Designing Product for the Synchronized Supply Chain
Introduction
Consider the intimate relationship between product designed for a synchronized supply chain network, and the network design and operation of a synchronized supply chain. An excellent design fit provides a responsive, reliable delivery that optimizes the investment in capacity and inventory by matching the dynamics of supply with demand. It creates shareholder value by accelerating supply chain velocity beyond that of the competition. A poor design fit sends the customer seeking the competition, wastes both the capacity and the inventory investment, and diminishes shareholder value. But what ties the product and the network together?
While traveling last year, I ordered a Valentine's Day gift for my wife through a mail order catalog. The design of the product seemed quite splendid from its photograph in the catalog. It was guaranteed for "day of" delivery, if ordered ten days in advance. When I called to place my order fourteen days in advance, the order taker insisted that my gift be delivered the day before Valentine's Day. This lack of synchronization missed the whole point of the gift. The order taker was unsure of the network's capacity to deliver on Valentine's Day, and decided to commit my firm order to an earlier delivery to save capacity for expected rush orders. The operation of the network was not properly matched with the design of the product.
Just four days before Christmas this year, my wife mentioned a book that she would like to have. I found the book on the Amazon.com Web site in one brief search. It was fun to access a few sample pages and to read a quick book review. I ordered the book with the Amazon.com "one click" feature, and was delighted that I could have the book sent gift wrapped with a personalized card. An email confirmed the same day shipment, and the book arrived by UPS as promised. This was an altogether positive experience because the product design for the supply chain matched the network design and operation of the supply chain.
A good analogy for understanding the difference between product design for a supply chain and network design of a supply chain is to think about the difference between an architect and a building contractor. The architect envisions the use of a structure, for example an office space, then designs the structure from basic elements of steel, concrete, glass, wood, electrical, plumbing, HVAC, interiors, and furniture. The architect specifies the design in readily available materials. This is design for a supply chain. The contractor orders and takes delivery of all the materials through existing construction supply channels, then integrates these materials to approximate the architect's design. The contractor must resolve any inconsistencies with the design in real time. This is design of a supply chain. When there is a good match between the architectural concept and the contractor's craftsmanship; the customer is delighted, the office space is used as office space, and both the architect and the building contractor make money.
Differences in Synchronized Supply Chain Networks
"A supply chain is the global network used to deliver products and services from raw materials to end customers through an engineered flow of information, physical distribution, and cash."1 The physical material does not start to flow downstream in a synchronized operation, until it is pulled to a customer order. This customer order is the synchronization signal to pick from stock, complete any assembly or postponement operations, and deliver the finished goods to the customer in one continuous flow.
Synchronized supply chain networks operate differently than other kinds of supply chains. The unifying theory for synchronized operations comes from the Theory Of Constraints (TOC) by Eli Goldratt as popularized in his 1984 book, The Goal. 2 But, TOC has to be applied in a particular way from the upstream push/ pull boundary to the downstream customer in order to synchronize a supply chain network. Goldratt's TOC elements of "drum-buffer-rope-throughput" become translated into a capable system constraint, preloaded node inventories (including the system constraint buffer), the communication of synchronized demand information, and the use of equivalent throughput as a key performance measure. 3 There may also be opportunities to synchronize downstream cash flows to the system constraint. Some of these concepts are not practical without the use of Internet technology to enable information and cash connections to be made across all geographies and time zones.
In a synchronized supply chain network, one of the trading partners is the system constraint that effectively limits the end-to-end throughput for all other trading partners. Inventory is appropriately preloaded at each of the synchronized -nodes in order to quickly bring a synchronized supply chain network to its full throughput. End-customer demand information is fed directly to the system constraint. Then, the system constraint node broadcasts a synchronizing information sequence simultaneously to all the other synchronized network nodes. A properly structured supply chain network with parallel information flows and synchronized operations can overcome the oscillatory tendencies of the bullwhip effect. This is because the bullwhip effect is exacerbated by the serial propagation of demand information and by the accumulation of logistics delays. Equivalent throughput is used as one key performance indicator (KPI) to keep each of the trading partners in alignment with the delivery requirement. Invoicing can be synchronized to throughput at the system constraint, rather than at final shipment, to shrink order-to-cash cycle time. These synchronization techniques are applicable to both forward and reverse supply chain networks.
Product Design Influences Network Design and Operation
A product's design influences the supply chain network's value-adding processes, its capacity and its inventory investments, and the definition of its global performance measures. When a product is designed for the supply chain network, the product design is consistent with an optimization of the following network characteristics:
• The length of supply chain that can be synchronized
• The incremental information technology investment needed for synchronization
• The node capacity investment
• The total system inventory investment
• The definition of equivalent throughput as a KPI
Figure 1—Strive for designs with simple, flat BOMs versus complex, deep BOMs.
A bill of materials (BOM) is used to define the product. The BOM documents all the materials and the parent-child relationships, much like a family tree, of how individual materials relate to each other to form assemblies and products (Figure 1). A list of the material suppliers is a by-product of the BOM. The supplier list defines the supply side nodes of the supply chain network. Each level of material integration in the BOM hierarchy that requires an incremental set of suppliers is a new echelon on the supply side of the supply chain network (Figure 2). The more complex the product BOM, then the broader (more nodes) and the deeper (more echelons) the supply side of the supply chain network. Conversely, a simple product design reduces the complexity of the supply chain network. As the product design drives a broader and deeper network, real-time demand information must be broadcast and synchronized to an increasingly larger number of nodes. This drives up the information technology investment.
Figure 2—Map the value-adding transformation onto the supply chain network.
Each supply chain echelon has an associated cycle time. The larger the number of echelons, the longer is the cumulative cycle time. The customer expects a competitive order-to-delivery cycle. The order-to-delivery cycle is defined by the total time to communicate and process the customer's order, plus the cumulative cycle time to complete production and process a shipment, as well as the transit time and customs clearance time to deliver the product. Synchronization can only be applied to that downstream portion of a supply chain network, where the customer's order-to-delivery cycle expectation exceeds the sum of the ordering and transportation times.
In some industries, a second limitation exists, when the breadth of the BOM involves so many suppliers that it becomes impractical to synchronize all of them.4 This is the point in the network where a narrow "head" on the BOM broadens into wide "shoulders." For example, a dairy processing plant with a cycle time of five hours can be totally synchronized, when the customer goes to the store only once a day; and the BOM for milk is relatively simple. In a second example, the downstream synchronization for an electronics assembly is limited to just three days out of the 22 days of total cycle time. While the customer expects 10 days from order until delivery, and only five days are consumed with ordering time and transit time; the BOM explodes into 180 part numbers and 84 suppliers at a point three days upstream from packaging.
It is useful to think of capacity and inventory as having both a unique and a common component. One node in the supply chain network will be the system capacity constraint that limits the end-to-end throughput for the entire network. Where the capacity requirement of the product design is common with the capability of the system constraint, then that product is aggregated with all the other products in the system constraint throughput. But, when the product design requires a unique capacity capability, then the system constraint becomes dependent on the product mix. Likewise, where specific materials required by the product design are common to the existing inventory buffers, then the incremental throughput from that product tends to maintain or even improve inventory turns. But, when the product design requires unique materials, then the node inventory is broadened with incremental safety stock in different part numbers causing inventory turns to decrease.
Network Design and Operation Influence the Product Design
The supply chain network design and operation influences a product's cost structure, the ability to provide economical product customization, and the flexibility to provide reliable delivery in the face of dynamically changing demand. When the design of the supply chain network is matched with the product design, supply chain network operations are consistent with an optimization of the following product characteristics:
• A tax-advantaged country of origin to lower the price point
• Low variability, low landed cost import/export logistics to lower the
price point
• The ability to dynamically switch trading partners to source different
technologies for different models within a single product family
• The application of risk pooling techniques, such as postponement, to
deliver a range of customized products
• The ability to deliver a set of services as part of the product solution
• The seamless integration of forward and reverse supply chains
In order to leverage a tax-advantaged country of origin, or a free trade zone, or an ultra-low labor rate the supply chain network becomes distributed in geography and time, while taking on a higher degree of cultural diversity. One strategic issue becomes how to best use technology to maintain synchronicity, while overcoming geography, time, and culture? Internet economics play a central role in making synchronized, global supply chain networks a reality. The ability to move information and cash anywhere in the world electronically by a reliable, secure means is a critical success factor. Another critical success factor is the ability to characterize transportation paths, resolve issues, and maintain a complete network of low variability, reliable logistics connections. Unless these two factors are a given, a product's design cannot benefit from a competitive network infrastructure.
While logistics variability is bad for cost, product variability is good for customer satisfaction. Implementing mass customization can be a nightmare in order fulfillment. Once again, Internet technology can provide unbelievable opportunities for supply chain network flexibility. Here are three Internet enabled network solutions that provide economical product differentiation:
First, models within a product family can be positioned into a high-, medium-, and low-price niche of the market by implementing a modular design that supports the substitution of expensive components with inexpensive ones. For a product requiring a display panel, for example, the supply chain network is designed to switch dynamically among three suppliers based on customer preference for expensive vacuum florescent displays, or mid-priced liquid crystal displays, or inexpensive light-emitting diode displays; the product's list price is adjusted accordingly.
The concept of risk pooling is second. Here the inventory of unique material, with its inherently poorly forecast mix, is positioned optimally within the supply chain network to yield the best service level for the least inventory investment. For example, the performance features of a frequency counter are designed for control through firmware. The hardware for a generic frequency counter module is assembled and stocked at a midpoint in the supply chain. Once a customer order has been received, the appropriate firmware is loaded into the generic assembly giving it a customized personality. A small investment in product design and the postponement of loading firmware eliminates a large investment in finished goods of frequency counters with the wrong feature mix.
The ability of an Internet-enabled supply chain network to deliver worldwide services is a third way that supply chain network flexibility can enhance the total product solution. Internet delivered services like application engineering, financial options, credit approval and leasing, real-time product status checking, preventative maintenance reminders, online troubleshooting, returns labeling, etc. can be bundled into a continuum of product options that are now economical to deliver via the Internet.
With the exception of certain spare or repair part suppliers the set of trading partners, like fabricators, contract manufacturers, and manufacturing centers, that define a forward supply chain network are different than the set of trading partners, like repair depots, re-manufacturers, and recyclers, that define a reverse supply chain network. In most cases the information technology systems that support forward supply chain networks are not designed to run backwards, and the information technology systems that support reverse supply chain networks are not designed to run forward. Yet, the customer, who buys the product and may need to return the product, resides at the intersection of the forward supply chain network and the reverse supply chain network. The customer desires a product design and a network operation that appears to be seamless in both directions. Placing an order, taking delivery, making a payment, returning a product, receiving a credit, or seeking status information should be intuitive, economical, and easy. The manner in which the supply chain network operates should influence the product design, if only in product naming, packaging, and labeling.
Achieving Excellence Through Technology KPIs
Throughput is one key performance indicator for the operation of a synchronous supply chain network. Throughput is important as an end-to-end measure of the synchronized capacity of each trading partner and of the synchronized flow of pipeline inventory among trading partners. It helps to keep operations at each of the value-adding trading partners in alignment with the business strategy because it is truly a global performance measure. The concept of "equivalent throughput" allows partially manufactured upstream flows to be compared with the downstream flows of finished goods (Figure 3). The product's BOM establishes the equivalency for each echelon in the supply chain network. For example, one finished automobile downstream is equivalent to four doors which is equivalent to one dashboard, and interior is equivalent to four wheels and tires is equivalent to two axles is equivalent to one engine and transmission is equivalent to one unibody upstream.
Figure 3—Use equivalent throughput as a KPI for synchronized operations.
Equivalent throughput is measured as the rate of units per time entering the outbound pipeline. This KPI is independent of the logistics transit times within the supply chain network, but it is dependent upon the cycle time offsets between echelons of the supply chain network. The relative quantities and definition of the part product equivalency is defined by the BOM. "A supply chain network is synchronized, when the equivalent throughput at each node equals the broadcast demand in each time period."5
Equivalent throughput is an example of a KPI that is impractical without the technology enabler of the Internet to compress both geography and time in the collection of raw data and to speed the formulation of this data into daily information.
Conclusion
This white paper has briefly discussed the attributes of a synchronized supply chain network, the influence of product design on network design and operation, the influence of network design and operation on product design, and a preference for equivalent throughput as a synchronizing KPI. A deep understanding of the product BOM is the unifying thread running through these topics. While keeping in mind that a synchronized supply chain operates differently, the recipe for competition calls for the deliberate integration of product design with network design and operation and a dash of technology to help measure performance. It is all about the seamless integration between design of the synchronized supply chain and design for the synchronized supply chain.
Endnotes
1 Alber, Karen L. and William T. Walker, Supply Chain Management Principles and Techniques for the Practitioner, Alexandria, VA: APICS Educational & Research Foundation, 1998, p. 2.2 Goldratt, Eliyahu M. And Jeff Cox, The Goal: Excellence In Manufacturing, Croton-on-Hudson, NY: North River Press, 1984.
3 Walker, William T., "Synchronizing Supply Chain Operations," 2000 APICS International Conference Proceedings, Alexandria, VA: APICS, 2000, pps. 8-15.
4 Walker, William T., "Synchronized for Growth," APICS the Performance Advantage, April 2001, p. 26.
5 ibid.,3, p. 13.
