Chapter 11

Coordinated Product
and Supply Chain
Design

McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 11.1 A General Framework
Two distinct chains in organizations:
The supply chain which focuses on the flow
of physical products from suppliers through
manufacturing and distribution all the way to
retail outlets and customers, and
The development chain which focuses on
new product introduction and involves product
architecture, make/buy decisions, earlier
supplier involvement, strategic partnering,
supplier footprint and supply contracts.

11-2
Key Characteristics of Supply Chain
Demand uncertainty and variability, in
particular, the bullwhip effect
Economies of scale in production and
transportation
Lead time, in particular due to
globalization

11-3
 Key Characteristics of
Development Chain
Technology clock speed
Speed by which technology changes in a particular
industry
Make/Buy decisions
Decisions on what to make internally and what to buy
from outside suppliers
Product structure
Levelof modularity or integrality in a product
Modular product
assembled from a variety of modules
each module may have several options
Bulk of manufacturing can be completed before the
selection of modules and assembly into the final
product takes place
11-4
 Interaction between the Two
Chains
Fishers
concept of Innovative and
Functional Products
Functional products characterized by:
slow technology clock speed, low product variety,
and typically low profit margins
Innovative products characterized by:
fasttechnology clock speed and short product life
cycle, high product variety, and relatively high
margins.

11-5
 What Is the Appropriate Supply
Chain Strategy and Product
Design Strategy for Each Product
Each requires a Type?
different supply chain
strategy
Development chain has to deal with the
differing level of demand uncertainty

11-6
 Framework for Matching Product
Design and Supply Chain Strategies

FIGURE 11-3: The impact of demand uncertainty and product

introduction frequency on product design and supply chain strategy
11-7
11.2 Design for Logistics (DFL)
Product and process design that help to
control logistics costs and increase service
levels
Economic packaging and transportation
Concurrent and parallel processing
Standardization

11-8
 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

11-9
 Examples
Ikea
Worlds largest furniture retailer
131 stores in 21 countries
Large stores, centralized manufacturing,
compactly and efficiently packed products
Rubbermaid
ClearClassic food containers - designed to fit
14x14 Wal-Mart shelves

11-10
 Final Packaging
Delayuntil as late as possible
Repackaging at the cross-docking point is
common for many products

11-11
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

11-12
 The Network Printer Example

FIGURE 11-4: Concurrent processing

11-13
 Traditional Manufacturing
Set schedules as early as possible
Use large lot sizes to make efficient use of
equipment and minimize costs
Large centralized facilities take advantage
of economies of scale

11-14
 Standardization
Recall: aggregate demand information is more
reliable
We can have better forecasts for a product family
(rather than a specific product or style)
How to make use of aggregate data ?
Designing the product and manufacturing
processes so that decisions about which specific
product is being manufactured (differentiation) can
be delayed until after manufacturing is under way

11-15
 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

11-16
 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

11-17
 Modularity in Product and
Process
Modular
products are not always made
from modular processes
Bio-techand pharmaceutical industries make
modular products but use non-modular
processes; many products are made by
varying the mix of a small number of
ingredients

11-18
 Swaminathans Four Approaches
to Standardization
Partstandardization
Process standardization
Product standardization
Procurement standardization

11-19
 Part Standardization
Common parts used across many
products.
Common parts reduce:
inventories due to risk pooling
costs due to economies of scale
Excessive part commonality can reduce
product differentiation
May be necessary to redesign product
lines or families to achieve commonality

11-20
 Process Standardization
Standardize as much of the process as possible
for different products
Customizing the products as late as possible
Decisions about specific product to be
manufactured is delayed until after
manufacturing is under way
Starts by making a generic or family product
Differentiate later into a specific end-product

Postponement or delayed product

differentiation

11-21
 Delayed Differentiation
May be necessary to redesign products
specifically for delayed differentiation
May be necessary to resequence the
manufacturing process to take advantage of
process standardization
Resequencing
modify the order of product manufacturing steps
resequenced operations result in the differentiation of
specific items or products are postponed as much as
possible

11-22
 Postponement

Point of differentiation

11-23
 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

11-24
 Benetton Supply Cycle
Primary collection in stores in January
Finaldesigns 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

11-25
 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

11-26
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

11-27
 Benetton
Old Manufacturing Process
Spin or Purchase Yarn

Dye Yarn

Finish Yarn

Manufacture Garment Parts

Join Parts
11-28
 Benetton
New Manufacturing Process

Spin or Purchase Yarn

Manufacture Garment Parts

Join Parts

Dye Garment This step is postponed

Finish Garment
11-29
 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
Costsare 10% higher for manufacturing
New processes had to be developed
New equipment had to be purchased

11-30
 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 ?

11-31
 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

11-32
 Operational Strategies for
Standardization
Process

Nonmodular Modular

Modular Parts standardization Process standardization

Product
Nonmodular Product standardization Procurement standardization

11-33
 Selecting the Standardization
Strategy
If process and product are modular, process
standardization will help to maximize effective forecast
accuracy and minimize inventory costs.
If the product is modular, but the process is not, it is not
possible to delay differentiation. However, part
standardization is likely to be effective.
If the process is modular but the product is not,
procurement standardization may decrease equipment
expenses.
If neither the process nor the product is modular, some
benefits may still result from focusing on product
standardization.

11-34
 Important Considerations
Strategies designed to deal with demand
uncertainty and/or inaccurate forecasts
Changes suggested in the strategies may
be too expensive to implement
Redesign related costs should be incurred at
the beginning of the product life cycle
Benefits cannot be quantified in many cases:
increased flexibility, more efficient customer
service, decreased market response times

11-35
 Important Considerations
Resequencing causes:
levelof inventory in many cases to go down
per unit value of inventory being held will be higher

Tariffs
and duties are lower for semi-finished or
non-configured goods than for final products
Completing the manufacturing process in a local
distribution center may help to lower costs associated
with tariffs and duties.

11-36
 Push-Pull Boundary
Pull-based systems typically lead to:
reduction in supply chain lead times, inventory levels,
and system costs
making it easier to manage system resources
Not always practical to implement a pull-based
system throughout the entire supply chain
Lead times may be too long
May be necessary to have economies of scale in
production or transportation.
Standardization strategies can combine push
and pull systems
Portion of the supply chain prior to product
differentiation is typically a push-based supply chain
Portion of the supply chain starting from the time of
differentiation is a pull-based supply chain.
11-37
 Back to the HP Case
Long lead times, high inventory levels, imbalance of
inventory
Localization (labeling and manuals, power supply, plug)
One cause of imbalance (too much inventory for printers
localized for one market, too little inventory for another
market)
Significant uncertainty on how to set safety stock
Too many localization options
Uncertainty in local markets
Some options
Air shipment
A factory in Europe
Improve forecasting practices (how?)

11-38
 Back to the HP Case
HP management considered postponement as an
option
Ship unlocalized printers to European DC and localize
them after observing the local demand
At 98% service level, safety stock dropped from 3.8
weeks supply to 2.6 weeks supply on the average
Annual savings around $800,000
Value of inventory in transit (and hence insurance
costs) goes down
Some of the localization material can be locally
sourced (cheaper)
European DC had to be modified to facilitate
localization. Printer needed to be redesigned.
All Vancouver products now DC-localizable
(postponement). One of the best of such practices.
11-39
 11.3 Supplier Integration into New
Product Development
Traditionallysuppliers have been selected after
design of product or components
However, firms often realize tremendous benefits
from involving suppliers in the design process.
Benefits include:
a decline in purchased material costs
an increase in purchased material quality
a decline in development time and cost
an increase in final product technology levels.

11-40
The Spectrum of Supplier Integration
No single appropriate level of supplier integration
None
Supplier is not involved in design.
Materials/subassemblies supplied as per customer
specifications/design
White box
Informal level of integration
Buyer consults with the supplier informally when designing
products and specifications
No formal collaboration
Grey box
Formal supplier integration
Collaborative teams between buyers and suppliers engineers
Joint development
Black box
Buyer gives the supplier a set of interface requirements
Supplier independently designs and develops the required
component 11-41
Appropriate Level Depends on the
Situation
Process Steps to follow:
Determine internal core competencies.
Determine current and future new product
developments.
Identify external development and
manufacturing needs.

11-42
 Appropriate Level Depends on the
Situation
Black Box
Iffuture products have components that require
expertise that the firm does not possess, and
development of these components can be separated
from other phases of product development, then
taking
Grey Box
If separation is not possible
White Box
Ifbuyer has some design expertise but wants to
ensure that supplier can adequately manufacture the
component

11-43
 Keys to Supplier Integration
Making the relationship a success:
Select suppliers and build relationships with them
Align objectives with selected suppliers

Which suppliers can be integrated?

Capability to participate in the design process
Willingness to participate in the design process
Ability to reach agreements on intellectual property
and confidentiality issues.
Ability to commit sufficient personnel and time to the
process.
Co-locating personnel if appropriate
Sufficient resources to commit to the supplier
integration process.
11-44
 11.4 Mass Customization
Evolved from the two prevailing manufacturing
paradigms of the 20th century
Craft production and mass production.
Mass production
efficientproduction of a large quantity of a small
variety of goods
High priority on automating and measuring tasks
Mechanistic organizations with rigid controls
Craft production
involves highly skilled and flexible workers
Often craftsmen
Organic organizations which are flexible and changing

11-45
 Absence of Trade-Offs
Two types meant inherent trade-offs
Low-cost, low-variety strategy may be appropriate for
some products
For others, a higher-cost, higher-variety, more
adaptable strategy was more effective
Development of mass customization implies it is
not always necessary to make this trade-off
Mass customization
delivery of a wide variety of customized goods or
services quickly and efficiently at low cost
captures many of the advantages of both the mass
production and craft production systems
not appropriate for all products
gives firms important competitive advantages
helps to drive new business models
11-46
 Making Mass Customization
Work
Highlyskilled and autonomous workers,
processes, and modular units
Managers can coordinate and reconfigure
these modules to meet specific customer
requests and demands

11-47
 Key Attributes
Instantaneous
Modules and processes must be linked together very
quickly
Allows rapid response to various customer demands.
Costless
Linkages must add little if any cost to the processes
Allows mass customization to be a low-cost
alternative.
Seamless
Linkages and individual modules should be invisible to
the customer
Frictionless
Networks or collections of modules must be formed
with little overhead.
Communication must work instantly
11-48
 Mass Customization and SCM
Many of the advanced SCM approaches and
techniques essential if mass customization is to
be successfully implemented
IT critical for effective SCM is also critical for
coordinating different modules
Concepts like strategic partnerships and supplier
integration essential for the success of mass
customization.
Postponement can play a key role in
implementing mass customization

11-49
 SUMMARY
Design for logistics concepts
Efficient
packaging and storage
Certain manufacturing steps can be
completed in parallel
Standardization
Integrating suppliers into the product
design and development process
Advanced supply chain management
facilitating mass customization

11-50