Design for Supply: An Evolutionary Path

Design for supply involves more than just part and supplier reuse. Leading companies see benefits from simulation and modeling before and during product launch.

By Michael J. Burkett -- Supply Chain Management Review, 11/1/2006

Design for manufacture has been around for a number of years and many of its concepts have been applied to the supply chain, especially as manufacturers pursue global sourcing strategies. However, there are design considerations associated with outsourced supply chains that go beyond manufacturing alone. These factors include transportation costs and lead times that are exacerbated by early design decisions that increase variability or that add risk by locking in single-source components.

To ensure a profitable product, it is important to create a lifecycle plan that considers factors such as contract manufacturing and other sources of supply. In other words, companies need to consider not only design for manufacture but also design for supply.

Design for supply strives to avoid those design practices that drive supply chain complexity, increasing not only direct material costs but the overhead costs associated with such issues as the proliferation of part numbers or an expanding supply base.

This means that supply chain professionals are stakeholders in the design process and must be involved at the earliest stages of new product introduction (NPI). A recent AMR Research study validates this point. The study lists NPI as the number-one influencer of supply chain demand. Additionally, a recent National Science Foundation and Michigan State University study found that material costs could be cut 10 percent by applying design for supply and total cost of ownership (TCO) analysis at the concept and assessment phases of a new product introduction. To ensure that supply chain decision makers participate early in the design process, companies should use integrated product teams and employ a solid sales and operations planning process.

It’s important to recognize that an effective design for supply strategy will not remain stagnant; instead it will progress through a series of evolutionary stages from standardization to optimization and beyond. (See Exhibit 1 below.)

Design for supply is certainly not a new concept. Many manufacturers have already benefited from applying fundamental design-for-supply (DFS) strategies around part reuse and cross-functional collaborative product design. These strategies are applied in the early stages of NPI and later in the product’s life to value-engineer or redesign an existing product to be more cost-effective and supply chain friendly.

The Chrysler group of Daimler-Chrysler, for example, has been employing a platform and component reuse strategy as part of its Fastcar program. This strategy was a key driver in the group’s 20-percent increase in productivity the past three years as recorded by the Harbor Group, which compiles statistics on manufacturing efficiencies. Automotive is not the only beneficiary of this approach. IBM’s Common Building Block initiative has achieved annual savings ranging from $140 million to $250 million from improved reuse of existing components and suppliers.

Establishing a solid reuse strategy requires organizational readiness in addition to technology. One of the greatest challenges of reuse is providing designers with incentives to use existing components and processes while also allowing them the freedom to innovate. Successful companies, like those previously mentioned, form an organization responsible for creating and maintaining a reusable component database. The components in this database are usually those that are not a differentiating factor to the customer. Rules are established that hold designers accountable for reusing components unless a case is presented for adding a unique feature that will influence market demand. Standardization efforts like these can help lay a solid foundation for more mature DFS strategies.

While reuse is a sure way to reduce variability and improve volume pricing, it does place a constraint on innovation when applied too rigidly. To design for supply while also developing new and exciting products and ensuring long-term profitable growth, companies need to look at the trade-off: What is the benefit of a new innovation versus the cost of supply?

This challenge opens the door to the next evolution in design for supply; simulating the cost and supply chain impact of design trade-offs. This concept has its roots in the computer-aided-design (CAD) systems used to prove out and optimize a design’s functionality. But we are now expanding beyond product functionality analysis to business and cost impact.

One example is analyzing the cost-benefit trade-offs associated with different product options. SKU proliferation is the bane of any supply chain professional. By increasing product feature variability, companies tie up valuable cash in inventory. Supply chain professionals are now pushing back for justification of the endless list of product options that marketing and product development send their way. This effort is applied both on the front-end when features are being defined and on existing product options to find opportunities for rationalization. Sony Ericsson modeled the cost-benefit trade-offs of features when it introduced its P500 cell phone and refined the list of features to optimize customer revenue, time-to-market, and supply cost.

Another effective DFS strategy is product-cost modeling. Product-cost modeling is growing more sophisticated to predict cost before product launch. Cost estimation tools have existed for many years, from basic spreadsheets to commercial software. Now a more advanced capability is evolving that models a virtual production environment, whether internal or externally owned, and then conducts what-if analyses based on alternative design decisions.

Manufacturer Thomas & Betts has started modeling processes and products from initial design concept through development for its electrical transmission products. Likewise, a tier-one automotive manufacturer shaved 34 percent off the cost of a design by modeling its true manufacturing cost.

Another analytic approach gaining traction is to correlate features in a CAD model with the procurement or manufacturing cost for the part. Caterpillar is one of the earlier users of this approach, comparing casting features in CAD models with historical procurement data to identify opportunities to reduce cost.

Supply chain modeling during new product launch takes design for supply to a whole new level. This strategy moves companies beyond the stages of reuse and product-cost analysis to understanding the product’s impact on the supply chain network. A few leading manufacturers are using advanced technology applications for network design and inventory optimization. Pharmaceutical manufacturer AstraZeneca built industry-specific templates to design and simulate launch activities, such as resource allocation, inventory distribution, product configuration, and capital-expenditure scenarios. The company saved an estimated $200 million off a product launch by understanding and managing the ramifications of launch decisions such as product-packing configuration and dosages, inventory levels, and manufacturing capacity ramp-up.

Chaos defines the current state for many companies. Innovation often runs amuck with no visibility into the total lifecycle cost of sustaining the product profitably over time. Accountability for product launch success is often absent. Even if metrics exist, there is no closed-loop corrective action taken on the causes of product launch failure. To achieve world-class design for supply, each manufacturer must find where it fits on the DFS maturity curve and then decide on the next steps to take.

A few suggested steps toward DFS improvement include:

• Identify the person or team that will enforce accountability and corrective action for poor product-launch practices.

• Understand product segments and the global distribution methods required for success.

• Define the metrics to measure a design’s impact on inventory, reuse, lead time, and other supply chain cost drivers.

• Understand the organization’s position on the DFS maturity curve as a way to define the next step of evolution.

Product innovation is critical to long-term growth for manufacturers, but sustaining profitability and customer service levels requires a robust supply chain to deliver that innovation. R&D investment often ranges between 3 and 20 percent of a company’s revenue depending on the industry, and it is even higher when the investment of the cross-functional product launch team is factored in. By driving profitability from new products and sustaining margins across the full life of a product, companies can create the return on R&D investment needed to fuel continued innovation and achieve “NPI Nirvana.”