Global Logistics & Supply
August/September, 1997 click for Article
for Efficient Global Logistics"
Ken Homa, Distinguished Professor of Business, Georgetown University
Even though product design is a major determinant of manufacturing costs — some companies report that as much as three-quarters of final product cost are embedded early in the product development process — it commonly is overlooked as a source of strategic and operational leverage for global logistics efficiency.
The slight is hardly surprising. While the most advanced companies may recognize the leverage that can accrue from a logistics-friendly product design, very few have been able to incorporate this understanding into a repeatable methodology that yields product designs which promote rather than inhibit logistical efficiency. Since few companies have a formal, institutionalized understanding of the linkage between product design and logistics efficiency, few people in their organization are consciously aware that such a relationship exists. Even in companies where great strides have been taken to break down organizational silos and create multifunctional product development teams, the logistics function is rarely represented as an active member on these teams, and supply-chain efficiency is seldom considered as a high priority design objective.
In many companies, marketing and engineering functions still design products in relative isolation, sometimes with an eye to manufacturabilty, and then throw the product over the transom into the logistics system. Logistics managers may then suggest modifications to support supply-chain efficiency, but these late-game ideas tend to be costly to implement, both in terms of time and money, and usually are rebuffed.
As a consequence, most logistics systems have little choice but to play the hand they’re dealt and try to maximize supply-chain efficiency for a given set of product designs. But results are grossly sub-optimal because of inefficiencies that are frozen in the inherent design. While these constraints may be tolerable in a smaller-scale or confined, domestic environment, their impact is amplified in a global network with high volumes, long transport distances, and site variations. While product design can be a substantial enabler of efficient global logistics, it more often is a major limiter.
To appreciate the leverage that can accrue to global logistics from product design, consider the core operating objectives of all supply chains:
High service levels: Being able to fulfill customer orders quickly and completely, often with a high degree of customization, on a reliably consistent basis;
Low cost: Achieving the lowest total costs, from production through final delivery, and always meeting required quality levels;
High asset productivity: Minimizing investment in fixed network assets — facilities, equipment, etc. — and in accounts receivable and inventory.
In general, achieving these lofty and sometimes conflicting objectives requires:
• A strategically designed network of facilities that leverages both global-scale and location-specific economies, efficiencies and competencies;
• Efficient, flexible operating processes that enable ultra-fast response to specific and immediate customer requirements (e.g. just-in-time, mass customization), and dynamic reaction to broader, changing conditions such as site-specific capacity overloads, supply discontinuities, or locational market shifts;
• Applied information technology that shortens cycle times by virtually eliminating communications lags and, more important, by facilitating the substitution of information, a relatively cheap “logical” or “virtual” asset, for more expensive hard physical assets like inventory.
These foundation elements are usually necessary for supply-chain efficiency, but they are rarely sufficient for optimization.
More specifically, optimization requires product designs that support the supply-chain objectives and make them achievable. Unfortunately, a tight linkage between product design and logistics efficiency is more often the exception rather than the rule. Consider the fairly typical situation that many companies face :
• Product lines are multi-generational (and highly eclectic), having evolved over a number of years, sometimes having been developed under different design strategies and usually by a different roster of designers.
• Core products are built with different fundamental design structures, so there are multiple “platforms” that must be supported.
• Product designs are highly intricate and complicated, using a myriad of unique parts and components, many of which are similar but distinct from parts used in other products. So, there is a long list of unique parts and components that are used in relatively few sub-assemblies and models.
• Production is done from a “dead start” that is initiated when a requirement is signaled, either by an order or a forecast, beginning with materials procurement and flowing continuously to finished goods in a well-defined, often inflexible sequence of operations with little stocking of parts or pre-building of sub-assemblies.
• Specific customer requirements are satisfied through ad hoc customization. Product and process modifications are “designed in” after-the-fact, with a good faith effort to minimize added costs and operational disruption. But, the specified product differentiation usually forces variations at both early and late stages of the manufacturing process.
Companies facing these typical conditions can maximize supply-chain efficiency through basic operational strategies like:
Line rationalization: Opportunistically paring line breadth and increasing component standardization.
Design for manufacturing and assembly: Insuring, at a minimum, that individual parts and components can be economically produced at high-volume levels and assembled efficiently.
Low cost procurement: Consolidating global requirements for similar parts and products to enable quantity-advantaged procurement, e.g. quantity discounts and favorably negotiated prices.
Minimized landed costs: Deploying economically scaled production and assembly to sites that minimize landed costs at final destinations, with due consideration to both manufacturing and distribution costs.
While these standard tactics can provide substantial benefits (especially with respect to product economics), there are major opportunities that may be foregone and residual operating issues that work against the supply chain’s objectives. For example :
High administrative costs: The sheer number of items (parts and products) may present an enormous management burden, including extensive record-keeping, numerous supplier contacts, etc.
Inadequate scale: If there is low parts standardization, the quantity of individual components may be too low to support high-volume, efficient production or quantity-based procurement.
Slow response time: If products are, in fact, built from a dead start, cycle times may be greater than the response times imposed by aggressive customers unless the company builds to forecast.
High inventories: Both parts needs and finished goods requirements may require high levels of inventory to meet customer cycle-time standards.
Production inefficiencies: Customizing after-the-fact may cause disruptions to normal manufacturing flows.
In a nutshell, these difficulties can be mitigated with supply-chain-sensitive product design geared to a few key objectives :
Design simplification: Extreme reduction in the number of unique models, design platforms, and parts per model, to eliminate whole chunks of administrative and production work completely.
Practical specifications: Designing parts and components with realistic tolerances that provide some degree of material substitutability and consider the likely site-to-site variations, facilitating the dynamic shifting of production among sites and suppliers.
Component standardization: Specifying common parts for use in multiple products and models, providing maximum scale leverage and allowing economically feasible “strategic stocking” of important, long lead-time components.
Modularization: Design of component modules that can be used in multiple products and models on an interchangeable “plug and play” basis to enable concurrent or pre-building of sub-assemblies for fast finishing when orders are received (i.e. assembly to order).
Integrated product and process design: Developing a supply chain, from materials procurement through final stop delivery, that closely links to the product definition and requirements, with particular emphasis on assembly sequencing that allows end-of-line customization — the postponement of required product differentiation to the latest possible point in the supply chain.
Achieving these objectives can provide several levels of benefits, including faster response times, lower inventories, and more flexibility to meet both overall and customer-specific requirement shifts. Implementing the principles requires a broad-based, and multi-faceted organizational commitment. The apparent keys for success are:
• Recognize the linkage between product design and global logistics efficiency and communicate it broadly throughout the organization.
• Give logistics a “seat at the table” during the design process and elevate the priority of supply-chain objectives in the development of product specifications.
• Formalize the supply-chain-sensitive design principles into development protocols that are relentlessly followed as rules rather than exceptions.
• Provide the tools that designers require to do the job, including easily accessible parts archives and process-flow software.
• Track performance by monitoring compliance to the principles, reporting benefits achieved, and, when appropriate, providing compensation incentives for achievements.
The bottom line is that product design is the heart of the supply chain: an effective product design can enable logistical efficiency, an inefficient design can cripple it. The relationship is particularly crucial in a global logistics environment where all inefficiencies are magnified in importance. Companies can choose to formally reflect supply-chain requirements in their product designs, or suffer the consequences of ignoring them.