Design for Supply Chain Management
While many marketers look for the traditional ways to differentiate their brand and productfrom those of their competitors, a growing number are reassessing the value of differentiation by considering their supply chain strategies and costs. Here are four principles your company can use to leverage the supply chain in your company's marketing efforts.
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THE FIRST PRINCIPLE focuses on the design and selection of common components for product families or platforms. This concept is to minimize component variations used to produce each brand or family of products. While it is important for marketing to differentiate each offering so that it can adequately satisfy the needs of unique consumer segments, differentiations that are not discernable by consumers should be minimized. Examples of these non-consumer discernable components include gas caps for automobiles, power supplies for electronics and non-consumer packaging and containerization. While many marketers are still looking for any means of differentiation, many firms are beginning to critically assess the value of the differentiation introduced through marketing against supply chain cost considerations.
Component commonality offers a number of opportunities for reducing supply chain cost including reduced material cost, reduced obsolescence, reduced production cost, reduced inventory carrying cost and reduced life cycle support cost. Design for supply chain suggests that the cost elements related to materials inventory and life cycle support need to be included as a negative when assessing product design decisions.
Modularity
The second principle focuses on component modularity. Many industries have initiated the design of modules to provide common functionality while reducing supply chain cost. Examples of such modules would be power supplies, displays, cooling systems and packaging. The modularity principle suggests that common subsystems should be designed to meet a broad range of feature requirements. The advantage is that fewer variations of the specific subsystem are required to meet a broad range of functionality. The disadvantage is that the module would have to be over designed for the entry level product and possibly not be robust enough for the high performing version of the product. In the case of the over-design, common modules may also make it difficult to compete at a lower price point due to the features that must be incorporated into a mid-range module.
Modularity offers a number of opportunities for reducing supply chain cost by decreasing the number of subsystem variations that must be produced, stocked in materials inventory, integrated into the product during the production process and maintained in repair part inventory. The result can be a reduction in procurement, manufacturing, inventory and spares management cost. Design for supply chain suggests that the up-front costs required for modularity need to be matched against the long term savings potential related to procurement, quality, manufacturing and post-sales support.
Universality
The third principle focuses on universality of product features and characteristics globally. While the application of this principle must be restrained due to the need to design products to meet the requirements of individual market requirements, some firms still use local suppliers with different specifications to make components or products for local markets. For example, the creation of different packaging, feature codes or interfaces for different countries introduces significant complexity and therefore cost into the supply chain. An example where universality was not considered is the specification of three different seat standards for an off-road vehicle, depending on where it was manufactured. The result is three different manufacturers, potentially different manufacturing processes, lack of product interchangeability and increased complexity in global support. The North American automobile industry has traditionally followed a similar strategy. However, due to its need for radical change, some of the North American firms have instituted many initiatives to drive more product universality to achieve economies of scale in design, procurement, production and support.
Universality offers a number of opportunities for reducing supply chain cost by decreasing the number of designs, variations in materials, finished goods 10 LQ(tm) LogisticsQuarterly.com March/April 2007 and spares inventory. Design for supply chain suggests that the opportunities for sourcing and production economies of scale as well as asset utilization and flexibility will drive toward more component and product universality while recognizing the need for meaningful differentiation.
Postponement
The final principle focuses on manufacturing and logistics postponement. Postponement means delaying manufacturing processes and logistics commitment until as late as possible in the customer fulfillment process. The ultimate in postponement is the configure-to-order (CTO) process located in a single manufacturing facility that propelled Dell to its success. The postponement principle has been applied many times in the form of CTO manufacturing, delayed packaging or shipping from a single centralized location (e.g., DHL, FedEx, or UPS hub location). However, previous postponement applications have not really focused on designing the product for supply chain, but have instead designed the supply chain to take advantage of postponement opportunities. While the difference is subtle, designing for supply chain implies that the firm should design the product to open up opportunities for postponement rather than design the product and then see if manufacturing or logistics can be postponed. As an example, computer servers are designed to be CTO. However, they are often designed to be too tall to fit as "belly freight" in a passenger airliner thus requiring air freighters for delivery. The result of this design characteristic is that there are fewer opportunities for logistics postponement because the ability to service less traveled freight lanes is reduced. A change in product design might open up many more opportunities.
The principle of postponement is generally applied to improve service levels while reducing inventory carrying costs and obsolescence by not finalizing inventory form or placement until demand is more certain in the form of an improved forecast or an actual order. Beyond the inventory and service opportunities, design for supply chain attempts to design the product to facilitate postponement by allowing rapid customization and transportation while also minimizing variable costs.
Conclusion
While the above principles are not new for supply chain managers, they have not often been viewed in concert, particularly beyond the functions involved in supply chain management. Traditionally, each of the four principles has been the primary focus of one of the major business functions: 1) Marketing for component commonality (often resulting in more complexity, though); 2) research and development for modularity; 3) some combination of marketing, research and procurement for universality; and 4) supply chain management for postponement. This independent view results in poor decisions regarding the principal trade-offs. While the concept of "design for ..." needs to consider many cross-functional trade-offs, it is interesting to note that a growing number of supply chain organizations are beginning to call for such an initiative. An integrated cross-functional supply chain framework with appropriate metrics can facilitate product, service and process design that optimizes the trade-offs between service and total cost. My sense is that we will begin to see more banners promoting the concept of "design for supply chain" in the coming year.