1. EFFECTIVE INVENTORY AND SERVICE MANAGEMENT THROUGH PRODUCT AND PROCESS REDESIGN EFFECTIVE INVENTORY AND SERVICE MANAGEMENT THROUGH PRODUCT AND PROCESS REDESIGN HAU LEE Presented by: I.Esra Buyuktahtakin

2. Hau Lee2 OUTLINE IntroductionIntroduction –Product Proliferation –Some concepts in product/process design –Delayed Product Differentiation ModelsModels –Built-to-order –Built-to-stock ApplicationsApplications ConclusionConclusion

3. Hau Lee3 Introduction/Product Proliferation Product Proliferation Different requirements of different markets Expansion of the customer base Multiple versions of the same product Product variety is increasing HP workstations have 500,000 options (RAM cards, video cards, graphic cards, monitors, disk drives, etc..) GM cars have 20,000,000 versions (colour, interior combinations, drive train configurations, and option choices)

4. 4 Introduction Product Proliferation: Rapid Technology Changes and Increased Globalization Rapid increase in product variety High Variation Uncertainty Difficulty in Demand Forecasting High Inventory Investment and Poor Customer Service

5. Hau Lee5 Introduction To deal with product proliferation Investment on information technology decision support systems transportation modes Product and process Redesign Obstacles to implement p&pr engineers generally do not consider inventory and service dimension design requires close collaboration among different functional areas within a corporation design changes requires investment

6. Hau Lee6 Introduction Redesigning the process to improve logistic efficiency DFM(Design for manufacture): The designers’ consideration of the organization’s manufacturing capabilities and customer expectations when designing a product. Concurrent Engineering: Concurrent Engineering: is the bringing together of engineering design and manufacturing personnel early in the design phase. DMF and concurrent engineering concepts emphasize the importance of considering more than functionality and performance of a product in its design stage. Delayed product differentiation Delayed product differentiation is a key concept for gaining control of inventory and service in a global market

7. Hau Lee7 Introduction/Literature What is Delayed Product Differentiation? What is Delayed Product Differentiation? Delaying the differentiation point in which a product gains its specific identity Increase the flexibility to meet uncertain and changing demands Related concepts with Delayed Product Differentiation design for localization: the strategy to meet the different local requirements design for customization: the strategy to meet the needs of different market segments design for flexible manufacturer part commonality part modularity

8. Hau Lee8 Introduction/Scope of the paper  This paper observes product and process design from the delayed product differentiation aspect. ! Two inventory models(built-to-order, built-to-stock)presented in this paper provide the product developer an insight of inventory and service dimensions of their designs.

9. 9 Model Built-to-Order Final products are built on demand Intermediate product is customized according to customer demandBuilt-to-stock Finished products are built to stock Immediate delivery of finished products are critical

10. 10 Built-to-Order Assumptions and notations: T=total production time t=point of product differentiation intermediate inventory~periodic review order-up-to-S review period= 1 time unit customer orders~ i.i.d. D(r) : demand in r time units F(x/r)= Pr{D(r) <= x} demands are never negative orders arrive at the beginning of each time unit customize the products in the intermediate inventory unmet orders are backlogged first-come, first-serve inventory position= inventory on hand+WIP- backlog W= waiting time in the generic prod. W <= t Y = response time Y =T - t + W T-t A built-to-order inventory model

11. Hau Lee11 Model/Built-to-Order An example: Let t=4,x=1 and S=10 t-x = 3 immediate time units demand Total demand=10, W=x=1 total demand=11>S, W =2>x Thus: 3 33 1 Inventory on hand=0 Time = 1 12 3 Inventory on hand=0 Time = -1 Order=3 3 41 2 Inventory on hand=0 Time = 0 Order=3 Order=4 1 23 1 Inventory on hand=3 S=10 Time = -2 Order=4 4 Event(W>x)={demand of immediate(t-x)time units >S}

12. Hau Lee12 Model/Built-to-Order Two service measures: i)A target E(Y) ii)A target reliability(probability)of response time being less than or equal to the target R S can be found from both of these service measures In the model the first one is used

13. Hau Lee13 Model/Built-to-Order First Service measure:

14. Hau Lee14 Model/Built-to-Order Second Service measure: The probability that the response time to customer orders in a time unit is less than or equal to some target R time units

15. Hau Lee15 Model/Built-to-Order let H(t):expected holding cost per unit time for intermediate inventory g(t):unit holding cost rate for intermediate inventory g(t) is nondecreasing function WIP-before=WIP-after when t is delayed to investigate the effects of delayed product differentiation

16. Hau Lee16 Model/Built-to-Order F(S-x/t)=Pr{D(t) =x}

17. Hau Lee17 The effect of the changing t on holding cost and S

18. Hau Lee18 Delayed Product Differentiation at the Disc-drive manufacturing Long lead time in process inventory~shorten lead time two steps of manufacturing process: generic & customization first part is short, second part is long high levels in-process inventory is required for high reliability coupon boards insertion no significant value added~no increase in inventory cost Disc drive manufacturing example illustrated

19. Hau Lee19 Another Built-to-order Application 4 Steps of manufacturing: 1.fabrication of application-specific integrated circuits 2.building sheet metal,power supply, can and cable building 3.integration of base memory, floppy drive, hard drive and the opr.system 4.assembly of power cord, keyboard, mouse, monitor and documentation To implement delayed product differentiation: standardization of base memory, floppy drive, hard drive and the operating system the point of differentiation is deferred from the end of the second stage to the end of the third stage the number of units held in inventory to support the same response time target decreases

20. Hau Lee20 Model/Built-to-Stock Assumptions & Notations: T: total manufacturing time t: differentiation point T-t: time units for customization Finished goods inventory Inventory and backorder costs are identical for all end prod.i Periodic review Review period= 1 time unit Demands are independent across time units Demands for different end products are correlated  ik : covariance of demands for end product i and k in a time unit  i /  i is constant for all i Unmet demands are backordered

21. Hau Lee21 Model/Built-to-Stock Question: How to characterize the operational performance such a system as a function of t, T, the requirement fill rate, and the demand distribution of the end products. Based on this function the costs and the benefits of the point of product differentiation t is investigated.

22. Hau Lee22 Model/Built-to-Stock Two actions based on the inventory status of end product i: Allocation decision for the items completed in generic production process Decision for the amount of new items to begin production Equal fractile allocation rule Equal fractile allocation rule Allocation of the each product i so that an equal fractile point or same service level is achieved by each of the end product i on an appropriately chosen demand distribution

23. Hau Lee23 Based on these two moments,firstly service level is determined,then the value of the Si is determined to satisfy the target service level. total system demand variance over t periods Variance of end product j over T-t time units Expected total system demand over T periods

24. Hau Lee24 The effect of delayed product differentiation on Var( I i )

25. Hau Lee25 Centralized system in Schwarz paper The larger N, the greater the reduction in variance from delayed product differentiation. The second model presented in the Schwarz paper is a special case of this model. N independent and identical retailers with common standart deviation in a time unit, .

26. 26 Application/Built-to-Stock Delayed Product Differentiation by DC localization Printers manufactured in U.S. and distributed to DCs in Europe, U.S. and the Far East Localization Packaging printer with the appropriate power supply module with the correct voltage and plugs and a manual with the appropriate language Long lead times for the non U.S. DC~ High levels of safety stock Inventory savings from the reduction of the safety stock Savings from pipeline inventory Unlocalized printer is less bulky and localization materials are not bundled “Local content” and “local manufacturing” makes a company more marketable However: Need to develop a local supply base of localization materials Cultural and organizational barriers

27. Hau Lee27 An example for the inventory savings gained from DC localization Factory localization t:1 week T: 5 week DC localization t is pushed very close to T K i : safety stock factor Demands for different country versions of the printer in Europe are independent Safety stock level for end product i:

28. Hau Lee28 Application/Built-to-Stock Delayed Product Differentiation at the Printer manufacturing

29. Hau Lee29 Application/Built-to-Stock To evaluate the effectiveness of commonality; Inventory savings for the parts Material costs of parts Investment cost for the reengineering change Inventory savings for finished goods should be assessed.

30. Hau Lee30 Conclusion Inventory and customer service are critical issues in the competitive market Design engineers should consider logistic issues besides the functionality, performance and manufacturability of a product

31. Hau Lee31 Conclusion Product and process changes are powerful means to gain control of inventory and service in the competitive market Inventory models have a lot to offer

32. Hau Lee32 THANK YOU…