Design for Supply Chain Management Phil Kaminsky David Simchi-Levi Philip Kaminsky Edith Simchi-Levi

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, 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

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

McGraw-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

McGraw-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

McGraw-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

McGraw-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

McGraw-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 14x14” Wal-Mart shelves

McGraw-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

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

McGraw-Hill/Irwin © 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

McGraw-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

McGraw-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 semi- finished product is difficult

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

McGraw-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

McGraw-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”

McGraw-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

McGraw-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

McGraw-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

McGraw-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

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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

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

McGraw-Hill/Irwin © 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

McGraw-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

McGraw-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

McGraw-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

McGraw-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

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

McGraw-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 and suggestions  Issues with postponement –Costs are 10% higher for manufacturing –New processes had to be developed –New equipment had to be purchased

McGraw-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

McGraw-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 ?

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

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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 HP’s options?

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi HP DeskJet Case: Options  Short Term –Rationalize safety stock  Long Term –Air shipment –European factory –More inventory –Better forecasting –DC localization

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Safety Stock Rationalization: Example Europe AB  Recall: Safety Stock = z  STD *  LT

McGraw-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?

McGraw-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

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Evaluating DC Localization

McGraw-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

McGraw-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

McGraw-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

McGraw-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

McGraw-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.

McGraw-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.

McGraw-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

McGraw-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