Topic 3: Variety Postponement September 2006

Agenda for the day: 1. Review assignment and lecture on postponement. 2. Hewlett Packard Case

Key Ideas/Tools from Yesterday 1. Smart extrapolation method: regression analysis 2. Accurate Response 3. Managing uncertainty requires shorter lead times, inventory buffers and better forecasting.

The Pyramid of Supply Chain Excellence Customer Value Fast, Flexible Operations (Avoid Uncertainty) Inventory (Hedge Against Uncertainty) Accurate Forecasts (Reduce Uncertainty)

Effective postponement requires matching decouple points with product design. 1. Where do you locate the decouple point in the supply chain? 2. Can you redesign the product to match the decouple point?

Effective Postponement

Two Alternative Supply Chain Designs Production System RM Production System RM FG Make-to-Order Make-to-Stock RM = raw material & part inventories FG = finished good inventories Advantages: Disadvantages:

Two Alternative Supply Chain Designs Production System RM Production System RM FG Make-to-Order Make-to-Stock RM = raw material & part inventories FG = finished good inventories Minimizing production and transportation costs -Finished good inventory availability -Forecasting -Product variety -Product mix stability Minimizing supply and demand mismatch costs -Lead time -Raw material inventory availability -Order variability/seasonality/capacity -Set-up times Primary Advantage: Management Challenges:

Postponement is a hybrid approach Example: Assemble-to-Order WIP Decouple Point ? ? ? ? Component Production Sub- assembly Final Assembly Retailing Decouple point:the point at which the system changes from make-to-stock to make-to-order Customer name attached to order Inventory held to reduce lead time

Locating the decouple point Place decouple point after steps with: –Large scale economies –Long lead times –High set-up costs Place decouple point before steps with: –Variety fan-out –High variable cost content WIP

Examples of Decouple Points Component Manufacturing Sub- Assembly Final Assembly DistributionRetail

Steps to re-design the product.

Inventory-Service Crisis at HP The Crisis: Inventory Imbalance –excess inventory in some product options –shortages in other product options Contributing Causes –many product options due to geography –long DC replenishment lead time –highly uncertain market –inflexible design: difficult to rework one option to make it another –out of control inventory system –uncoordinated functional interests; conflicting incentives

Longer Term Alternatives for HP Alternatives: Air Shipment European factory Universal model Lower product variety Forecasting methods Shorter review period More inventory Driver: Leadtime Variability Review period Fill rate Effectiveness: Too expensive Volume? Design costs Lost revenue? Too difficult Transport costs Right trade-off?

What Happened at HP? Deskjet re-designed to be DC-localizable (postponement). Implementation in early Millions of dollars saved from inventory reduction, service improvement, and freight reduction. Innovative packaging won patents. All Vancouver products now DC-localizable (postponement). Vancouver as showcase for “Design for Localization/Postponement” -- Best practices spreads to other HP divisions.

HP Printers: Distributor Customization Partial Final Assembly Component Assembly Add Local Materials WIP Add Local Materials WIP Add Local Materials WIP Factory US Distribution Asian Distribution European Distribution Full Final Assembly Component Assembly Factory US Distribution Asian Distribution European Distribution Before Postponement After Postponement

Costs and Benefits of DC Localization Stocks of localization materials higher at DCs Potential freight reduction Investment to install localization capability at DCs Quality assurance Procurement of localization materials Value of local “manufacturing” Potential for other products Customs and duties implications Green effects

Implementation Issues R&D resistance –Product works, why change it? DC resistance –Requires new capabilities and objectives Additional costs –Product redesign –Increased cost of modular product –DC efficiency vs. plant efficiency –Shipping costs

Lutron: Different Views of Mass Customization Design Manufacture Components Assemble Manufacture Components Assemble WIP Assemble Rework Manufacture Components FG Assemble Manufacture Components FG Special Products Lighting Panels Flourescent Ballasts Standard Products

Apple Powerbook: User Customization Put your "personal cool" on your PowerBook 1400 Wood: Redwood burl, Corellian Birch burl, Walnut Brushed aluminium and Brushed copper Leather: black, grey boarskin, yellow, red, burgandy Blue denim We will have BookCovers for other PowerBooks in June!

Benetton: Process Reversal Knit & Assemble SpinDye Spin Knit & Assemble Before Process Reversal After Process Reversal Days Weeks Days Weeks Days

Tomorrow: Platform planning Pizza Postponement Assignment is due.