Product
Development

Traditionally suppliers have been selected after

design of product or components

However, firms often realize tremendous benefits

from involving suppliers in the design process.

Benefits include:
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.
The Spectrum of Supplier Integration

No single appropriate level of supplier

integration
None
Supplier is not involved in design.
Materials/subassemblies supplied as per customer
specifications/design
White box
Informal level of integration
Buyer consults with the supplier informally when
designing products and specifications
No formal collaboration
Grey box
Formal supplier integration
Collaborative teams between buyers and suppliers
engineers
Joint development
Black box
Buyer gives the supplier a set of interface requirements
Supplier independently designs and develops the
Appropriate Level Depends on the Situation

Process Steps to follow:

Determine internal core competencies.
Determine current and future new product
developments.
Identify external development and manufacturing needs.
Appropriate Level Depends on the Situation

Black Box
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
Grey Box
If separation is not possible
White Box
If buyer has some design expertise but wants to
ensure that supplier can adequately
manufacture the component
Keys to Supplier Integration

Making the relationship a success:

Select suppliers and build relationships with them
Align objectives with selected suppliers

Which suppliers can be integrated?

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.
Mass Customization

Obtaining Customer Information

Fitted Products
Choice Products

Operations and Supply Chain Consideration

Concepts of Commonality, Universality,

Modularity and Postponement can contribute to
the production side of mass customization.
 Costs:
Cost of collecting and transmitting choice
selections, and fitted product measurements if
needed

Cost of managing high volumes of individual

orders (versus managing fewer , large orders
from distributors/resellers/retailers for standard
products
Benefits:
Benefit of offering customizable items in the
marketplace (larger market share, price
premiums, brand enhancement etc.)
Thank you