Z I c) Lu

Society of Manufacturing

Engineers

1992 % ALL RIGHTS RESERVED

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Design for Logistics-The New Frontier

author HAL MATHER President Hal Mather, Incorporated Atlanta, Georgia

abstract A quality, high-performance product designed for ease of manufacture using DFMlDFA concepts is worthless if it can’t be delivered when the customer needs it. The design of a product significantly influences a company’s ability to deliver on-time. This aspect of design is described as: design for logistics (DFL:). Key elements of this concept are reduced product variability, multi-application products so product variety is minimized, and a time-to-market design strategy using focused resources. A list of performance measures that rate a design for its logistics efficiency completes the picture.

conference Time-Based Competition October 28-29, 1991 Livonia, Michigan

index terms Design Standardization Management Measurement Optimization Product Design

Society of Manufacturing Engineers One SME Drive l P.O. Box 930 l Dearborn, Michigan 48121

Phone (313) 271-l 500

SA4E TECHNICAL PAPERS

This Technical Paper may not be reproduced in whole or in part in any form without the express written permission of the Society of Manufacturing Engi- neers. By publishing this paper, SME neither endorses any product, service or information discussed herein. nor offers any technical advice. SME specifically disclaims any warranty of reliability or safety of any of the information contained herein.

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INTRODUCTION

Design for Assembly (DFA) and Design for Manufacture (DFM) concepts are well-known today. These concepts are excellent additions to our knowledge base of how to design successful products. But they are not sufficient.

Ease of production is a worthwhile objective only if the product is designed to quickly serve the customer. A product that is inflex- ible to the dynamics of the marketplace is worthless, no matter how easy it is to produce.

I call this aspect of design, Design for Logistics (DFL). In- cluded in this concept is the need to have minimum inventories at the same time as being flexible, to maximize the return on assets (ROA) of a design.

How do you get designers to consider all these different pressures that impact a design as well as the traditional ones of functionality cost and aesthetics? Through concurrent engineering, the teaming

'2. of people from different business functions working together to bring all aspects of the business into the design arena. Huge benefits can result, including faster product introduction, fewer engineering

ir changes after the product is introduced, and a higher ROA result.

DESIGN MUSHROOMS

One of the traditional objectives of designers is to design

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products with a minimum product standard cost. This gives the maximum margin to the selling activity that hopefully results in above average profits. But the lowest standard cost products will rarely, I might even say never, provide maximum profits. They are even less likely to provide maximum ROA. And it's ROA that we need, not profits alone. The assets needed to support the product must be included when con- sidering design alternatives.

Spent Versus Committed Costs Budgetary control in manufacturing companies is directed at the major expenditures, the spent costs. But where design is concerned, this is too late. The horse has already left the barn. Major cost ex- penditures are committed during the design phase and cannot be reduced later. This is shown in Figure 1.

PRODUCT LIFE CYCLE COSTS

CONCEPT

80

IFE 60 YCLE OSTS I,) 40

20

0

PROOUCTION ONGOING

Figure 1. Spent versus committed costs.

The left axis is the total costs incurred by having a product in your portfolio of products. This is the total costs over.the full life cycle of the product, including design, product introduction, manufacturing, after sales service after the product is obsoleted and all the related selling and administrative costs this product incurred.

The horizontal axis is four phases during a product's life cycle. Conceptual design occurs first, what might truly be called development. Design means the conversion of the conceptual design into production specifications. This could include the manufacture of preproduction prototypes. Production is self explanatory. On-going is spare parts or other support after the product is obsolete.

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The curve labelled "Spent" shows which percentage of the life cycle costs are incurred in each of these four phases. This curve is probably true for short life cycle, high technology products. Adjust the numbers for your products.

'r' The curve labelled "Committed" shows which percent of the life

cycle costs a company is put on the hook for in each of these four product phases. As you can see, conceptual product layouts and their conversion to design specifications commits most of the costs this product will incur.

These costs are what I call the recorded costs, the costs picked up by an accounting system. But there are also non-recorded costs, such as a product that is designed in such a way that you can't give good customer service. That is a cost although it's not recorded by accounting. How about a design that requires huge inventories to give any degree of customer service? That is also a cost not re- corded by accounting (most accounting systems do not charge products for the costs of having inventory). And a designhat guarantees you cannot flex to a dynamic marketplace is also a cost not recorded by accounting.

How do these non-recorded costs look if plotted on Figure l? Exactly the same as the recorded costs. Non-recorded costs are de- signed in, not caused when incurred.

A Consumer Electronics Case Study A company in Europe designed a new line of c,onsumer electronic

products. The product outperformed the competition by a.factor of 2 to 1. The selling price was the same as the competition so the price/performance ratio was also 2 to 1. The aesthetics were so good, this product won the Paris electronics show the year it was introduced as the best design at the show. The chief designer received a medal for his outstanding work. The company received lots of free adver- tising in all the consumer electronics magazines, as editors wrote articles praising the product's outstanding value!.

But the product was logistically unfriendly. It was impossible to serve the customer with this design, even though inventories were huge. This company did more to sell their competitors' products than all their competitors' marketing activities put together. They designed a product with exceptional performance but they couldn't keep the ones customers were buying in stock. So customers bought the closest alternatives. What should have been a roaring success was a loser. Simply because of ignoring logistics.

What was wronq? There were two major problems. The stacked lead time of the product from the start of procurement of the longest lead time items to purchase of the finished product by a customer averaged 16 months. And the variability necessary in the end product

h was introduced early in this 16 month lead time. So forecasts of which end product a customer might buy had to be made over a year in advance. But as we all know, forecasts are always wrong. Customers

:*+ didn't buy what was forecasted but what they wanted. The 16 month stacked lead time prohibited fast response to correct the faulty fore- casts.

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An analysis of the design showed that the logistically unfriendly nature of the product had been caused by a focus on reducing the product standard costs. A minimum increase in standard costs would have reduced the stacked lead time to just over 6 months and allowed the end pro- duct variety to be added just before product distribution. With these parameters the product would have been a winner and provided excellent ROA. Thepressure for lowest product standard costs guaran- teed a loser, with negative ROA.

Develop a design architecture. Don't think the consumer elec- tronics story is an isolated incident. There are few designs of products, ranging from the simplest to the most complex, that I have analyzed that could not be improved, from a logistics perspective, with little out-of-pocket expense and no deterioration of product per- formance. And the .logistics performance improvement would make these products significantly more successful, giving a much higher realized ROA.

Designers need help in considering the logistics issues in their designs. My suggestion is to develop a design architecture statement, unique to your company and its products, that channels consideration of logistics into the design alternatives decision process.

Items to be included are:

1. Design for short stacked lead times. Provide the flexi- bility to respond quickly to the changing marketplace. Don't force reliance on long range "accurate" forecasts.

2 : Add variability at the last possible moment. I call this a mushroom product - standard materials and processes for the early stages of procurement and manufacture (the stem of the mush- room) with the variety occurring in the latest steps, (the cap of the mushroom).

3. Select standard materials and components from a preferred list, especially those with long lead times. If unique items are needed for desired functionality or to differentiate your product from the competition, these unique items must have short lead times.

These items should be part of any design review process. ,Reject long stacked lead times, reject variety too early and reject long lead time unique items. They will doom the design, no matter how excellent its performance. So you might as well reject it now to save the expense and lost opportunity when the customer rejects it.

DESIGN MULTI-APPLICATION PRODUCTS

End product variety has a positive and negative component. The positive is incremental sales and a broadening of the line to be a full line producer. The negative is additional expenses, usually buried in the overhead category, to manage the additional variety, plus the incremental assets needed to support the sales. Additional product variety is beneficial when the incremental sales cause an in- crease in total ROA. This total increase may not come from just this product's sales but from its synergy with other products in the line.

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Additional variety is detrimental when its incremental costs and assets cause a deterioration in ROA.

i This suggests that there is an optimum product variety. I have used ROA as the criteria to set the optimum and this must be the ulti- mate objective. However, temporary objectives could be different,

u such as maximum market share, maximum return on sales or some other criteria. These different objectives suggest different optimum pro- duct portfolios but there still is an optimum.

How many companies are sure they are at the optimum to meet their business objectives? In my opinion, very few. Emotion, opinion and contrary goals in different business functions cause conflict any time the product line comes under review. A logical approach to re- solving this very troublesome management variable, the product line variety, is impossible under these conditions.

Other types of variety have similar effects to end product variety, except they are more likely to be negative to your financial health. Raw material and component variety that is not necessary to provide end product variety will cost you in more management costs and higher assets with little or no potential offset to these costs. Vendor, customer, process, and order size variety are other examples of variety that should be managed well but rarely are.

Look at these numbers If you do a cumulative Pareto (ABC, 80/20 rule) sort on the sales

volume from your product line you will usually find the 80/20 rule applies, 80% of your annual sales come from 20% of the product line. If you now go to the 50% variety point, you'll find 95% of your annual sales. That means that the second 50% of your product line only generates 5% of your sales.

If you now take the support costs of your business (annual sales minus profits minus unburdened direct labor and unburdened direct mat- erial sent to the customer and retained as value added - you can't take out scrap, rework, obsolete and slow moving inventory, returned . goods, etc.) you will find at least 50% of your support costs are needed for this 5% of sales. If you now take the assets used by the business or created to support these last 5% of sales you'll find about 40% of your total assets are used to get these last 5% of sales. It's going to be pretty tough to get a direct ROA contribution from this last 50% of product variety.

Professor H. Thomas Johnson, co-author of "Relevance Lost" states this illusory view held by many managers, "that 85 percent of the pro- ducts make 110 percent of the profit and the other products are losers. The reality is that 25 percent of the products make 200 percent of the profit. The other 75 percent are losing money."

. If we bring assets into the picture and measure what percent of products actually generate positive ROA it is probably around 15%. The other 85% are decreasing the ROA the first 15% provided.

'i Of course, you'll say that you have to have these slow moving,

special items to get the sales of the fast movers. And that could

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be true. But I demand that you prove that. I want to see the cus- tomer order history that shows a direct linkage between selling high volume products with the presence of specials or slow moving items. In 99% of industry this linkage just isn't there. The customers who buy the high volume items are a different class of customer than those that buy the slow movers.

Now you'll say that some of the slow movers have just been intro- duced and you have high hopes they'll grow into high volume, profitable products. That's excellent, we must keep refreshing the line. But what about the new products we introduced several years ago that we thought would be winners but are still languishing as slow movers? And what about yesterday's winners that are now in the decay phase of their product life cycle but no-one has yet killed them? These products cost you every day they are in the line unless they have synergy with other, profitable products.

Design for win/win One way to ensure variety doesn't get out of hand is to design

multi-application products. I call this "variety without variety", in other words, application variety without product variety. This way the benefits of the application variety flow into the business without the negatives of an extensive product line.

In many cases this will result in an increase in product standard costs. But as 'noted earlier, designing for the lowest PSC is not the objective, designing to maximize ROA is. The lowest PSC and maxi- mum ROA are in direct conflict.

A good example of this thinking is built-in dishwashers manufac- tured by General Electric. A short time ago, the,se were painted at the factory the variety of offered colors, such as white, black, tan, bronze, etc. Today the dishwashers have beenredesignedto accept a front panel. In the box with the dishwasher is a selection' of panels painted different colors. After the dishwasher is installed, the selected colored panel is inserted. .

This design obviously increased the product standard cost over painting at the factory. But now there is only one end product in- stead of four or more. Inventories are reduced at the same time as service to the customer is increased. And the support costs for one product versus four or more have reduced. Hence the product is designed now to increase ROA, the correct objective to start with.

DESIGN FOR QUICK-TO-MARKET

Many companies live or die on their ability to beat the compe- tition with new products introduced into the marketplace. This comment applies mainly to high tech companies, but being quick-to-market would benefit many companies, high tech or low. This suggests that companies should have a well thought out product introduction process that is designed to speed a product from concept to marketplace. But that is rarely true. The normal way new products are introduced is, "along with your regular duties, would you also help to introduce this new product". It's not surprising, then, that new product introductions take a back seat to existing products.

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How should new products be introduced? With 3 key elements - focus, organization and project management.

Focus "Focus on everything and you focus on nothing" is a popular

saying. But we fail to focus time and time again, wasting energy I and resources needlessly. It's time to understand focus and apply

it.

The best way I know to get you thinking is to pose a riddle. I have 6 ships coming into dock to be unloaded. They are all arriving at the same time on the same day. That's called the 'law of random arrivals!

I have 6 empty docks to tie the ships up to. I have 6 cranes to unload the ships. If I use 1 crane to unload 1 ship it will take 6 days to unload it. I can use more than one crane per ship but I only have 6 cranes. If I use more cranes per ship the time to unload that ship is reduced proportionately. For example, 2 cranes take 3 days to unload a ship. I can use all 6 cranes on one ship if I want, the time to unload it reduced to one day.

How should I deploy my cranes to,minimize the average time the ships are in dock? While they are in dock they cost me harbor fees, when at sea they earn me money.

If you take the two extremes of 1 crane per ship or 6 cranes per ship you will find the time to unload the 6 ships with one crane per ship is 6 days, with 6 cranes on one ship the average is .3% days. The power of focusing is obvious. The military have told us this for years, concentrate your firepower on a limited objective, solidify it, then move onto the next. Never scatter your firepower over mul- tiple objectives.

I have 6 new products I would like to introduce quickly. I have 6 development engineers I could assign to these projects. How should I assign my engineers to get the average time to market the lowest and the highest priority product there fastest? Answer, focus as many development engineers on one project as makes sense. I realize that cranes and people are different, so perhaps 6 engineers on one project could betoomany. But one engineer per project would be worse. And in most cases we assign 6 projects per engineer, diffusing his or her attention even more.

Focusing requires you to prioritize your projects first. Once this is done, assign as many resources to the number one project as is logical, then move onto number two and so on. You'll be amazed at the time contraction that results.

Orqanization i As mentioned earlier, new product introductions are too often

treated as part time intrusions into a person's regular activities. It's no surprise, then, that new product introductions rarely go

"., smoothly. It's even rarer that they go quickly. Most new product introductions are usually done serially. Activities are performed in one department and then "thrown over the wall" to the next. This‘ is diagrammed in Figure 2.

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“OVER THE WALL” DESIGN

l Serial Process l Many Eng’g Changes l Short Design & Dev. Time l Long Total Time l Business Unfriendly Products l Low ROA Results

Figure 2. Over the wall design.

The results are as spelled out on the bottom of the figure. There are only two ways to reverse these negative elements. One, hire designers who are knowledgeable about all aspects of business so they can consider them when designing new products. This is possible, but designers with these skills are in very short supply. Second, form a team of people with members from each business function who together design a product. Each team member brings to the table his specialty. In other words, never let designers design products, they'll kill you. Make them members of design teams. Now task the team to design products that are successful from all perspectives.

Project management A new product introduction is a project. Supporting existing

products is a process. The skills, systems and techniques needed to manage projects are quite different to those needed to manage processes.

This means that new product introductions need excellent project management and managers. The key elements of project management are to lay out the actions needed, assign resources, set milestones, con- stantly review progress, and do whatever is necessary to stay on schedule.

The project manager could be any member of the design team. His or her skills are those needed to get the team working together

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to successfully meet the new product introduction date. Delay must be unacceptable unless the project is in jeopardy if forced forward.

MEASURE DFL SUCCESS

Designreviews are used by many companies to check whether a new product meets its objectives or is considered acceptable to go to market. It's critical that this design review process also checks if the product is logistically friendly.

Questions to be asked are:

a. Is the product's stacked lead time short enough so the pro- duct can be flexible to the marketplace dynamics?

b. Are the early stages of production standardized, in both materials and processes, ie, a mushroom design?

C. Are the varieties of end items, components, and processes reduced as low as possible?

d. Is the product designed for low inventories and high customer service simultaneously?

e. Has design for lowest PSC given way to design for maximum ROA?

SUMMARY

Products are successful when they delight the customer. This means they perform their function well, are priced relative to the function they perform, and are available when the customer needs them.

The last phase of requirements, available when needed, is rarely included in design discussions. This design for logistics (DFL) requirement must be included in all new product introductions.

The battle for markets in the 1990's will be waged on the customer front. Those c:ompanies that succeed in profitably treating customers like royalty will be winners. Those that don't will fail.

Designing products for superior logistics must become an urgent business priority. Do it now and be a winner. Wait too long and be just one more business casualty.

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Mr. Mather is President of HAL MATHER, INC., ATLANTA, GA., an International Management Consulting and Education Company. Since 1973 he has been helping all types of industrial concerns to become more competitive and improve their business results. Recent assign- ments have taken him throughout NORTH AMERICA, EUROPE, the FAR EAST, AUSTRALASIA, SOUTH AFRICA, MEXICO and BRAZIL.

Mr. Mather helps companies two ways, the first of which is per- sonal consulting. He has worked with both large and small companies and has stimulated many successful projects with enormous payback.

The second way he helps companies is as a dynamic lecturer and educator. He conducts private courses for companies, tailored specif- ically to their products, processes, and problems. His expertise encompasses MRP II, JIT, CIM and he is a leading expert in the factory of the future. His educational style motivates the key managers in a business to make the quantum changes necessary to make a company a "world class competitor".

Mr. Mather is a prolific author. His many articles have appeared in a number of magazines, among them the HARVARD BUSINESS REVIEW and CHIEF EXECUTIVE, and he has been quoted in FORTUNE, INC., and INDUSTRY WEEK. He'won the Romeyn Everdell award in 1987 for the best article published in the Production and Inventory Management Journal. His two books "BILLS OF MATERIALS", and "HOW TO REALLY MANAGE INVENTORIES", are classics in the field. His new book, "COMPETITIVE MANUFACTURING", is.receiving rave reviews by many industrial leaders.

He has been certified at the Fellow level by the AMERICAN PRODUCTION AND INVENTORY CONTROL SOCIETY, is a Fellow of the INSTI- TUTION OF MECHANICAL ENGINEERS (U.K.), a Senior Member of the COMPUTER AND AUTOMATED SYSTEMS ASSOCIATION of the SOCIETY OF MANUFACTURING ENGINEERS, and is a member of both- the INSTITUTE OF INDUSTRIAL ENGINEERS and the ASSOCIATION FOR MANUFACTURING EXCELLENCE. He is listed in WHO's WHO IN THE SOUTH and WHO's WHO IN FINANCE AND INDUSTRY.