Topic 3: Variety Postponement

1. Topic 3: Variety Postponement September 2006

2. Agenda for the day: 1. Review assignment and lecture on postponement. 2. Hewlett Packard Case

3. Key Ideas/Tools from Yesterday 1. Smart extrapolation method: regression analysis 2. Accurate Response 3. Managing uncertainty requires shorter lead times, inventory buffers and better forecasting.

4. The Pyramid of Supply Chain Excellence Customer Value Inventory(Hedge Against Uncertainty) Fast, Flexible Operations (Avoid Uncertainty) Accurate Forecasts (Reduce Uncertainty)

5. Effective postponement requires matching decouple points with product design. 1. Where do you locate the decouple point in the supply chain? 2. Can you redesign the product to match the decouple point?

6. Effective Postponement

7. Two Alternative Supply Chain Designs Make-to-Order Make-to-Stock RM Production System FG RM Production System Advantages: Disadvantages: RM = raw material & part inventories FG = finished good inventories

8. Two Alternative Supply Chain Designs Make-to-Stock Make-to-Order RM Production System FG RM Production System Primary Advantage: Management Challenges: • Minimizing supply and demand mismatch costs • Lead time • Raw material inventory availability • Order variability/seasonality/capacity • Set-up times • Minimizing production and transportation costs • Finished good inventory availability • Forecasting • Product variety • Product mix stability RM = raw material & part inventories FG = finished good inventories

9. 1 2 3 4 5 Postponement is a hybrid approach Example: Assemble-to-Order Decouple Point WIP ? ? ? ? Component Production Final Assembly Sub- assembly Retailing Decouple point: the point at which the system changes from make-to-stock to make-to-order • Customer name attached to order • Inventory held to reduce lead time

10. Locating the decouple point WIP • Place decouple point after steps with: • Large scale economies • Long lead times • High set-up costs • Place decouple point before steps with: • Variety fan-out • High variable cost content

11. Examples of Decouple Points Component Manufacturing Final Assembly Sub- Assembly Distribution Retail

12. Steps to re-design the product.

15. Inventory-Service Crisis at HP • The Crisis: Inventory Imbalance • excess inventory in some product options • shortages in other product options • Contributing Causes • many product options due to geography • long DC replenishment lead time • highly uncertain market • inflexible design: difficult to rework one option to make it another • out of control inventory system • uncoordinated functional interests; conflicting incentives

16. Longer Term Alternatives for HP Alternatives: • Air Shipment • European factory • Universal model • Lower product variety • Forecasting methods • Shorter review period • More inventory Driver: • Leadtime • Leadtime • Variability • Variability • Variability • Review period • Fill rate Effectiveness: • Too expensive • Volume? • Design costs • Lost revenue? • Too difficult • Transport costs • Right trade-off?

17. What Happened at HP? • Deskjet re-designed to be DC-localizable (postponement). Implementation in early 1992. • Millions of dollars saved from inventory reduction, service improvement, and freight reduction. • Innovative packaging won patents. • All Vancouver products now DC-localizable (postponement). • Vancouver as showcase for “Design for Localization/Postponement” -- Best practices spreads to other HP divisions.

18. Asian Distribution European Distribution HP Printers: Distributor Customization US Distribution Factory Before Postponement Component Assembly Full Final Assembly US Distribution WIP Add LocalMaterials Factory Asian Distribution Component Assembly Partial Final Assembly WIP Add LocalMaterials After Postponement European Distribution Add LocalMaterials WIP

19. Costs and Benefits of DC Localization • Stocks of localization materials higher at DCs • Potential freight reduction • Investment to install localization capability at DCs • Quality assurance • Procurement of localization materials • Value of local “manufacturing” • Potential for other products • Customs and duties implications • Green effects

20. Implementation Issues • R&D resistance • Product works, why change it? • DC resistance • Requires new capabilities and objectives • Additional costs • Product redesign • Increased cost of modular product • DC efficiency vs. plant efficiency • Shipping costs

21. Lutron: Different Views of Mass Customization Special Products Manufacture Components Design Assemble Lighting Panels WIP Manufacture Components Assemble Flourescent Ballasts FG Manufacture Components Rework Assemble Standard Products FG Manufacture Components Assemble

22. Apple Powerbook: User Customization Put your "personal cool" on your PowerBook 1400 Wood: Redwood burl, Corellian Birch burl, Walnut Brushed aluminium and Brushed copper Leather: black, grey boarskin, yellow, red, burgandy Blue denim We will have BookCovers for other PowerBooks in June!

23. Benetton: Process Reversal Before Process Reversal Spin Dye Knit & Assemble Weeks Days Days After Process Reversal Spin Dye Knit & Assemble Days Weeks Days

24. Tomorrow: Platform planning Pizza Postponement Assignment is due.