The creative process of product development shapes the very texture of our lives
today, from what we eat and wear to our most sophisticated communications systems.
In most companies, product development focuses on creating a product line to
meet form, function, performance, and basic cost targets. Designers often work
closely with manufacturing and, in some cases, with suppliers who may offer
specialized knowledge of various components. Their communication with the supply
chain organization, however, comes only after product design is complete. That's
because designers typically view the supply chain as a delivery system.
But product design dictates much of the cost of the supply chain. In fact,
Hewlett Packard considers 80% of all supply chain costs as built right into
the product. This means that the product itself determines 80% of the cost
of delivering it, which leaves supply chain design to work out the remaining
20%. So the options are to tinker around the edges of total supply chain cost
or to integrate product design efforts with supply chain design efforts--and
work directly at the heart of total supply chain costs.
IKEA Puts It All Together
It's just this type of strategic product design and supply chain integration
that has made IKEA of Sweden the world's largest furniture retailer, with revenues
of more than $15 billion and 128 company-owned stores in 26 countries. A relative
newcomer to the North American market, IKEA is considered one of the world's
most successful multinational retailing operations. IKEA's ready-to-assemble
furniture reflects the company's integrated vision of supply chain and product
design.
It is no coincidence that the company is famous for both the ease with which
customers can carry home and assemble its furniture and the efficiency of its
logistics and distribution system. IKEA even operates its own railroad to deliver
product from Älmhult in Sweden to Duisberg, Germany, a distance of more
than 1000 km. In 2002, IKEA Rail moved 20 million cubic meters of merchandise,
and it is forecast to move 80 million in 2010. IKEA's furniture is designed
and manufactured to fit in flat, standardized packages that ship economically,
require less space, and are easy for consumers to take home.
Begin at the End: Redesign Your Packaging
IKEA forms project teams to design products that are aesthetically appealing,
easy to assemble, and economical in terms of materials, storage, and transport.
The company's strategy and operations revolve around the integration of product
design and supply chain.
Reaching this level of integration doesn't happen overnight, but when it works,
the results are impressive. The biggest challenge in designing products for
the supply chain is the cross-functional nature of the process, which requires
engineering, marketing, manufacturing, finance, and supply chain team members
to collaborate and communicate. But getting these people together can be daunting.
An excellent place to begin the process is with packaging. Packaging is usually
one of the last activities in product development and does not usually involve
the same level of personal investment--or ego--as, for example, product design.
The principal challenge in redesigning packaging from a supply chain perspective
is that the necessary knowledge and information reside in several different
organizations. Many companies not only outsource many of their logistics activities,
they also outsource package design activities to packaging suppliers who understand
the materials and how best to use them for both product protection and marketing.
The packaging providers sell products by weight and so tend to concentrate
on that aspect of package design--sometimes with conflicting motivations. After
all, a packaging company that sells, say, corrugated products has every incentive
to design packages that use more corrugated materials. The farther you ship
products, however, the more significant the volume of the packaging becomes
as the driver of total delivered cost. The cost of moving container loads of
products across the Pacific, for example, is typically based on volume rather
than weight.
Philips and Hewlett Packard Lose Weight
During a recent in-depth study of its packaging, Philips Consumer Electronics
developed several strategies from a volume-based rather than weight-based perspective.
According to Ab Stevels of the Philips Environmental Competence Centre and
adjunct professor in the Executive Master's in International Logistics (EMIL)
program at Georgia Institute of Technology, the company could realize an improvement
of 40% to 60% in both economical and environmental costs with the implementation
of packaging redesigns.
Philips began the process with a competitive analysis of packaging performance
based on weight, volume, and ecological indicators to help identify opportunities
and set realistic targets for reducing integrated packaging and logistics costs.
They also evaluated trends, including the increase in average transport distances
and the fact that more sales are taking place in large outlet chains, which
buy in bulk. They found they could reduce the distribution costs for TV sets,
for example, by 55% by instituting several volume-based strategies. The savings
come from increasing the number of sets transported per truck (17% cost savings),
increasing the number of sets per square meter of warehouse floor (15% cost
reduction), and so on. Almost all the savings were largely attributable to
a reduction in the ratio of package volume to product volume.
Hewlett-Packard found similar opportunities in packaging redesign. Last year,
its inkjet printer business improved the package-to-printer volume ratio by
45%, which nearly doubled the number of printers per pallet and reduced the
total logistics costs for some products by 50%.
The Time Is Now: Models for Change
These examples highlight the savings possible by integrating product design
and supply chain performance--and packaging is just the tip of the iceberg.
It's no surprise that the idea is gaining momentum. The Supply Chain Council,
one of the industry's leading professional organizations responsible for the
Supply Chain Operations Reference (SCOR) model, is now launching the Design
Chain Operations Reference (DCOR) model. Just as SCOR defines supply chain
processes, DCOR defines processes in the product design chain that will lead
to improved performance. Such a model will provide a common language for solutions
from vendors, consultants, and other partners. It will allow for industrywide
benchmarking and accelerate the focus on measurable process outcomes from both
business value and customer value perspectives.
DCOR is initially focused on developing open standards for the design process.
That's a first step toward integrating product development and supply chain
management. It's a promising sign that two organizations from opposite ends
of the spectrum--the Supply Chain Council and the Product Development and Management
Association--are coming together to develop DCOR. Finding common ground for
designers and supply chain professionals to communicate and collaborate will
lead to better delivery of better products while adding value that will reach
all the way to the consumer.