2003 Simchi-Levi, Kaminsky, Simchi-Levi. Why Do These Goal

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Design for Supply Chain Management
Phil Kaminskykaminsky_at_ieor.berkeley.edu
David Simchi-Levi Philip Kaminsky Edith
Simchi-Levi
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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

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The Goals of the Manufacturing Organization

• Responsiveness
• Competitive pricing
• Efficiency
• Customer service

Conflicting Goals!
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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

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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

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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

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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

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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

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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
Board
Printer
Customer (Europe)
Stage 1 (Europe)
Stage 2 Integration (Far East)
Stage 1 (Europe)
Board
Printer
Stage 2 (Far East)
Customer (Europe)
Integration (Europe)
Plastics, motors, etc.
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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

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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

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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 semi-finished
  product is difficult

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Modularity in Product and Process

• Are modular products always made from modular
  processes?

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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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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

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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 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

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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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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

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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

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Hewlett-Packard Disk DrivesManufacturing Process
Redesign

• HPs disk drive division supplied several
  customers

tests
Customer 1
PCB Insertion
Customer 2
Customer 3
Coupon Insertion
PCB insertion postponed
Customer 1
PCB Insertion
Customer 2
common tests
Customer 3
tests
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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

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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

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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

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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

How to be flexible?
Postponement
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BenettonOld Manufacturing Process
Spin or Purchase Yarn
Dye Yarn
Finish Yarn
Manufacture Garment Parts
Join Parts
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BenettonNew Manufacturing Process
Spin or Purchase Yarn
Manufacture Garment Parts
Join Parts
This step is postponed
Dye Garment
Finish Garment
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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

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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

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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
• Which products to offer, how much to keep, how to
  optimally substitute ?

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A Framework for Standardization
Process Standardization
Part Standardization
Modular
Maximize component commonality across products
Delay customization as late as possible
Product
Product Standardization
Procurement Standardization
Non-Modular
Leverage equipment and part commonality across
products
Carry a limited number of products in inventory
Non-Modular
Modular
Process
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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

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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 HPs options?

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HP DeskJet Case Options

• Short Term
• Rationalize safety stock
• Long Term
• Air shipment
• European factory
• More inventory
• Better forecasting
• DC localization

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Safety Stock RationalizationExample Europe AB

• Recall Safety Stock z ? STD ?LT

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Evaluating Alternatives

• Air Shipment
• Expensive
• European Factory
• Not sufficient volume
• Better Forecasting
• How?
• More Inventory
• More problems
• DC Localization
• What will savings be?

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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

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Evaluating DC Localization
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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

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Implementation

• RD Support
• The product is working, so why bother?
• DC Support
• Not our core competency
• New packaging
• Capital investment

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Results

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

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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

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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.

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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.

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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

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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