Product and Process Design

Dr. Ranjan Ghosh Indian Institute of Management

Calcutta

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

The Goals of the Manufacturing Organization

• Responsiveness• Competitive pricing• Efficiency• Customer service

Conflicting Goals

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

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

Design for Logistics (cont’d)

• Design for Logistics uses product design to address logistics costs

• Key Concepts of Design for Logistics– Economic packaging and transportation– Concurrent/Parallel Processing– Mass Customization

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

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

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

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

Mass Customization• Customization, Predictability and

Performance

MassCustomization Performance

Predictability

Mass Customization• Predictability of Demand• Predictability of Operations

– Inventory levels– Equipment capacity requirements– Increase in the number of components and

hence in the number of suppliers

Mass Customization

• How should/do companies implement mass customization without suffering the negative effects of increased product variety and variability?

Strategies for Managing Variety

• Modularity• Standardization• Postponement• Process Re-sequencing• Quick Response

Modularity in Productand 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

Modularity in Productand 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

Modularity in Productand Process

• Are modular products always made from modular processes?

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

– Lubricants are produced by varying the composition and quantity of ingredients.

A Framework for Mass Customization

Modular

Product

Non-Modular

Non-Modular Modular

Processes

PartStandardization

ProcessStandardization

ProductStandardization

ProcurementStandardization

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 ?

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

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

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 otherSecond Alternative

– 25% probability -- short 50 of each– 25% probability -- extra 50 of each– 50% probability -- no shortage or extra

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

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

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

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

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

How to be flexible?Postponement

BenettonOld Manufacturing Process

Sequence of Processes

• Spin or Purchase Yarn• Dye Yarn• Finish Yarn • Manufacture Garment Parts• Join Parts

BenettonNew Manufacturing Process

Re-Sequencing of Processes

• Spin or Purchase Yarn• Manufacture Garment Parts• Join Parts• Dye Garment (This step is postponed)• Finish Garment

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

A new Supply Chain Paradigm

• A shift from a Push System...– Production decisions are based on

forecast• …to a Push-Pull System

From Make-to-Stock Model….

ConfigurationAssemblySuppliers

Demand Forecast

• The three principles of all forecasting techniques:

– Forecasts are usually wrong– The longer the forecast horizon the worst

is the forecast – Aggregate forecasts are more accurate

• The Risk Pooling Concept

Push-Pull Boundary

• Point where the Production Process switches from Push to Pull (or Build-to-Forecast to Build-to-Order); also known as De-Couple Point.

De-Couple Points• Before Product Variety explodes• After long lead time stages• After stages with constraint capacity• After stages with large setup times or costs.• They occur typically between component

manufacturing and Sub-assembly, or between Sub-assembly and Final assembly, or between Final assembly and Distribution,or between Distribution and Retail.

Push-Pull Supply Chains

Push-Pull Boundary

PUSH STRATEGY PULL STRATEGY

Low Uncertainty High Uncertainty

The Supply Chain Time Line

CustomersSuppliers

A new Supply Chain Paradigm

• A shift from a Push System...– Production decisions are based on

forecast• …to a Push-Pull System

– Parts inventory is replenished based on forecasts

– Assembly is based on accurate customer demand

….to Assemble-to-Order Model

ConfigurationAssemblySuppliers

Business models in the Book Industry

• From Push Systems...– Barnes and Noble

• ...To Pull Systems– Amazon.com, 1996-1999

• And, finally to Push-Pull Systems– Amazon.com, 1999-present

• 7 warehouses, 3M sq. ft.,

Matching Supply Chain Strategies with Products

Pull Push

Pull

Push

IComputer

II

IV III

Demand uncertainty

(C.V.)

Delivery costUnit price

L H

H

L

Economies of Scale

Locating the Push-Pull Boundary

Organizational Skills Needed

RawMaterial Customers

PullPush

Low Uncertainty

Long Lead Times

Cost Minimization

Resource Allocation

High Uncertainty

Short Cycle Times

Service Level

Responsiveness