Designs in Sync

Dec. 21, 2004
Product-design collaboration with supply-chain partners pays big dividends.

Hewlett-Packard Co. was faced with a perplexing problem with its 700 and 800 series deskjet printers. Selling on the order of a half million units a month, with 100 SKUs per series, there was no identifiable market for a specific set of features. Difficulty in forecasting demand resulted in high inventories, yet the company's ability to deliver popular models was poor. Ultimately, HP lost market share. By analyzing the entire supply chain, HP uncovered a solution that looks beyond material costs as the key driver of new-product development. For its next generation of printers, HP created a design that allows postponing product differentiation until much later in the supply chain. Though adding cost to the unit, this design strategy provides a hedge against forecast uncertainties, and it has allowed a 5% to 7% overall cost savings, including inventory savings, while at the same time presenting customers with the variety they crave. "Reducing future uncertainty by investing in the design allows us to respond to market fluctuations quickly enough without excessive inventory cost," says Vancouver, Wash.-based Swagata Saha, product manager, HP deskjet printers. The link between product development and the supply chain is becoming more important as companies gain a better understanding of supply-chain dynamics. Because it drives so many processes, decisions, and costs both upstream and downstream, linking of design with the supply chain can lower costs across the entire chain. To reap the benefits of this approach, manufacturers of complex products have put in place specific organizations, design strategies, management initiatives, and metrics that other companies can adopt. At HP, for instance, Web-based modeling tools are provided to designers that allow them to understand the cost of variety, its impact on forecast error, and cost implications across the upstream supply chain, says Corey Billington, executive director, supply-chain operations. The algorithms take into consideration inventory costs, end-of-life obsolescence, devaluation rates, price protection, demand uncertainty, and supply uncertainty. "This gives us a basis in mathematics, so decisions on product variety are not just opinion-based or political," says Billington. "Now it's an informed debate." To spread the gospel of design for supply-chain principles across HP, Billington's group has set up an intranet-based "community of practice" for collaboration on the topic, including training on the Web-based modeling tools. In addition, an internal group consults on design for supply chain throughout the HP organization. "I have no doubt we have created hundreds of millions of dollars of economic value for HP with these design-for-supply-chain methodologies," Billington observes. Sexy To Sensible Pitney Bowes Inc. has gone so far as to modify its incentive compensation system both in R&D and in supply-chain management to reward adherence to design-for-supply-chain principles. "In the past, designers had incentives to invent sexy new technology, but that built a level of complexity into our office products you don't normally find except in large copiers," says Raymond Hill, vice president, product supply, mailing systems, at the Stamford, Conn.-based company. Pitney Bowes reviewed its fundamental product-design strategies, and today complexity reduction, standardization, and modularity are cutting inventories, improving quality, and speeding time to market while slashing total development expense. "Ten percent of my executive compensation is now tied to this drive for common architecture and standardization," says Hill. "Then there is an additional 15% tied to cycle-time and inventory-turn targets. We cannot hope to achieve the business results along the supply chain we desire without these design strategies in place." Within Pitney-Bowes' engineering function, supply-chain benefits are quantified in terms of time to market, manufacturing cost of product, product performance, and spending levels to develop the product. "A major theme in 2000 is [providing incentives to] my team to apply these four metrics in an equation that results in profitability," says Dennis Stemmle, vice president, engineering, mailing systems. "We use the profitability equation to make design tradeoffs." In some cases investment to develop a new product has been cut in half. "Also, it allows better use of our product development resources, because with the common architecture strategy we are able to do more product launches with the same resources," says Stemmle. "The linkage between product development and the supply chain is critical if your focus is on the mission of profitability." Backup Systems Modular design has allowed Nortel Networks Corp. to dig much deeper into its supply chain to extract more industry expertise and apply it in new products. Consciously shifting away from a strategy of vertical integration to one of outsourcing, Nortel has seen the supplier content in its systems increase from 30% to 60% over the last few years. This allows Nortel to focus on its value-add competencies of network configuration and testing. "We used to do everything ourselves," says Richardson, Tex.-based David Robertson, chief architect, emerging service provider solutions. "Now we go so far as to put together the supply chain before we go to design and development of the actual product." Success with this product-development/supply-chain strategy rests in the supply-chain setup and the effectiveness of modularity. "Every product development [project] has risk," continues Robertson. "Any one link in the chain might allow the chain to break. So you architect the chain as best you can at the project start. Where you think there might be risks, you build in links in parallel, and then once you feel the chain is strong, you can knock off a couple of links. As a courtesy you let the parallel links know they are in competition for the same business." Identifying where to put interfaces is the key to mastering the art of modular design, says Robertson. Designs must be divided and modules created so that subsystems contributed by suppliers can change and evolve independently, taking advantage of industry power curves and new innovations. In this way companies can easily plug the latest technology into new devices and reap economies of scale. To understand and influence the direction of new technologies, Nortel Networks codevelops technology road maps with its supplier base under nondisclosure agreements, planning multiple generations of products into the future. On one hand, Nortel brings industry knowledge that can help guide the technology direction of highly intellectual-property-oriented suppliers. On the other, it knows when commodity-component vendors go live with new releases and can plan release of its own products, including the technology, accordingly. Success Cycle Harley-Davidson Inc., Milwaukee, has made specific organizational moves to meld product design and development with the supply chain. Its purchasing department now has two distinct faces: operational purchasing, which serves the day-to-day build schedules in production, and development purchasing, which is dedicated to new-product design and development. Begun in 1996, but not at its full strength of 35 people until last year, the development-purchasing organization is a separate function colocated with product development, charged with supply-base development, supply-management strategy, and acting as a strong voice for the supplier in the company's product-development process across its five manufacturing sites. Along with engineering and manufacturing, the group assesses supplier skills, competencies, and capabilities, and matches those with the with the Harley-Davidson product vision. "Knowing our strategic product direction, it is the responsibility of the development-purchasing engineer to determine if the current supply base can support that direction, or whether we have to go out and find a different supplier with new capability," says Greg Smith, director, development purchasing. Much of the interaction between Harley-Davidson and its supply base is managed within the Supplier Advisory Council (SAC). Sixteen tier-one supplier representatives, primarily CEOs and other high-ranking executives, sit on the council for staggered four-year terms. Each council member, in turn, has 10 or more other tier-one suppliers it communicates with, giving the council reach into some 200 suppliers. SAC members contact their assigned members quarterly to collect information on business conditions, strategy-implementation success, and roadblocks. In 1999 the SAC addressed three core issues: product cosmetics, cost breakdowns, and their master supply agreement, all of which have major implications on supply chain/product development. The master supply agreement covers everything important to the Harley-Davidson/supplier relationship. The product warranty module defines responsibility when defects occur depending on whether the supplier is simply a manufacturer or has developed the component. "It clarifies the responsibility, which then guides the behavior upstream in the supply chain as to how the product is developed," says Smith. The essence of the cost-breakdown initiative is to understand the cost drivers of the suppliers' production so that Harley-Davidson can design components accordingly. A supplier bidding on a job must include the details -- the cost breakdown -- behind his quote, including process flow, run times, yields, scrap, and overhead. "Our intention is not to beat down the supplier -- in fact, we have a very firm policy to not negotiate a supplier's margin," says Smith. "But we want to understand their cost drivers because they can have a huge [effect] on how we design our products." For instance, knowing that a certain part requires polishing, and that that is the supplier's core cost driver, Harley-Davidson will design to make the part more easily manufactured around the operation of polishing. "The essence of the cost breakdown is to drive the right behaviors and the right focus into new-product development along the supply chain. There is also the element of continuous improvement around existing parts."

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