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PRODUCT PROLIFERATION AND THE SUPPLY CHAIN: A CASE STUDY
Frances M. Randall
Kidde Safety1393 S Third StreetMebane, NC 27302Telephone: (919) 304-8200 ext 8213Facsimile: (919) 563-3339
E-mail Address:
and
Vidyaranya B. Gargeya
479 Bryan Building
The University of North Carolina at Greensboro
Greensboro, NC 27402
Telephone: (336) 334-4990
Facsimile: (336) 334-4083
E-mail Address:
February 2005
Paper submitted for presentation at the
16th Annual Conference of the Production and Operations Management Society (POMS)
Chicago, IL, April 29 – May 2, 2005
Please address all correspondence to
Vidyaranya Gargeya
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PRODUCT PROLIFERATION AND THE SUPPLY CHAIN: A CASE STUDY
Abstract
Although it has been said that the customer is always right, that does not mean that the customer is always profitable to the business. As customers desire changes to existing products or special order items and as companies fail to eliminate dying product lines, the supply chain can become clogged. Product flexibility (with or without “necessary” demand volumes) can cause forecasting problems with vendors, excess raw material inventory issues, and manufacturing capacity concerns on the production floor. Pricing items without considering these issues can have a significant effect of a company’s bottom line. This paper reports on the findings of a questionnaire-based study of a medical manufacturer of gastrointestinal endoscopy accessories and supplies regarding current issues and attitudes toward product offerings that can better focus company policies regarding proliferation/consolidation. It has been found that providing current estimates of costs and performance measures may increase the focus on supply chain management (external and internal).
Definition of Supply Chain Management
“Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements” (Simchi-Levi, Kaminsky, Simchi-Levy, 2003). Supply chain management takes into consideration that a product is not made or supplied in a vacuum but is the culmination of all relationships (personal and business) between the customers downstream who demand the goods and services and suppliers upstream who supply the goods necessary for the manufacturer to process and therefore satisfy that final demand. Supply chain management also makes it evident that in order for the supply chain to be efficient, it must meet the customers’ needs while minimizing the overall costs—not necessarily the end price that the customer will be charged.
Some companies realize that a critical portion of that supply chain exists under their own roof if they are the manufacturer/distributor. Not only do they interface with customers and their many suppliers, they are also responsible for converting raw materials into work-in-process and ultimately finished goods, storing them (unless they are a pure engineer- or make-to-order manufacturer), and distributing them to the customer and sometimes the end-user. This is no small feat. Some of their issues in supply chain management include dealing with lead time, yield rates, inventory issues of external and internal suppliers, and attempting to match supply and demand (knowing that forecasts can be misleading). Obviously, manufacturers/distributors have a lot to juggle in order to maintain product flexibility for customers while also keeping an eye on company costs.
Review of the Literature
Many authors have discussed product proliferation and its effects on the supply chain, qualitatively and quantitatively. Indeed, a survey by the Deloitte consulting firm (MSI, 2003) conducted on 600 manufacturing firms showed that most manufacturers have failed to effectively deal with their supply chain complexity. It was estimated that new products (those introduced in the last 3 years) comprised 29% of a manufacturer’s revenue (up 21% from 1998 and expected to be at least 35% by 2006) (MSI, 2003). However, supporting product innovation was one of the least important supply chain priorities even though risk mitigation, obsolescence, and supplier collaboration are among the key factors affecting it (MSI, 2003). Only 7% of those surveyed were considered “complexity masters”; able to generate 73% greater profit margins due to customer, product, and supply chain related operations promoting collaboration, flexibility, and visibility (MSI, 2003).
Karry Kouvelas (2002) made the case that even though well intentioned; those companies touting product proliferation can lead themselves to worsening performance levels and gradual loss of competition in the marketplace. A well-diversified product offering can be a plus, but not at the expense of business inefficiencies. Because it happens gradually, indeed evolutionarily, this proliferation often does not manifest itself readily to corporate management. Often perceived to be the exclusive property of sales/marketing, the product portfolio affects the heart of the manufacturing organization. Increased portfolios require increasing numbers of bills of materials, more component/raw material inventory, and increased numbers of quality issues due to increased numbers of items. There is also a need for more storage space, equipment and/or changeovers, engineering changes, production personnel (and therefore a probability of increased human resources personnel to recruit, hire, and maintain records), working capital, and interruptions to normal, sustainable production levels.
Griffiths, James, and Kempson (2000) simply stated that “all the companies in the chain, their staff, the buildings and equipment would not exist without the end consumer(s) buying their products or services. Therefore, all activities within a supply chain should be directed or focused towards satisfying the consumer’s needs—to provide him with what he wants, how, where and when he wants it.” However, to always have what the customer wants on hand would require huge stocks of inventory, particularly to accommodate the requested (always-changing) volumes. The usual solution is to try to push the variability back up the supply chain by changing supplier volumes and mixes. Vendors are often unable to handle this variation and have difficulty responding, resulting in quality and availability problems ultimately to the customer’s detriment. To cope with the decreased manufacturing efficiency and effectiveness, cellular manufacturing cells are advocated, culminating in customer focused cells (made-to-order cells geared to particular customers) which focus on small batches, high variety, and shortened lead times. Even here however, minimum volumes are required.
It has been pointed out that the determination of a company’s market qualifiers and market winners is key in how manufacturing strategy can be chosen. Martin and Denis (2000) referenced Hill’s 1993 concept of “order winners” and “order qualifiers” and their use to logically lead to manufacturing strategy. However, they go a step further to broaden the winner/qualifier use to the market place saying that to be competitive requires not only a manufacturing strategy, but also a supply chain strategy. They argued that a lean strategy is driven by cost, while an agile strategy is driven by service and customer value. Even though both strategies require product quality, lead-time is more important in an agile environment where capacity has to be reserved for volatile demand.
In order to link production resources to customer orders, Chen, Zhao, and Ball (2002) argued that the available-to-promise (ATP) function is becoming more important to the supply chain. Using a mixed integer-programming model, they applied a variety of constraints (raw material availability, production capacity, material compatibility, and customer preferences) to investigate the sensitivity of supply chain performance. Make-to-order environments are plagued with high product mixes and low order volumes that make forecasting incredibly difficult. Again, quality and costs are order qualifiers while flexibility, lead times, and order promising speed win the orders. By concentrating on ATP fulfillment performance, customer service can improve and inventory can be reduced, even if using a batch system instead of a real-time system. Chen, Zhao and Ball found that batching only increased resource utilization and profitability of orders up to a certain point, but after that point, missed orders began to eat into profits (batches of six for their experiments were optimal).
Sislian and Satir (2000) proposed a strategic perspective for insourcing and outsourcing decisions for companies whose competitive strategies lie in product differentiation and focus. Elements of their framework include competitive advantage and demand flexibility, as well as process capability, process maturity and strategic risk. The keys to affecting competitive advantage are cost leadership, product differentiation, and focus. The assumption is that the activities considered for outsourcing cannot be performed in-house cost-effectively and/or the activity’s contribution to the overall unit cost of the product is insignificant. Since customer requirements often drive an organization’s operational strategy, the level of demand flexibility has to be viewed in light of manufacturing capabilities. These capabilities must response to changes in product, mix, volume, and/or delivery. Once competitive advantage and flexibility have been determined, management must then take into account the organization’s ability to process, ease in processing, strategic risk inherent in not receiving their goods from a supplier (due to quantity or quality), and the divulging of proprietary information to suppliers before they make their final decision to outsource.
The role of supply chain management in developing the operational flexibilities needed to support agile manufacturing has been discussed by Narasimhan and Das (1999). Manufacturing agility is defined as the ability to produce a broad range of low-cost, high quality products with short lead times in varying lot sizes, built to customer specifications. The ability to vary production volumes economically in response to market demands, implement minor design changes for customization, reduce delivery lead times, and develop and introduce new products efficiently are needed manufacturing flexibilities. Volume, modification, and delivery flexibilities were studied using a survey distributed to the National Association of Purchasing Management members. Results found that supply chain management practices do affect manufacturing flexibilities. Highly dynamic markets require the ability to accommodate drastic volume changes without adversely affecting production costs. In this case, the firm needs to develop a supply base with strong responsiveness to order quantity and specification changes while avoiding the use of cross-functional purchasing teams which sometimes have communications issues and coordination problems.
Andy Tsay (1999) noted that in order to reconcile manufacturing/procurement time lags to the need for timely market response, supply chains often have to commit themselves to forecast quantities rather than realized demand, where the financial impact falls on the manufacturer (due to the costs of securing the raw materials and the installation of capacities). Due to decentralized/imperfect control, decisions are often made from only a local perspective or by over-forecasting. These problems can be overcome by using a Quantity Flexibility (QF) contract in which a customer commits to a minimum purchase and the manufacturer (or upstream party) guarantees a maximum deliverable (as a percentage deviation from the customer’s forecast). In this case, both parties absorb some of the supply chain’s inventory/stock-out cost burden. Although this does not guarantee efficiency, there are tradeoffs as the customer gets cost reductions (given his minimum purchase agreement) and the supplier gains sales that are more predictable.
Wickham Skinner (1969) made the statement that a company’s manufacturing function is seldom neutral; it is either a competitive advantage or a corporate milestone. Manufacturing affects corporate strategy and vice versa. Generally, strategy includes a plan for products and the marketing of those products to a particular set of customers. This marketing strategy places demands on the manufacturing arm of the company. Management tends to focus on production and efficiency rather than focusing on strategy that leads to specific tasks and systems designs. Wheelwright and Hayes (1985) supported this idea of understanding the company’s current position and the need for transformation to achieve competitive effectiveness. Outlining the stages of manufacturing effectiveness, they believe that manufacturing can contribute significantly to the competitive success of any business.
Stalk (1988) pointed out that factory costs are very sensitive to the variety of goods that a plant produces. With a 50% reduction in variety, productivity can increase 30%, costs can be reduced 17%, and the break-even point can be substantially reduced. He relayed that in a market competition with the Japanese, Sweden’s SKF attempted to avoid direct competition by increasing high-margin product offerings, but not simultaneously dropping any of its lower margin items. This complicated plant operations and increased production costs. This actually allowed the competition to work under an umbrella of costs (that as long as they did not exceed), allowed for product expansion and varied applications.
Whitney (1996) advocated a pruning of the company tree, evaluating customers, products, and services to determine which are strategic, significant, and profitable. He argues that business lose focus believing flawed ideas about fixed costs and incremental contributions, allowing managers to pursue non-strategic growth targets—remaining ignorant of the true profitability of their customers, products and services. Businesses do not “refocus” because they are either preoccupied with the present or past or they do not understand the future. Because they have no formal “pruning” procedure, businesses only know how to “plant.” He lays out a framework to prune the existing foliage and to help the business keep growing afterwards.
Preliminary Research Framework
It is from the Skinner (1969), Wheelwright and Hayes (1985), and Whitney (1996) articles that the framework of this research emerged. Skinner points out that “you can’t have it both ways”; there are some important tradeoffs decisions in manufacturing. Wheelwright and Hayes believe that four stages of manufacturing exist; a company progresses through these in order to achieve a competitive advantage and sustainability. Whitney says that it is imperative that a company knows which products are its drivers: which are strategic, significant, and profitable. Each of these articles seeks to define where a company sees itself and in what direction it needs to go in order to remain a going concern, indeed a profitable and growing concern. Moreover, of course, these decisions influence the company’s supply chain as decisions regarding customer offerings and supplier purchases are ultimately affected.
Hypothesis/Issues to be Addressed
The focus of this research is to elaborate on how a company perceives its manufacturing function and how then, product proliferation can clog the supply chain. Without a clear understanding of manufacturing consideration and roles, it is likely that product proliferation can abound as its costs and inefficiencies go unconsidered. If the conversion of raw materials into a finished good available for sale is taken for granted, or misunderstood, strategy regarding an external supply chain cannot be of considered focus either. An attempt then is made for a preliminary pruning of those unprofitable/insignificant products in light of company perceptions. It is expected that there would be a considered focus from the production areas (vs. the sales force or management group) to consolidate products in order to increase efficiencies in production.