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Design for Supply Chain Management
Phil [email protected]
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)
Board Printer
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 timeProduce 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 DrivesManufacturing 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
CouponInsertion
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
BenettonOld Manufacturing Process
Spin or Purchase Yarn
Dye Yarn
Finish Yarn
Manufacture Garment Parts
Join Parts
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
BenettonNew 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
Non-Modular Modular
Leverage equipment and partcommonality 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
Mean Weekly Demand 3656 Monthly / 4.33Std. Dev 2703 Monthly/(4.33).5
Lead Time 5
Std. Dev of DemandPeriod
6044 2703*(5).5
Safety Factor 1.9 98% serviceSafety Stock 11483 1.9*6044
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
AVG STD SafetyStock
Weeksof SS
A 42 32 66 6.75
AA 420 204 416 4.25
AB 15830 5625 11,484 3.11
AQ 2301 1169 2395 4.48
AU 4208 2205 4517 4.62
AY 307 103 211 2.96
Total 23109 19089 3.55
Generic 23109 6244 12792 2.38
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