Chapter 6

Supply Chain Integration

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Dell Desktop PC Supply Chain: Case Study Optimizing the Flexibility of the Desktop PC Supply Chain

2006 Massachusetts Institute of Technology. All rights reserved.

Agenda
L6 vs. L5 Value Comparison Root Causes Analysis Project Methodology & Next Steps Lessons Learned

Critical Components of a Desktop PC & Major Component Manufacturers

Chipset AMD Intel

Motherboard ASUS Foxconn Intel MiTAC Desktop PC Acer Apple Dell Fujitsu Siemens Gateway HP Lenovo/IBM

Printed Circuit Board BTI Electronics Compeq GCE Plato Electronic LAN Chip Broadcom Intel

Desktop Chassis ASUS Flextronics Foxconn 4 MiTAC Company list is not comprehensive. Lite-On Images used on this page belong to the respective companies.

L6 vs. L5
L6

MB
China Integration

5 Weeks
Supplier Logistics Center Dell Manufacturing

Customer

Chassis L5

3rd Party Integrator (managed by Equipment Manufacturers)

MB 1 Week
Dell

: L5 additional cost

Chassis 5 Weeks

Supplier Logistics Center

Manufacturing

Customer

Problem Statement
Since July 2004, Dell and its contract manufacturers (CMs) have had to adapt an increasing % of L5 manufacturing:
1. Empty chassis are shipped by ocean (L5) to Dell US & Europe first. Motherboards are then air-freighted to Dell US & Europe. 2. Dell incurs motherboard expedite/air-freight cost and 3rdparty integration cost. 3. CMs incur cost for idle labor dedicated for MB-chassis integration.

L6 vs. L5: Value Comparison

L6 Integrated offshore & outside a Dell facility Integrated motherboard-inside chassis shipped on water L5 Integrated inside a Dell facility Chassis shipped on water Motherboards shipped by air

+ Labor savings + MB air-freighting costs are eliminated + Reduced motherboard packaging costs Reduced supply chain flexibility More motherboards need to be re-worked in the event of an MB ECN

+ Increased supply chain flexibility Increased motherboard airfreighting costs 3rd-party integration cost in US Separate logistical costs for chassis and motherboards

L6 is more cost-effective than L5.

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L5 Driving Increasing Operational Cost

MB-Airfreighting & 3PI Integration Cost

Costs of air-freighting MBs and 3PI integration have been increasing.

Worldwide Procurement Expedite Council established

Q3FY05 Act

Q4FY05 Act

Q1FY06 Act EMF

Q2FY06 Act APJ MDS

Q3FY06 Act Total

Q4FY06 FC T

Americas

AMF includes 3PI integration cost. EMF and APJ dont as integration is done in Dell factory.

L6 vs. L5 Shipments: % Comparison

Dell Worldwide L5 vs. L6 Shipments Received
100% 11% 90% 80% 70% 60% 50% 89% 40% 30% 20% 10% 0% Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 93% 94% 7% 6% L5% L6% 4%

from a Typical Contract Manufacturer

5% 4% 14% 9% 6% 10% 15% 27%

L5 shipped % has been increasing since March 2005.

95% 96% 86% 91% 94% 96% 90% 85% 73%

Root Causes Analysis

Majority of expedites are caused by chipset supply shortage.
3.8% 8.3%

Chipset supplier decommit or supply issues

24.5%

Quality/Eng Issues Dell Forecast Accuracy

63.5%

NPI

AMF Expedite $ by Root Cause (January to June 05) 10

Project Scope

Is Desktops DAO (Dell America Operation) Constrained by chipset supply shortage

Is Not Laptops, servers, storages, peripherals Outside DAO To improve chipset supply

Focused on factory To improve Dells demandoperational improvement forecasting ability Motherboard-chassis integration Fans, power supply, SPAMS (Speakers, Printers, Advanced Port Replicators, Monitors, Scanners), or other components

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Project Methodology BPI project team established to evaluate the following 6 scenarios:
1. Keep as current: 3rd-Party Integrator (3PI) managed by Equipment Manufacturers 2. DAO Cellular Integration: Enable the Dell factory work cells to perform L5 L10 mfg work 3. Offline Integration: Keep the current L6 L10 mfg process unchanged; add a separate facility to handle MB-chassis integration work a. At SLC (Supplier Logistics Center) b. At a Dell-leased building 4. 3PI managed directly by Dell 5. L6 from Equipment Manufacturers Mexico plants
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Factors to Considered
For each of the 6 scenarios, BPI project team assessed the following attributes:
1. Process smoothness & sustainability 2. Cost per box 3. Product quality 4. Capital investment 5. Material handling/cost-accounting 6. Logistics

Project Goal: Identify the optimal scenario based on these input attributes.
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Complexity Analysis
Option 2 Option 2 Option 1 (original) (revised) 10 1 1 8 5 5 5 5 5 5 10 10 1 10 10 5 10 10 1 10 10 10 1 5 1 5 57 $10.07 1 1 1 5 1 60 $7.00 1 1 1 5 1 60 $7.90 Option 3A 1 5 5 7 5 5 5 1 1 10 5 5 55 $7.54 Option 3B 1 5 5 7 5 5 5 1 1 10 7 5 57 $7.70 Option 4 5 5 5 7 1 1 1 5 1 10 10 5 56 $7.61 Option 5 10 10 5 5 1 1 1 7 10 1 1 10 62 $7.00

Worldwide Procurement Regional Procurement Master Scheduler Production Control Operations DAO Quality Processing Engineering Supplier Quality Eng (Regional) Supplier Quality Eng (Global) Cost Accounting Inventory Control Logistics Total: Cost per Box

Legend: The Cost per Box data has been modified to respect Dells data confidentiality. Option 1: EM-managed 3PI Option 3A: Integration at SLC/hub Option 4: Dell-managed 3PI Option 2: Integration at DAO work cells Option 3B: Integration at Dell-leased bldg
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Option 5: Integrated chassis from Mexico

Option 2 vs. 4: Value Comparison

Option 2: Integration at DAO Work Cells + Lower capital expenditure investment + Less impact to business if chipset supply reverts to 100% L6 + Fit the Dell Direct model better Builder headcount is more difficult to scale Increased inbound & scheduling complexity More part numbers to manage Factory thru-put rate is downgraded Option 4: Dell-managed 3PI + Dell has direct control over the 3PI + More clear definition of quality issues ownership + Less manufacturing infrastructure change required, less impact on existing supply chain network + Little additional capital expenditure investment, little lead time change Only an incremental change from the original manufacturing design

Option 4 enables Dell to focus on the more valueadded portion of the MB-chassis integration.

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Lessons Learned
1. Supply chain coordination requires involvement from all partners in the chain (customer, supplier, sub-tier suppliers). 2. A well-planned strategy complements strong operational execution ability from supply chain partners. 3. Change management requires 3 key ingredients:
Top-down leadership Bottom-up engagement Cross-functional coordination

4. Qualitative judgment is just as important as or more critical than quantitative analysis. 5. Working in a bi-lingual/bi-regional setting has its perks and challenges.
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Discussion and Q&A

Questions and Thoughts

17

Back-up

18

Manufacturing Costs: L5 > L6.

Costs Common to L5 and L6
Costs of doing either L5 or L6: Raw material costs Chi a materials transportation costs China assembler's cost (Foxconn performing L1-->L5) Chassis ocean-shipping cost Chassis US transportation cost (trucks, rail) Chassis inventory hol ing cost at SLC US assembler's cost at Dell (from L7-->L10) Type Materials Logistics Labor Logistics Logistics Inventory Hol ing Labor

L6 Only Costs L5 Only Costs

Costs of doing L6, rather than L5: China assembler's cost (Foxconn performing L6) Type Labor

Co t of doing L , ath than L : Mot r oard ackagi g cost dit cost Mot r oard air-fr ight/ transportation cost Mother oard Mother oard inventor holding cost at Chassis & other oard transportation cost C to local/regional integrator and ack) (from Local/regional integration cost (Accurate, aberex) Motherboard rework cost at ell ell L5 mgmt cost (e.g. Expedite Council)

T p Mat rials ogistics ogistics Inventor

olding

ogistics Labor Labor/Qualit Labor

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Pros & Cons of the 6 Options

Description 1 Current Process, EMmanaged 3PI Pros Least impact for Ops & PE Dell does not own inventory during MBchassis integration at 3PI Cons Most expensive option WWP and Regional Procure. have more intense EM and 3PI mgmt/coordination Most difficult option for SQE 2 L6 at Dell work cells Less complex for WWP SQE mgmt is reduced L5 and L6 parts are ordered and tracked independently clear-cut Cost Accounting Easiest option for Logistics 3 A 3 B L6 at Dell SLC Less complex for WWP SQE mgmt is reduced L6 at Dellleased external location Dell-managed 3PI Less complex for WWP SQE mgmt is reduced Long ramp time of new builders Difficult for PC to run deviations of both L5 and L6 in one process simultaneously Work cells config need to change Ops and PE Greatest impact for

DAO Quality concern from an L5-L6 hybrid mfg model Most complex for Cost Accounting Extra PC and IC headcounts required Most complex for Cost Accounting and IC Extra PC and IC headcounts required Requires additional lease commitment Easiest option for Ops & PE DAO Quality expected to improve as Dell directly manages 3PI Lowest possible cost compared to China L6 Overall easiest option for Dell Most manageable for Master Sch./COC, PC, IC, Ops, and DAO Quality Most complex for Cost Accounting and IC difficult to manage Parts Cost at a Dell-managed 3PI

L6 from EM (China, Mexico, and/or elsewhere)

Requires Regional Procure. to manage L6 out of EM facilities from China, Mexico, and possibly other regions. Increased SQE mgmt

20 Multi-regional logistics coordination is a concern.

6.1 Introduction


Effective SCM implies:

 

Efficient integration of suppliers, manufacturers, warehouses, and stores. Coordinate activities across the supply chain

Improve performance: reduce cost, increase service level, reduce the bullwhip effect, better utilize resources, and effectively respond to changes in the market place. Challenges can be met by integrating:
 

the front-end, customer demand, to the back-end, production and manufacturing portion of the supply chain. Push, pull, pushpull strategy. Matching products and industries with supply chain strategies. Demand-driven supply chain strategies. The impact of the Internet on supply chain integration.

Various supply chain integration strategies:

   

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6.2 Push, Pull, Push-Pull Systems

Push and Pull traditional categories of manufacturing operations  More recent hybrid strategy of combining the two, Push-Pull systems


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Push-Based Supply Chains

  

Production and distribution decisions based on long-term forecasts. Manufacturer demand forecasts based on orders received from the retailers warehouses. Longer reaction time to changing marketplace:
  

Inability to meet changing demand patterns. Obsolescence of supply chain inventory as demand for certain products disappears. Variability of orders received much larger than the variability in customer demand due to the bullwhip effect.
Excessive inventories due to the need for large safety stocks  Larger and more variable production batches  Unacceptable service levels  Product obsolescence

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Bullwhip Effect in Push-Based Supply Chains

  

Leads to inefficient resource utilization Planning and managing are much more difficult. Not clear how a manufacturer should determine production capacity? Transportation capacity?
 

Peak demand? Average demand? Higher transportation costs Higher inventory levels and/or higher manufacturing costs more emergency production changeovers
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Results:
  

Pull-Based Supply Chains



Production and distribution demand driven

 

Coordinated with true customer demand rather than forecast demand firm does not hold any inventory and only responds to specific orders. Reduced lead times through the ability to better anticipate incoming orders from the retailers. Reduced inventory since inventory levels increase with lead times Less variability in the system Decreased inventory at the manufacturer due to the reduction in variability.
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Intuitively attractive:
   

Implementation of Pull-Based Systems



Often difficult to implement

 

when lead times are long



impractical to react to demand information.

more difficult to take advantage of economies of scale

Advantages and disadvantages of push and pull supply chains:

 

new supply chain strategy that takes the best of both. Pushpull supply chain strategy

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Push-Pull Strategy


Some stages of the supply chain operated in a push-based manner



typically the initial stages

Remaining stages employ a pull-based strategy.  Interface between the push-based stages and the pull-based stages is the push pull boundary.


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Supply Chain Timeline

FIGURE 6-8: Push-pull supply chains

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General Strategy
Make a part of the product to stock generic product  The point where differentiation has to be introduced is the push-pull boundary  Based on extent of customization, the position of the boundary on the timeline is decided


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Identifying the Appropriate Supply Chain Strategy

FIGURE 6-9: Push-pull supply chains

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Impact of Demand Uncertainty and Economies of Scale



Demand Uncertainty:
 

Higher demand uncertainty leads to a preference for pull strategy. Lower demand uncertainty leads to an interest in managing the supply chain based on a long-term forecast: push strategy. The higher the importance of economies of scale in reducing cost
 

Economies of scale:


The greater the value of aggregating demand The greater the importance of managing the supply chain based on long-term forecast, a push-based strategy. Aggregation does not reduce cost A pull-based strategy makes more sense.

Economies of scale are not important

 
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Implementing a PushPull Strategy



Achieving the appropriate design depends on many factors:

product complexity  manufacturing lead times  suppliermanufacturer relationships.


Many ways to implement a pushpull strategy



location of the pushpull boundary.

 Dell

locates the boundary at the assembly point  Furniture manufacturers locate the boundary at the production point
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Impact of the Push-Pull Strategy



Push portion
Low uncertainty  Service level not an issue  Focus on cost minimization.  Long lead times  Complex supply chain structures  Cost minimization achieved by:

 better

utilizing resources such as production and distribution capacities  minimizing inventory, transportation, and production costs.


Supply Chain Planning processes are applied.

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Impact of the Push-Pull Strategy



Pull portion
High uncertainty  Simple supply chain structure  Short cycle time  Focus on service level.  Achieved by deploying a flexible and responsive supply chain  Order-fulfillment processes are applied


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Characteristics of the Push and Pull Portions of the Supply Chain

Portion Objective Push Minimize cost Pull Maximize service level

Complexity

High

Low

Focus Lead time Processes

Resource allocation Long Supply chain planning

Responsiveness Short Order fulfillment

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Interactions of the Two Portions

  

Only at the push-pull boundary Typically through buffer inventory Different role for the inventory in each portion
 

In the push portion, buffer inventory is part of the output generated by the tactical planning process In the pull system, it represents the input to the fulfillment process. Forecast based on historical data obtained from the pull portion Used to drive the supply chain planning process and determine the buffer inventory.

Interface is forecast demand

 

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6.3 The Impact of Lead Time

Longer the lead time, more important it is to implement a push based strategy.  Typically difficult to implement a pull strategy when lead times are so long that it is hard to react to demand information.


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Impact of Lead Time

FIGURE 6-10: Matching supply chain strategies with products: the impact of lead time and demand uncertainty
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Impact of Lead Time



Box A
 

Items with short lead time and high demand uncertainty Pull strategy should be applied as much as possible. Items with long supply lead time and low demand uncertainty. Appropriate supply chain strategy is push. items with short supply lead time and highly predictable demand. Continuous replenishment strategy
  

Box B
 

Box C
 

Suppliers receive POS data They use these data to prepare shipments at previously agreedupon intervals A pull strategy at the production and distribution stages and push at the retail outlets.

Box D


Items with long lead times are long and unpredictable demand
 

Inventory is critical in this type of environment Requires positioning inventory strategically in the supply chain
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6.4 Demand-Driven Strategies



Requires integrating demand information into the supply chain planning process


Demand forecast:
 Use

historical demand data to develop long-term estimates of expected demand determines the impact of various marketing plans such as promotion, pricing discounts, rebates, new product introduction, and product withdrawal on demand forecasts.

Demand shaping:
 Firm

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Forecast Errors Are Always Present!

 

High demand forecast error has a detrimental impact on supply chain performance Approaches to improve accuracy


Aggregate forecasts are more accurate,

 

Select the pushpull boundary so that demand is aggregated over one or more of the following dimensions: Across products/geography/time

  

Use market analysis and demographic and economic trends to improve forecast accuracy (see Chapter 2 for details). Determine the optimal assortment of products by store


Reduce the number of SKUs competing in the same market.

Incorporate collaborative planning and forecasting processes with your customers

Demand forecast by SKU by location has to be supported by the supply chain

 

Interaction of demand planning and tactical supply planning Iterative process

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6.5 The Impact of the Internet on Supply Chain Strategies

Expectation that increasing use of the internet would solve a lot of the business problems  Reality was very different  Many of the problems in the internetbased businesses were related to logistics strategies


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Successes and Failures



Notable Failures
Furniture.com  Peapod.com


Notable Successes


Amazon.com Cisco
inventory write-off in 2001  Has been successful in leveraging the internet subsequently
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Hybrid of successes and failures


 $2.2B

E-Business
E-business: a collection of business models and processes motivated by Internet technology and focusing on improvement of extended enterprise performance.  E-commerce: ability to perform major commerce transactions electronically.


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Key Observations
  

e-commerce is only part of e-business. Internet technology is the force behind the business change. Focus on the extended enterprise


Business-to-consumer (B2C)
direct to customer,  Retail activities over the Internet, and includes products, insurance, banking, and so forth.


Business-to-business (B2B)
Conducted over the Internet predominantly between businesses.  Includes:

  

electronic sourcing (the so-called eSourcing) reverse auctions collaboration with suppliers and vendors to achieve common goals.
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Grocery Industry
 

Typical supermarket employs a push-based strategy Peapod was built on pure pull strategy with no inventory and no facilities.
  

Significant service problems with high stockout rates Changed to a pushpull strategy by setting up a number of warehouses Warehouse covers a large geographical area


Aggregated demand

Other challenges:
  

Reducing transportation costs Short response time Low customer density high economies of scale in transportation cost push-based strategy is more appropriate.
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Products have low demand uncertainty

 

Book Industry


Initial model of Amazon.com a pure pull system with no warehouses and no stock.


Ingram Book Group supplied most of Amazons customer demand. Amazon.coms service level was affected by Ingram Books distribution capacity Using Ingram Book in the first few years allowed Amazon.com to avoid inventory costs but significantly reduced profit margins.


As volume and demand increased:

 

As demand increased distributor no longer required.

Current Amazon.com:
  

Several warehouses around the country where most of the titles are stocked. Inventory at the warehouses is managed using a push strategy Demand satisfied based on individual requests, a pull strategy.

Slow moving low volume books and CDs are not stocked at Amazon distribution centers


Amazon orders those when demand arrives.

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General Retail Industry



Late to respond to competition from virtual stores and to recognize the opportunities provided by the Internet. Brick-and-mortar companies are adding an Internet shopping component to their offering.


Already have the distribution and warehousing infrastructure High-volume, fast-moving products stocked in stores


Click-and-mortar firms
 

Push strategy

Low-volume, slow-moving products are stocked centrally



Push-Pull strategy

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Traditional Fulfillment Versus eFulfillment

Traditional fulfillment E-fulfillment Supply chain strategy Shipment Reverse logistics Delivery destination Lead times Push Bulk Small part of the business Small number of stores Relatively long Pushpull Parcel Important and highly complex Large number of geographically dispersed customers Relatively short

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Summary


 

Implementation of push-pull strategies and demand-driven strategies have helped many companies to improve performance, reduce costs, increase service levels. Collapse of many Internet companies shows that e-business has great challenges. Companies need to:
  

Identify the appropriate supply chain strategy for individual products. Case for no physical infrastructure or inventory is tenuous Pushpull strategy
 

advocates holding inventory although it pushes the inventory upstream in the supply chain.
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