1

Supply Chain

John Vande Vate

Spring, 2007

2

Make-to-X

• Make-to-Order

• Make-to-Forecast

• Make-to-Stock

3

Managing Variability

• Three Levers:– Inventory– Capacity– Time

Which levers are MTO, MTF, MTS using?

4

Which Levers

• Make-to-Order– Capacity!– Time: If we can convince the customer to

wait…– Inventory

5

Pros-Cons• MTO:

– Pros: • Little or no finished goods inventory• Customization can be competitive advantage

– Cons: • Manufacturing subject to high demand variability• Lead-time can be competitive disadvantage

• MTF– Pros:

• Helps smooth capacity requirements• Can respond to (foreseen) changes in demand• Product availability

– Cons• Only as good as the forecast• No real limit on inventory

• MTS– Pros:

• Minor smoothing of capacity requirements• Product availability• Definite capacity on inventory

– Cons:• Manufacturing still subject to demand variability• Inventory

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Make-to-X• Make-to-Order:

– When:• The product cannot be inventoried• The product is highly customized• Prices are declining• Customers will wait or the process is quick

• Make-to-Forecast: – When:

• Customers won’t wait or the process is too long• Capacity is constrained • Product is perishable

• Make-to-Stock: – When:

• Commodities with little differentiation• Capital intensive manufacturing

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The Point

• Make to Order is not a superior strategy

• It is a superior strategy for some markets

• It – Supports highly customized products– Eliminates finished goods inventories– Reduces reliance on forecasting

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Mixed Strategies

• MTS/F up to a point• MTO from this point on• Typically this point where product differentiates• The Question: When in the process to assign the

customer?• The trade-off

– Later means shorter lead times

– Later means process has undergone more differentiating steps…

9

Digression: Push-Pull

• This point is often called the “Push-Pull Boundary”

• Confusion about what is Push, what is Pull

• Hopp, Spearman paper attempt to resolve

• Thought provoking. Not definitive

10

Postponement

• Delaying the point of differentiation and with it, the transition to Make-to-Order, until later in the process

• Examples:– HP Printers in Europe

– Milliken Carpet Tiles

– Philips Bulk Packaging

– BMW Paint Shop

– Cell Phone Mfg.

– …

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Bulk Packaging

• Delayed customer specific packaging

• Don’t have to forecast sales by customer

• Shortens order-to-delivery window

• Allows efficiency in in-bound transportation

12

HP Imaging & Printing

• Delaying product differentiation to local market

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IPS Product IPS Product PlatformsPlatforms

network printer

digitalmulti-function

e-enabled appliance

basic office printing

color LaserJet/fast color ink

toner cartridge

- volume business

- standard configurations

- low product complexity

- value business

- customized configurations

- high complexity

14

Competing with Dell

• The BTO advantage– Low FG inventory– Customizable product– Quick delivery– Short cash-to-cash cycle– Purchase components at last minute

• The BTO dis-advantage– High manufacturing costs

– Can’t move desktops to China– High delivery costs

• Hard to consolidate last mile

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HP Adaptive Supply Chain Strategy

Mfg

Plann

ing

Ord

erFu

lfillm

ent

Logi

stic

s

Procu

rem

ent

Services

High Value & Solutions

Value Add

Low Touch

No Touch

Industry Standard Servers

Commercial Printing

Digital Imaging

Shared Printing

Personal Printing

Supplies

Portables & Handhelds

Business PC & Workstation

Consumer PC

Monitors & Options

Network Storage Solutions

Business Critical Servers

ES

GIP

GP

SG

Product Set

Managed Services Solutions

Customer Support Solutions

Consulting & Integration Sol..

HP S

Solutions (ESG / HPS)

Pro

du

ct/

Serv

ice G

en

era

tion

Customer Segment

Consumer

EnterpriseDir

ect

/ I

nd

irect

GTM

SMB

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Dell’s Strategy

• Bulky differentiated products, e.g., desktops and servers– Build to order in the US

• High value density differentiated products, e.g., lap tops– Build to order in China and airfreight

• Undifferentiated products– Make the supplier hold the inventory

HP Postponement:HP Postponement:Impact on product flowsImpact on product flows

Mfg, localization

distribution

Mfg localization,distribution

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Evolution of Evolution of PostponementPostponement

I. Localization

Slot Localization(Manuals; Cables)

II. Packaging

Packaging lines(Bulk Pack etc.)

III. Integration

Assembly and test(Formatters etc.)

PostponementPostponement Benefits

Inventory Flexibility (Demand signals)

Freight efficiency (Bulk shipping)

Cost reductions (Local procurement)

Speed (Time-to-market)

Legal (Tax & duties,

Export regulations)

MeasuresService Level

Total Supply Chain cost

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BMW Example

• Positioning the Boundary in BTO

Production sequence set throughout manufacturing

Body Shop AssemblyPaintshop

Startcustomer order

Re-sort Re-sort

BMW-Production System

Assembly

Startcustomer order

‘Late order assignment’

The BMW Production System

Body Shop Paintshop

Assort

Component Control

‘frozen horizon’

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Production Control Systems for Body/ Surface/ Assembly

Body Shop

...

Start of Assembly

Sequence stability 100%

Paintshop

Component Control

Planning

Order assignment not until assembly start

Painted car bodies are handled as supply parts

24

Milliken

• The Millitron• Computer-controlled micro jets inject dye

with surgical precision deep into the face of the carpet.

• 400 micro-jets per square inch• Can blend colors on carpet • As carpet passes through the Millitron,

entire designs can be changed without as much as a pause.

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26

Printed Carpet Tile

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Opportunity From Catastrophe

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The Fire

• Tuesday, January 31, 1995 destroyed Milliken & Company's Live Oak/Milstar Complex and Carpet Service Center.

• A 600,000 sq ft carpet manufacturing, warehousing, cutting and distribution facility.

• Total loss over $400 million.

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Opportunity From Catastrophe

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Reconstruction

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Before the Fire

• Several base tiles feed

• Several “gun bars” or color schemes

• Frequent and long changeovers

• Push to base tiles, Pull to customer orders

• Push-Pull interface before the millitron

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After the Fire

• One base tile

• One or two gun bars

• Nearly no changeovers

• Millitron is the push-pull interface

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Discussion

• The relationship between postponement & inventory pooling

• Manufacturing operations spread across the supply chain

• Blurring of the distinctions between distribution and manufacturing

• Emerging competition between contract manufacturers and logistics service providers

• Lean is production accomplished with minimal “buffering” costs– Remember the three buffers: Inventory, time, capacity