1. Ricardo Ernst Top Management Program in Logistics & Supply Chain Management (TMPLSM) Production and Operations Management 8: Mass Customization

2. 2 Mass Customized Production Achieve “job-shop” customization with “flow-shop” productivity Mismatch Mass Production Shop Mass Customization Shop Job Shop CustomizedStandardized Functional Flow PRODUCT PROCESS

3. 3 Physical Processes (simplified) Levi’s Traditional Supply Chain Retail Outlets Shipping To Retail Stores DCs (Hub & Spoke Shipping (to DCs) Factory Ware- housing Production Raw Material Procure. Production Planning Demand Forecasting Market Research Design Research Original Levi’s Stores

4. 4 Levi’s Traditional Supply Chain Large Inventories and Long Lead Times (needing high working capital) Retail Outlets Shipping To Retail Stores DCs (Hub & Spoke Shipping (to DCs) Factory Ware- housing Production Raw Material Procure. R.M. 15 days WIP 15 days F.G. 15 days F.G. 100 days F.G. 60 days INVENTORIES (approximate) Average Lead Time = 8 Months Production Planning Demand Forecasting Market Research Design Research

5. 5 Levi’s Traditional Supply Chain Lots of Fixed Assets FIXED ASSETS (besides inventories) Heavy Equip. Real Estate Vehicles Real Estate Working Capital Real Estate Retail Outlets Shipping To Retail Stores DCs (Hub & Spoke Shipping (to DCs) Factory Ware- housing Production Raw Material Peocure. Production Planning Demand Forecasting Market Research Design Research

6. 6 Desired Personal Pair’s Supply Chain Retail Outlets Shipping To Retail Stores DCs (Hub & Spoke Shipping (to DCs) Factory Ware- housing Production Raw Material Procure. Original Levi’s Stores Data Link to Factory PP Kiosk in Stores Ordering and production planning are simplified Production Planning Demand Forecasting Market Research Design Research

7. 7 Raw Material Procure. Production Shipping By FedEx Original Levi’s Stores Customer No Need for Storage, Simplified Shipping Retail Outlets DCs (Hub & Spoke Shipping (to DCs) Factory Ware- housing Production Raw Material Procure. Original Levi’s Stores Data Link To Factory PP Kiosk in Stores xxx Production Planning Demand Forecasting Market Research Design Research Shipping To Retail Stores

8. 8 Required supply chain capabilities for Personal Pair Build to order quickly Data Link To factory PP Kiosk in Stores Raw Material Procure. Production Shipping By FedEx Original Levi’s Stores Customer Supply Lead Time = 4 Days Order Lead Time = 2 Weeks

9. 9 An Innovative Approach to Linking Inventory to Product Design and Supply Chain Management: mass customization

10. 10 The critical question: Are appropriate processes for ordering procurement production delivery in place for Mass Customization?

11. 11 Consider Product Fan-Out & Push-Pull Points in the process A useful concept

12. 12 Product Fan-Out & Push-Pull Points A simple example Elsie makes and sells 10 flavors of Ice Cream Ice Cream Base Display & Serve Freeze & Pack Mix Ingredients Suppliers Milk, etc. Factory Stores

13. 13 Ice Cream Base Serve Cookies C Pack Cookies C Mix Cookies C Serve Butter B Pack Butter B Mix Butter B Serve Strawb’s Pack Strawb’s Mix Strawb’s Suppliers Milk, etc. Factory Stores Where in the process is the ice cream committed to a flavor? Product Fan-Out Point

14. 14 Ice Cream Base Serve Cookies C Pack Cookies C Mix Cookies C Serve Butter B Pack Butter B Mix Butter B Serve Strawb’s Pack Strawb’s Mix Strawb’s Suppliers Milk, etc. Factory Stores How deep does the order get into the supply chain? Push-Pull Point

15. 15 Ice Cream Base Pack Vanilla (Mix) Vanilla Suppliers Milk, etc. Factory Stores Elsie hears about “Postponement” Serve Vanilla + Topping Bar* Fan-Out Point Postponement * Let’s assume customers accept the “flavor”

16. 16 Ice Cream Base Serve Vanilla + Topping Bar Pack Vanilla (Mix) Vanilla Suppliers Milk, etc. Factory Stores Postponement allows bringing product fan-out point closer to push pull point IF you can do this, things become simpler and cheaper! Fan-Out & Push-Pull points

17. 17 Where are these points in Levi’s traditional supply chain? Product Fan-Out Point Push-Pull Point Retail Outlets Shipping To Retail Stores DCs (Hub & Spoke Shipping (to DCs) Factory Ware- housing Production Raw Material Peocure. Production Planning Demand Forecasting Market Research Design Research

18. 18 Where should these points be for Personal Pair’s Supply Chain Data Link To factory PP Kiosk in Stores Raw Material Logistics Production Shipping By FedEx Original Levi’s Stores Customer Product Fan-Out & Pull-Push Points Ideally merge Fan-Out and Pull-Push Points

19. 19 Back to Elsie Let’s examine some costs in a typical store before postponement Elsie sells 10 flavors of ice cream @ $ 30 per gallon. Buys ice cream once a week @ $ 5 per gallon Whatever is left at the end of the week is thrown out Demand for each flavor is independently and normally distributed with a mean=100 gal/week and standard deviation= 30 gal/week. Elsie sells 10 flavors of ice cream @ $ 30 per gallon. Buys ice cream once a week @ $ 5 per gallon Whatever is left at the end of the week is thrown out Demand for each flavor is independently and normally distributed with a mean=100 gal/week and standard deviation= 30 gal/week. How many gallons of safety stock should the store order every week?

20. 20 Safety Stock before postponement C u = cost of underage = $30 - $5 = $25. (Elsie loses out on the opportunity to make $25/gallon if she under-buys.) C o = cost of overage = $5. (Elsie must throw out unused ice cream, so she loses $5/gallon if she over-buys.) C u + C o P c = = = 83 % CuCu ($25 + $5) $25 z (from Normal table)  1 = 30 x - 100 Safety Stock = 30 gallons per flavor or 300 gallons for 10 flavors = Service Level X= 130 gallons = 100 gal (average demand) + 30 gal (safety stock)

21. 21 If flavoring can be postponed? Assume Cost of the ice cream base is $4 per gallon. Still unsold ice cream base is thrown out at end of week Toppings to cover one gallon of ice cream cost $1. Toppings do not need to be thrown out after a month. Assume Cost of the ice cream base is $4 per gallon. Still unsold ice cream base is thrown out at end of week Toppings to cover one gallon of ice cream cost $1. Toppings do not need to be thrown out after a month. How many gallons safety stock (of vanilla ice cream) should Elsie order every week?

22. 22 “Pooling” the Demand Demand distribution for 10 flavors Mean = 10 flavors * 100 gallons = 1000 gallons/week (Same total number of gallons as before postponement) Standard deviation = 30 * 10 = 95 gallons Remember Standard deviation of pooled demand goes up as the square root of the number of pools

23. 23 Service Level with Postponement C u = cost of underage = $30 - $4 - $1 = $25. C o = cost of overage = $4. C u + C o P c = = = 86% CuCu ($25 + $4) $25 95 z (from Normal table)  1.1 = x - 1,000 Safety Stock = 105 gallons vanilla per week x= 1045 gallons = 1000 gal (average demand) + 105 gal (safety stock

24. 24 Postponement can reduce costs and increase service level without withpostponement Safety Stock 300 gallons. 105 gallons Service Level 83% 86 % And avoid forecasting and planning complexities

25. 25 Promise of Mass Customization In Car Industry If cars were built only to order the industry could save $ 80 billion ( McKinsey's estimate) or $ 3600 per car (Nissan’s estimate) In addition to being able to charge higher prices If cars were built only to order the industry could save $ 80 billion ( McKinsey's estimate) or $ 3600 per car (Nissan’s estimate) In addition to being able to charge higher prices Most cars are built to stock--not to order Only 19 % of cars in Europe and 7 % in US are currently custom-made!

26. 26 The closer you can bring product fan-out point to order push-pull point, the better you are prepared for mass customized production