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Coordinated Product and Supply

Chain Design
Dr Prashant Gupta

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

Goals of Manufacturing Organization

Efficiency
Responsiveness
Competitive Pricing
Customer service

Why Do These Goals Conflict?

Forces for keeping low inventory
Expensive inventory
Low salvage values

Forces for keeping high inventory

Long lead times

Reduction in transportation cost
Higher Customer Service Level
To take care of inaccuracy in Demand
Forecasting

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.

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.

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

The Development Chain

The enterprise development and supply chain

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.

Appropriate Supply Chain Strategy

and Product Design Strategy for a
Product
Each product may require a different supply
chain strategy.
Development chain has to deal with the
differing level of demand uncertainty.

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Framework for Matching Product

Design and Supply Chain Strategies

The impact of demand uncertainty and product introduction

frequency on product design and supply chain strategy

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Design For Logistics (DFL)

Design for Logistics is defined as use of
product and process designs to reduce
logistics costs ( Distribution &
Transportation Costs) and to increase service
levels.
Key Concepts of Design for Logistics are:
1. Economic Packaging and Transportation
2. Concurrent and Parallel Processing
3. Standardization

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1. Economic Packaging & Transportation

Design products so that they can be
efficiently packed and stored.
Design packaging so that products can be
consolidated at the warehouse /cross
docking points.
Design products to efficiently utilize retail
space.

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Examples
Ikea
Worlds largest furniture retailer
220 stores in 33 countries
Large stores, centralized manufacturing,
compactly and efficiently packed products

Rubbermaid
Clear Classic food containers - designed to fit
14x14 Wal-Mart shelves.

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Final Packaging
Delay final packaging as late as possible.
Repackaging at the cross-docking point is
common for many products.

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2. 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.

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The Network Printer Example

Concurrent Processing

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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.

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3. Standardization
Standardization enables risk pooling across
products, leading to lower inventories, and
allows firms to use the information
contained in the aggregate forecasts more
effectively.
J. Swaminathan suggests that product
modularity and process modularity are the
key drivers for the standardization strategy.

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Modularity in Product and Process

Modular Product:
Can be made by appropriately combining different
modules.
It entails providing customers a number of options for
each module.

Modular Process:
Each product undergoes 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.

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Modularity in Product and ProcessExamples

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.

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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.

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Swaminathans Four Approaches to

Standardization

Part standardization
Process standardization
Product standardization
Procurement standardization

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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.

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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 as long as manufacturing is under way.
Starts by making a generic or family product
Differentiate later into a specific end-product

Postponement or delayed product differentiation

Delayed Differentiation
May be necessary to redesign products specifically
for delayed differentiation.
May be necessary to re-sequence the manufacturing
process to take advantage of process standardization.
Resequencing
Modify the order of product manufacturing steps.
Re-sequenced operations result in differentiation of specific
items or products as late as possible .

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Postponement

Point of differentiation

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

Benetton
New Manufacturing Process

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Spin or Purchase Yarn

Manufacture Garment Parts
Join Parts
Dye Garment
Finish Garment

This step is postponed

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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. E.g. Chip, Car
rental agencies, hotels.
Which products to offer, how much to keep,
how to optimally substitute ?

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Procurement Standardization
Consider a large semiconductor manufacturer
The wafer fabrication facility produces highly
customized integrated circuits (ASICs).
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.

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A Framework for Mass Customization

Modular
Maximize component
commonality across products

Delay customization as
late as possible

Non-Modular
Carry a limited number of
products in inventory

Non-Modular

Leverage equipment and part

commonality across products

Modular

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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.

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

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Important Considerations
Impact of Resequencing :
level of inventory in many cases may go down
per unit value of inventory being held will be higher

Tariffs and duties are lower for semi-finished or nonconfigured goods than for final products.
Completing the manufacturing process in a local
distribution center may help to lower costs associated with
tariffs and duties.

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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 because:
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.

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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 time
Produce 300 which can be dyed after demand is
observed

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Postponement: Example
First Alternative
25% (0.5x0.5) probability -- short 50 of each
25% (0.5x0.5) probability -- extra 50 of each
50% probability -- short 50 of one, extra 50 of
the other

Second Alternative
25% (0.5x0.5) probability -- short 50 of each
25% (0.5x0.5) probability -- extra 50 of each
50% probability -- no shortage or extra

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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.

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Supplier Integration into New

Product Development

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Supplier Integration into New

Product Development - Reasons
Reducing length of product life cycles.
Focus on core competency & Outsource
other business capabilities.
Make design process more efficient.

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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.

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Spectrum (Level) 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 required component

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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.

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Appropriate Level Depends on the Situation

White Box
If buyer has some design expertise, but wants to ensure that
supplier can adequately manufacture the component.

Grey Box
If future products have components that require expertise
that the firm does not possess, and development of these
components can not be separated from other phases of
product development.

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.

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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
Evolved from the two prevailing manufacturing
paradigms of the 20th century
Craft Production and Mass Production.

Craft production
involves highly skilled and flexible workers.
Often craftsmen.
Organic organizations which are flexible and changing.

Mass 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.

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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.

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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.

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.

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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.