Hau Lee

EFFECTIVE INVENTORY AND SERVICE EFFECTIVE INVENTORY AND SERVICE MANAGEMENT THROUGH PRODUCT MANAGEMENT THROUGH PRODUCT

AND PROCESS REDESIGNAND PROCESS REDESIGNHAU LEE

Presented by:Presented by: I.Esra Buyuktahtakin

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OUTLINEOUTLINE

• IntroductionIntroduction– Product Proliferation

– Some concepts in product/process design– Delayed Product Differentiation

• ModelsModels– Built-to-order

– Built-to-stock

• ApplicationsApplications

• ConclusionConclusion

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Introduction/Product Introduction/Product ProliferationProliferation

Product ProliferationProduct Proliferation• Different requirements of different markets

• Expansion of the customer base

Multiple versions of the same product

Product variety is increasingProduct variety is increasing• HP workstations have 500,000 options (RAM cards, video cards,

graphic cards, monitors, disk drives, etc..)• GM cars have 20,000,000 versions (colour, interior combinations,

drive train configurations, and option choices)

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IntroductionIntroduction

Product Proliferation:Rapid Technology Changes and Increased Globalization

Rapid increase in product variety

High Variation

Uncertainty

Difficulty in Demand Forecasting

High Inventory Investment and Poor Customer Service

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IntroductionIntroductionTo deal with product To deal with product

proliferationproliferation

Investment onInvestment on

• information technology

• decision support systems

• transportation modes

Product and process RedesignProduct and process Redesign

Obstacles to implement Obstacles to implement p&prp&pr

• engineers generally do not consider inventory and service dimension

• design requires close collaboration among different functional areas within a corporation

• design changes requires investment

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IntroductionIntroductionRedesigning the process to improve logistic efficiency

DFM(Design for manufacture):DFM(Design for manufacture):

The designers’ consideration of the organization’s manufacturing capabilities and customer expectations when designing a product.

Concurrent Engineering:Concurrent Engineering: is the bringing together of engineering design and manufacturing personnel early in the design phase.

• DMF and concurrent engineering concepts emphasize the importance of considering more than functionality and performance of a product in its design stage.

Delayed product differentiationDelayed product differentiation is a key concept for gaining control of inventory and service in a global market

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Introduction/Literature Introduction/Literature What is Delayed Product Differentiation?What is Delayed Product Differentiation?

• Delaying the differentiation point in which a product gains its specific identity

• Increase the flexibility to meet uncertain and changing demands

Related concepts with Delayed Product DifferentiationRelated concepts with Delayed Product Differentiation• design for localization: the strategy to meet the different

local requirements• design for customization: the strategy to meet the needs of

different market segments design for flexible manufacturer• part commonality• part modularity

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Introduction/Scope of the Introduction/Scope of the paperpaper

This paper observes product and process This paper observes product and process design from the delayed product design from the delayed product differentiation aspect.differentiation aspect.

! Two inventory models(built-to-order, Two inventory models(built-to-order, built-to-stock)presented in this paper built-to-stock)presented in this paper provide the product developer an insight of provide the product developer an insight of inventory and service dimensions of their inventory and service dimensions of their designs.designs.

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ModelModelBuilt-to-OrderBuilt-to-Order

• Final products are built on demand

• Intermediate product is customized according to customer demand

Built-to-stockBuilt-to-stock• Finished products are

built to stock

• Immediate delivery of finished products are critical

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Built-to-OrderBuilt-to-OrderAssumptions and

notations:T=total production time

t=point of product differentiation

• intermediate inventory~periodic review order-up-to-S

• review period= 1 time unit

• customer orders~ i.i.d.

D(r) : demand in r time units

F(x/r)= Pr{D(r) <= x} • demands are never negative

• orders arrive at the beginning of each time unit

• customize the products in the intermediate inventory

• unmet orders are backlogged

• first-come, first-serveinventory position= inventory on hand+WIP- backlog W= waiting time in the generic prod. W <= tY = response time Y =T - t + W

T-t

A built-to-order inventory model

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Model/Built-to-Order

An example:Let t=4 ,x=1 and S=10t-x = 3 immediate time

units demandTotal demand=10, W=x=1total demand=11>S, W

=2>x

Thus:

rT/SFSrtDPrrWPr

3 3 3 1

Inventory on hand=0

Time = 1

1 2 3

Inventory on hand=0

Time = -1

Order=3

3 4 1 2

Inventory on hand=0

Time = 0

Order=3Order=4

1 2 3 1

Inventory on hand=3

S=10 Time = -2

Order=4

4

Event(W>x)={demand of immediate(t-x)time units

>S}

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Model/Built-to-Order

Two service measures:Two service measures:

i)A target E(Y)

ii)A target reliability(probability)of response time being less than or equal to the target R

• S can be found from both of these service measures

• In the model the first one is used

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Model/Built-to-Order

First Service measure:First Service measure:

xxWPrtTWEtTWtTE)Y(Et

x

0

11 xt/SFxt/SFxwPrxwPrxWPr

1

000

11t

r

t

x

t

x

rt/SFxxt/SFxt/SFxxWPr

t

r

t

r

rSFTrtSFtT)Y(E1

1

0

1

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Model/Built-to-OrderSecond Service measure:Second Service measure:

The probability that the response time to customer orders in a time unit is less than or equal to some target R time units

RT/SFtTRWPrRYPr

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Model/Built-to-Order

let

H(t):expected holding cost per unit time for intermediate inventory

g(t):unit holding cost rate for intermediate inventory

g(t) is nondecreasing function

• WIP-before=WIP-after when t is delayed

to investigate the effects of delayed product to investigate the effects of delayed product differentiationdifferentiation

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Model/Built-to-Order

1

0

1t

r

rt/SFtT)Y(E

1 xlevel.invPrxlevel.invPrxlevel.invPr

S

r

txFtgtH1

)|()()(

S

x

xtxSFtxSF0

1

F(S-x/t)=Pr{D(t)<=S-x}= Pr{inventory level>=x}

txSFtxSF 1

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The effect of the changing t on The effect of the changing t on

holding cost and Sholding cost and S

S

r

txFtgtH1

)|()()(

dttxFtgtHS

0

)|()()(

dxtxFt'gdxt/txFdt/dStSFtgdt/dHSS

00

0dt/dS 0 t/txF

0t'g

t

r

rSFT)Y(E1

00

drdt/dStSftSFS

0dt/dS

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Delayed Product Differentiation at the Disc-drive Delayed Product Differentiation at the Disc-drive manufacturingmanufacturing

• Long lead time

• in process inventory~shorten lead time

• two steps of manufacturing process: generic & customization

• first part is short, second part is long

• high levels in-process inventory is required for high reliability

• coupon boards insertion

• no significant value added~no increase in inventory cost

Disc drive manufacturing example illustrated

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Another Built-to-order ApplicationAnother Built-to-order Application4 Steps of manufacturing:4 Steps of manufacturing:

1.fabrication of application-specific integrated circuits

2.building sheet metal,power supply, can and cable building

3.integration of base memory, floppy drive, hard drive and the opr.system

4.assembly of power cord, keyboard, mouse, monitor and documentationTo implement delayed product differentiation:To implement delayed product differentiation:

• standardization of base memory, floppy drive, hard drive and the operating system

• the point of differentiation is deferred from the end of the second stage to the end of the third stage

• the number of units held in inventory to support the same response time target decreases

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Model/Built-to-StockAssumptions & Notations:Assumptions & Notations:

T: total manufacturing timet: differentiation pointT-t: time units for customization• Finished goods inventory• Inventory and backorder costs are

identical for all end prod.i• Periodic review• Review period= 1 time unit• Demands are independent across time

units

• Demands for different end products are correlated

ik: covariance of demands for end product i and k in a time unit

i / i is constant for all i• Unmet demands are backordered

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Model/Built-to-Stock

Question:Question:• How to characterize the operational

performance such a system as a function of t, T, the requirement fill rate, and the demand distribution of the end products.

• Based on this function the costs and the benefits of the point of product differentiation t is investigated.

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Model/Built-to-StockTwo actions based on the inventory status of end product i:Two actions based on the inventory status of end product i:

Allocation decision for the items completed in generic production process

Decision for the amount of new items to begin production

Equal fractile allocation ruleEqual fractile allocation ruleAllocation of the each product i so that an equal fractile point or same service level is achieved by each of the end product i on an appropriately chosen demand distribution

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•Based on these two moments,firstly service level is determined,then the value of the Si is determined to satisfy the target service level.

j

N

j kjjkjii

tTtRIVar

1

22

total system demand variance

over t periods

Variance of end product j over T-t time units

N

jiiii

TRAIE1

Expected total system demand over T periods

j

jii/R

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j

j kjjkjii

tTtRIVar

1

22

2

2

jj

j kjjkj

222j

j kjjkjii

Rt/)I(Var

012

2

2

jj

j kjjkj

i

kjjk

1

The effect of delayed product differentiation on VarThe effect of delayed product differentiation on Var( I( Ii i ))

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Centralized system in Schwarz paperCentralized system in Schwarz paper

• The larger N, the greater the reduction in variance from delayed product differentiation.

ji

tTN/tIVar

• The second model presented in the Schwarz paper is a special case of this model.

• N independent and identical retailers with common standart deviation in a time unit, .

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Application/Built-to-StockDelayed Product Differentiation by DC localizationDelayed Product Differentiation by DC localization

• Printers manufactured in U.S. and distributed to DCs in Europe, U.S. and the Far East

• Localization

Packaging printer with the appropriate power supply module with the correct voltage and plugs and a manual with the appropriate language

• Long lead times for the non U.S. DC~ High levels of safety stock

• Inventory savings from the reduction of the safety stock• Savings from pipeline inventory• Unlocalized printer is less bulky and localization materials are not bundled• “Local content” and “local manufacturing” makes a company more marketableHowever: Need to develop a local supply base of localization materials Cultural and organizational barriers

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An example for the inventory savings gained from An example for the inventory savings gained from DC localizationDC localization

Factory localizationFactory localizationt:1 week T: 5 week

DC localizationDC localizationt is pushed very close to T

Ki : safety stock factor

Demands for different country versions of the printer in Europe are independent

Safety stock level for end product i:

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Application/Built-to-StockDelayed Product Differentiation at the Printer manufacturing

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Application/Built-to-Stock

To evaluate the effectiveness of commonality;

• Inventory savings for the parts• Material costs of parts• Investment cost for the reengineering

change• Inventory savings for finished goods should be assessed.

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ConclusionConclusion

• Inventory and customer service are critical issues in the competitive market

• Design engineers should consider logistic issues besides the functionality, performance and manufacturability of a product

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Conclusion

• Product and process changes are powerful means to gain control of inventory and service in the competitive market

• Inventory models have a lot to offer

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THANK YOU…THANK YOU…