Chapter 11

Coordinated Product
and Supply Chain
Design

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

11.1 A General Framework

Two

distinct chains in organizations:

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
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.

11-2

Key Characteristics of Supply Chain

Demand

uncertainty and variability, in

particular, the bullwhip effect
Economies of scale in production and
transportation
Lead time, in particular due to
globalization

11-3

Key Characteristics of
Development Chain
Technology

clock speed

Speed

by which technology changes in a particular

industry

Make/Buy

decisions

Decisions

on what to make internally and what to buy

from outside suppliers

Product

structure

Level

of modularity or integrality in a product

Modular product
assembled

from a variety of modules

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
11-4

Interaction between the Two Chains

Fishers

concept of Innovative and

Functional Products
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.

11-5

What Is the Appropriate Supply

Chain Strategy and Product Design
Strategy for Each Product Type?
Each

requires a different supply chain

strategy
Development chain has to deal with the
differing level of demand uncertainty

11-6

Framework for Matching Product

Design and Supply Chain Strategies

FIGURE 11-3: The impact of demand uncertainty and product

introduction frequency on product design and supply chain strategy
11-7

11.2 Design for Logistics (DFL)

Product

and process design that help to

control logistics costs and increase
service levels
Economic packaging and transportation
Concurrent and parallel processing
Standardization

11-8

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

11-9

Examples
Ikea
Worlds

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

11-10

Final Packaging
Delay

until as late as possible

Repackaging at the cross-docking point is
common for many products

11-11

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

11-12

The Network Printer Example

FIGURE 11-4: Concurrent processing

11-13

Traditional Manufacturing
Set

schedules as early as possible

Use large lot sizes to make efficient use of
equipment and minimize costs
Large centralized facilities take advantage
of economies of scale

11-14

Standardization
Recall:

aggregate demand information is more

reliable
We can have better forecasts for a product family
(rather than a specific product or style)
How to make use of aggregate data ?
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

11-15

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
11-16

Modularity in Product and

Process
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 semifinished product is difficult

11-17

Modularity in Product and

Process
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

11-18

Swaminathans Four Approaches to

Standardization
Part

standardization
Process standardization
Product standardization
Procurement standardization

11-19

Part Standardization
Common

parts used across many

products.
Common parts reduce:
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
11-20

Process Standardization
Standardize

as much of the process as possible

for different products
Customizing the products as late as possible
Decisions about specific product to be
manufactured is delayed until after
manufacturing is under way
Starts

by making a generic or family product

Differentiate later into a specific end-product
Postponement

or delayed product

differentiation

11-21

Delayed Differentiation
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
modify

the order of product manufacturing steps

resequenced operations result in the differentiation of
specific items or products are postponed as much as
possible

11-22

Postponement

Point of differentiation

11-23

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

11-24

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

11-25

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

11-26

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

11-27

Benetton
Old Manufacturing Process
Spin or Purchase Yarn
Dye Yarn
Finish Yarn
Manufacture Garment Parts
Join Parts
11-28

Benetton
New Manufacturing Process
Spin or Purchase Yarn
Manufacture Garment Parts
Join Parts
Dye Garment

This step is postponed

Finish Garment
11-29

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
11-30

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 ?

11-31

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
11-32

Operational Strategies for

Standardization
Process

Nonmodular

Modular

Modular

Parts standardization

Process standardization

Nonmodular

Product standardization

Procurement standardization

Product

11-33

Selecting the Standardization

Strategy

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.

11-34

Important Considerations
Strategies

designed to deal with demand

uncertainty and/or inaccurate forecasts
Changes suggested in the strategies may
be too expensive to implement
Redesign

related costs should be incurred at

the beginning of the product life cycle
Benefits cannot be quantified in many cases:
increased

flexibility, more efficient customer

service, decreased market response times

11-35

Important Considerations
Resequencing

causes:

level

of inventory in many cases to go down

per unit value of inventory being held will be higher
Tariffs

and duties are lower for semi-finished or

non-configured goods than for final products
Completing

the manufacturing process in a local

distribution center may help to lower costs associated
with tariffs and duties.

11-36

Push-Pull Boundary
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 pull-based

system throughout the entire supply chain
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.
11-37

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?)
11-38

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 practices.
11-39

11.3 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.
11-40

The Spectrum of Supplier Integration

No single appropriate level of supplier integration

None

White box

Informal level of integration

Buyer consults with the supplier informally when designing
products and specifications
No formal collaboration

Grey box

Supplier is not involved in design.

Materials/subassemblies supplied as per customer
specifications/design

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 required
component
11-41

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.

11-42

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, then
taking

Grey
If

Box

separation is not possible

White

Box

If

buyer has some design expertise but wants to

ensure that supplier can adequately manufacture the
component
11-43

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.
11-44

11.4 Mass Customization

Evolved

from the two prevailing manufacturing

paradigms of the 20th century
Craft

Mass

production and mass production.

production

efficient

production of a large quantity of a small

variety of goods
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
11-45

Absence of Trade-Offs
Two

types meant inherent trade-offs

Low-cost,

low-variety strategy may be appropriate for

some products
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
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
11-46

Making Mass Customization

Work
Highly

skilled and autonomous workers,

processes, and modular units
Managers can coordinate and reconfigure
these modules to meet specific customer
requests and demands

11-47

Key Attributes
Instantaneous
Modules

and processes must be linked together very

quickly
Allows rapid response to various customer demands.
Costless
Linkages

must add little if any cost to the processes

Allows mass customization to be a low-cost
alternative.
Seamless
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

11-48

Mass Customization and SCM

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

11-49

SUMMARY
Design

for logistics concepts

Efficient

packaging and storage

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

11-50