Design for Supply Chain Management Phil Kaminsky David

Design for Supply Chain Management Phil Kaminsky David Simchi-Levi kaminsky@ieor. berkeley. edu Philip Kaminsky Edith 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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

The Goals of the Manufacturing Organization Responsiveness Competitive pricing Efficiency Customer service Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 14 x 14” Wal-Mart shelves Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

The Network Printer Example Board Stage 1 (Europe) Customer (Europe) Stage 2 + Integration (Far East) Board Printer Stage 2 (Far East) Customer (Europe) Plastics, motors, etc. Mc. Graw-Hill/Irwin Printer Integration (Europe) © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Modularity in Product and Process Are modular products always made from modular processes? Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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” Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Hewlett-Packard: Laser. Jets 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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Hewlett-Packard Disk Drives Manufacturing Process Redesign HP’s disk drive division supplied several customers PCB Insertion Coupon Insertion tests Customer 1 Customer 2 Customer 3 PCB insertion postponed PCB Insertion common tests Mc. Graw-Hill/Irwin tests Customer 1 Customer 2 Customer 3 © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Benetton Old Manufacturing Process Spin or Purchase Yarn Dye Yarn Finish Yarn Manufacture Garment Parts Join Parts Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Benetton New Manufacturing Process Spin or Purchase Yarn Manufacture Garment Parts Join Parts Dye Garment This step is postponed Finish Garment Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 suggestions Issues with postponement – Costs are 10% higher for manufacturing – New processes had to be developed – New equipment had to be purchased Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 ? Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

A Framework for Standardization Modular Maximize component commonality across products Delay customization as late as possible Non-Modular Carry a limited number of products in inventory Non-Modular Mc. Graw-Hill/Irwin Leverage equipment and part commonality across products Modular © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

HP Desk. Jet 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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

HP Desk. Jet 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? Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

HP Desk. Jet Case: Options Short Term – Rationalize safety stock Long Term – Air shipment – European factory – More inventory – Better forecasting – DC localization Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Safety Stock Rationalization: Example Europe AB Recall: Safety Stock = z STD * LT Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Evaluating Alternatives Air Shipment – Expensive European Factory – Not sufficient volume Better Forecasting – How? More Inventory – More problems DC Localization – What will savings be? Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Evaluating DC Localization Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Implementation R&D Support – “The product is working, so why bother? ” DC Support – “Not our core competency” New packaging Capital investment Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Results Successful implementation Millions saved Service levels increased Packaging won awards Best practice spread to other HP divisions Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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. Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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. Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

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 Mc. Graw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi