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Flexible Production and Supply Chain Systems – Generating Value through Effective Customisation

Vinzenz Schwegmann, Gernot Strube, Peter Willats, Jochen Linck, Arndt Boenigk

Author contacs:

Dr. Vinzenz Schwegmann

McKinsey & Company, Inc.

Kurfürstendamm185

10707 Berlin

Germany Tel: +49 – (0)30 – 88 45 2190 vinzenz_schwegmann@mckinsey.com

Dr. Gernot Strube

McKinsey & Company, Inc. Prinzregentenstrasse 22

80539 Munich

Germany Tel: +49 – (0)89 – 55 94 8340 gernot_strube@mckinsey.com

Peter Willats McKinsey & Company, Inc. No. 1 Jermyn Street London SW1Y 4UH United Kingdom Tel: +44 – (0)20 – 78 39 8040 peter_willats@mckinsey.com

Dr. Jochen Linck McKinsey & Company, Inc Am Sandtorkai 77

20457 Hamburg

Tel: ++49 - (0)40 3612 1322

jochen_linck@mckinsey.com

Arndt Boenigk

McKinsey & Company, Inc. Prinzregentenstrasse 22

80539 Munich

Germany Tel: +49 – (0)89 – 55 94 8814 arndt_boenigk@mckinsey.com

Abstract: In the changing world of customization and personalization, production and supply chain management is a strategic lever of utmost importance. Being able to fulfill specific customer needs without accepting tradeoffs in cost, quality and lead time is key to success.

In this paper, we propose five key levers to create a "make-to-customised order" production system. The levers are derived from client case studies of superior companies from the industrial goods sector who deliver highly customised products in the most effective and efficient way. Furthermore, the paper discusses a 5-step process towards implementing the proposed production system.

1.

Introduction and guiding principles of a production system suitable to mass customisation

Customising products may unlock substantial customer and shareholder value. However, the potential revenue increase generated by customised products may not be offset by increased costs (Piller, Ihl, 2002; Zipkin 2001). Thus, managing both revenues and costs are critical for succeeding in mass customisation markets as illustrated in Figure 1.

Lever 1: Lever 2: Manage revenues Manage costs • Understand customer needs • Production/Supply Chain
Lever 1:
Lever 2:
Manage revenues
Manage costs
• Understand customer
needs
• Production/Supply Chain
100
Costs
– Market-/Customer-
Segments
– [Global] Network (e.g.,
plants, suppliers)
Revenues**
– Willingness to pay
– Site layout
– Maximum customer
waiting time
– Technology (e.g.,
50
degree of automation)
• Design products that fit to
the need
– Planning, scheduling,
executional and control
processes
• Implement production and
supply chain fulfilling
customer demands in
quality, lead time, etc.
0
– Employee qualification,
mindsets & behaviours
• Product Design
• Develop and implement
superior marketing and
sales concept
• Purchasing
• Other processes
Figure 1: Two main levers to improve profitability in mass customisation

With the rise of "Mass Customisation and Personalisation" in both business-to- customer and business-to-business markets, specific challenges emerged for the value chain of manufacturing companies:

Increased variety of parts: Product variety and new product introductions are exploding. For example, the number of coffee variants offered in the US has been multiplied by 35 over the last twenty years and the number of vehicle models has nearly doubled since 1970 (Cox, 1999). Even with clear platform strategies in place to modularize products, reality shows that complexity of parts is still growing. For example, producers of special machines or customised commercial vehicles often deal with as many as 100.000 SKUs.

Shorter life cycles, volatile demand and change of orders: It is in the nature of customisation that reaction times and planning horizons are shrinking dramatically. Managing permanent innovation or seasonal volume changes of more than 30% per month is as much daily business as short-term changes in order specifications.

Highly complex order management processes: In the world of customisation it is not enough to coordinate production with logistics and other operating

processes. Rather, a seamless integration with sales, engineering, and product development is demanded.

Reduced affect of economies-of-scale: Manufacturers entering the market of customised products cannot rely on traditional economies of scale. With production volumes down to one they have find new ways of flexible production including superior leveling, changeover effectiveness or one- piece-flow material handling.

Without a fundamental change in production and supply chain systems the above challenges will lead to enormous extra costs, e.g. increased inventory, high proportion of non-value activities. And customers are not necessarily willing to pay higher prices for mass customised products (Federal Reserve Bank of Dallas, 1998; PTW, McKinsey 2003), nor do they accept tradeoffs in, e.g., lead times.

With the importance of superior production and supply chain management being undoubted, it is often not the consumer goods industry to learn from (Lampel, Mintzberg, 1996; Piller, 2003). Although public attention focuses mainly on mass- customisation start-ups from this sector, we recommend to take a closer look at long- life goods and B2B-industries as a role model how to design and implement production and supply chain systems that deal with the challenges of mass customisation and personalisation (see Figure 2).

There are best-practice examples that represent role-models for successful customisation - like Japanese Toyota Home, a Toyota subsidiary producing customised prefabricated houses, but also European and US-based manufacturers from, e.g., the High-Tech or commercial vehicle sector. Although located in the long-life or B2B-sector, their operating systems can serve as benchmarks also for traditional consumer goods industries.

B2C–markets of MC still with lots of question marks Long-life goods and B2B-industry may serve
B2C–markets of MC still with lots of
question marks
Long-life goods and B2B-industry
may serve as role model
• Customization is daily business
• Sustainable success not yet proven
!
?
? ? ?
!
! !
– Decade-long experience
– Lots of failures*
– No mature cases
? ? ?
?
• Size often small ("by-product of core
non-customized segments")
– Customisation goes up to
individual engineering (e.g.,
heavy trucks, printing machines,
special steel)
!
! !
!
? ? ?
?
• B2C businesses sometimes masking
issues on mfg. and supply chain
• Customising long-life goods and
B2B-companies take advantage
of mass and lean production
– low percentage of mfg./logistics
costs leads to underestimating its
impact on customer satisfaction**
– Volumes up to 100.000 allow
taking advantage of scale
– Only few customer goods comp.
known as benchmarks in mfg.
– Systematic adaption of lean
manufacturing secure flexible
and efficient processes without
tradeoffs
*
**
20-25% of all MC companies founded between 1994 and 2002 have already disappeard
e.g., via lead time and quality

Figure 2: Why learn from long-life goods and B2B businesses for mass customsation

The ideal state for a mass customisation production and supply chain system is a full make-to-order process independent of forecasts and the need to produce to stock. Obviously, in most industrials environment this approach may rarely be realised to its full extent (Figure 3). The critical point in the value chain ("pacemaker") that defines the transition point from make-to-order to make-to-stock or -forecast is when the customer's accepted lead-time exceeds the internal order throughput time (Holweg, Pil, 2001). In other words, make-to-order is possible if the manufacturer has a clear understanding of how long the customer is willing to wait for a customised product.

Forecast data Accepted customer wait time Parts Preassembly Parts Preassembly Customer Final Finishing
Forecast data
Accepted customer wait time
Parts
Preassembly
Parts
Preassembly
Customer
Final
Finishing Distribution
assembly
« Exotic » parts; long
replacement time
D-14 D-13D-12 D-11 D-10 D-9
3 days
2 days
3 days
Make-to-stock /
Make to-order
make-to-forecast
possible
Pacemaker

Figure 3:

Make-to- (customized) order as overall role model for production and supply chain management

Based on this general concept, five key levers have been identified in order to implement a "make-to-customised order" production system:

1. Superior segmentation of customer base

2. Synchronisation and standardisation of supply chain

3. Implementation of lean production system

4. Modularisation of production layout and application of new technologies

5. Implementation of flexible work organisation

The following paragraphs will describe each lever and provide industry examples.

2.

Key levers for make-to- (customised) order production system

2.1. Superior segementation of customer base

Figure 4 shows an example from the machinery industry. Make-to-order (MTO) has already been possible for all orders that exceeded the current lead-time of 6 weeks. Improvements of the existing production system could shorten the lead-time to 3 weeks, which allowed serving almost 50% of the customers with MTO. In addition, the company managed to apply at least a make-to-assembly-process for another 40% of its customer base. Reducing the lead-time to less than a week has neither been technically possible nor would it have been economically reasonable as only about 5% of the customers required such short delivery times.

Percent of

100%

customers

satisfied with

90%

delivery lead

time

80%

70%

60%

50%

40%

30%

20%

10%

0%

MTO partly possible (e.g., Make-to-final assembly) MTO after improvement possible MTO already possible Improvement
MTO partly possible (e.g.,
Make-to-final assembly)
MTO after improvement
possible
MTO already possible
Improvement
Total lead
time (weeks)
0
1
2
3
4
5
6
7
8
9
10
Future
Current
lead time
lead time

Figure 4: Make-to-order decisions based on customer segments - machinery example

2.2. Synchronisation and standardisation of supply chain

With make-to- (customised) order being the proposed targeted end state, compressing the overall order lead-time is essential. As examples from different assembly and process industries show, more than two thirds of the period between order entry and distribution is about order checking and scheduling (Holweg, Pil, 2001). A superior synchronising and standardising of the supply chain can cut lead times by half. This includes, among others, the separation of complex material and information flows, and the synchronisation of order management, logistics and production between an OEM and its critical suppliers.

Convincing examples from both commercial vehicle and machining industries show how a set of clear rules, together with modern communication technology, helps stabilising the supply chain processes from program planning, order checking, logistics

planning and production scheduling, so that the typical "bull-whip effects" resulting in high inventory, rework, and long lead times can be avoided.

2.3. Implementation of lean production system

One of the most convincing examples of make-to-order production is Toyota Home (Figure 5). Toyota Home has thoroughly streamlined the entire production process by adapting the Toyota production system ("Lean Production") to the manufacturing of pre-fabricated houses. With a total order lead time of six months, a plant throughput time of only one day, and only two defects per house they are able to manage an extremely high degree of customisation in a cost-effective, high quality manner.

Full customization Make-to-order production • 10-13 containers/ house 1 1 2 2 3 3 Welding
Full customization
Make-to-order production
• 10-13 containers/ house
1 1
2
2
3
3
Welding
Welding
Painting
Painting
Assembly
Assembly
• Free design, e.g., kitchen
• 3,577 units in 2002
Stable production plan
Fitting
Fitting
4
4
6
6
/ 7
/ 7
12
12
• Two weeks freeze points
Exterior wall
Exterior wall
out
out
Construction
Construction
• Central order sequencing,
decentral work levelling
Short lead times
5
5
• Overall: 6 months*
Wood work
Wood work
Takt: 5'45''
Takt: 5'45''
• Production: 2 shifts
Variation of
Variation of
work content/
work content/
High quality
order: 4' - 43'
order: 4' - 43'
2 defects per house

* Sign of contract to move-in

Figure 5: Toyota home (Toyota, 2003)

The example also shows that the basic essence of lean manufacturing - rigid reduction of non-value added work ("waste"), relentless pursuit of quality, customer-back production planning, and no tradeoffs between quality, delivery time and costs to mention a few - also serves as a role model for production systems in the mass- customisation world.

2.4. Modularisation of production layout and application of new technologies

Within their plants companies can reduce throughput time and increase flexibility with the help of modular production layout and the selective use of new production technologies. For example, when designing a new plant for customised busses, traditional "steel-and-iron-assembly belts" could have been avoided in favor of a semi- manual, but highly flexible (and cost-efficient) solution that nevertheless follows the strict customer takt principle as it is a guiding principle in lean production.

Most highly automated production systems lack flexibility due to the fact that their production systems are too interlinked. Industry examples such as the one discussed

above also show that, e.g., by relocating work contents into preassembly areas and by dedicated production lines throughput times can be cut significantly.

New technologies may also significantly reduce throughput time and enhance flexibility. In the tool industry new technologies offer the opportunity to increase the tool complexity and accuracy. One example from the tool industry showed that the use of

laser finishing technology could decrease the throughput time by more than 50% and improve process stability significantly. The tool was intended to make plastic parts with

a leather-structure surface as often found on steering wheels and dash-boards in cars.

Lead-time is a critical factor for the industry, as customers tend to make design changes late in the process without delaying the start of production. Thus, reducing the throughput time was an important lever to potentially gain market share.

The future of production layout and technology still has open questions. For example, it

is yet not fully decided whether a higher degree of customisation will lead to even more

dedicated production lines or whether highly-flexible single lines may be able to manage completely different models without losing efficiency. However, current examples by Toyota indicate that the profitable bandwidth of one-line-multi-modeling may increase significantly.

2.5. Implementation of flexible work organisation

The idea of flexible work organisation is usually connected to flexible work hours, indeed an important backbone. However, organisational efforts should not be limited to that. Successful companies differ from their competitors in having established other levers as well, for example:

Cross-functional work organisations: Especially in an environment of customised products it is crucial to foster cross-functional groups including production, supply chain management, sales, and product development. For example, seamless design-for-manufacture processes that secure an early integration of production issues into product development help reducing variants and production complexity.

Standardised work procedures:

but standardising work procedures help avoiding non-value added activities and reducing lead times, and they free up capacity for further improvement of production processes.

Working on mindsets and behaviors: Successful companies do not only focus on the "technical" aspects of production, but also care for changing mindsets and behavior. A superior training, clear performance management processes, and clear roles and responsibilities help to increase both capabilities and motivation of operators and management.

Overall, it is the smart adoption and combination of organisational levers that lead to significant improvements. Implementation Process

At first sight it sounds like a contradiction,

Assuming that a company has been able to prove a significant positive value of customisation, we propose a rigid 5-step implementation process towards a mass customisation production and supply chain system (Figure 6).

It starts with identifying the key issues around specific customer requirements and

production capabilities. Regarding the market side it is critical to understand the

required degree of customisation and the accepted lead-time by different customer segments as a signpost for all operational processes. With the help of proven standard assessment tools a company can then diagnose its key performance indicators, material and information flows, and root cause problems to estimate what it takes to transform production and supply chain towards a make-to-order model.

As a second step, a company should derive the ideal production and supply chain system. Since the transformation towards mass customisation is not a continuous improvement process but a step change for most operational process, it is recommended to design an ideal "greenfield" system as benchmark and role model. Although it will probably not be implemented as such, it has proven to be more successful to start with a "perfect production and supply chain picture" that is later been adapted to reality than to compromise early on by only improving the current situation.

To derive the target system out of the ideal model - i.e., making the "greenfield" a "brownfield" - means drafting the blueprint the future as a soon-to-be-reality. It includes all material and information flows, layout, supplier and order management, and many others. This is - together with the implementation phase - typically the most critical phase in transforming the production and supply chain system. It will be followed by a detailed implementation roadmap.

The full implementation of the drafted system may take anytime between a few months and several years, depending on the size of the supply chain system. This is the phase where the rubber meets the road and top management involvement is absolutely necessary. As in many other transformation exercises, it is recommended to do regional or product specific pilots first.

Develop Identify key Derive Derive future implementation Implement issues ideal flow (target) flow roadmap •
Develop
Identify key
Derive
Derive future
implementation
Implement
issues
ideal flow
(target) flow
roadmap
• Assess actual
• Identify ideal
material and
costs, quality,
to
information flow
throughput times
• Check ideal state
vs. lacks within
company (skills,
resources, …)
• Generate tactical
implementation
plan
• Use improvement
levers according
time plan /
– Stabilization
development path
– Flow
• Document actual
– Takt
key performance
– Pull
• Do best-of-best
• Design "brownfield"
indicators
benchmarking
material and
information flow
• Derive time plan /
development path
• Identify key
operational issues
and root cause
problems
• Design
"greenfield"
• Agree on
material and
aspirational, but
information flow
realistic targets

for KPIs

Figure 6: Five-step implementation process

3.

Summary

Mass Customisation and Personalisation will find its way into a sustainable, mature business model - if it is able to deal with its challenges in production and supply chain. Here, a close look at best-practices from the long-life goods and B2B-sectors help to develop a world-class production and supply chain system. Derived from the overall role model of make-to-customised order, five key levers show the way. They include a sound customer segmentation, the synchronisation and standardisation of supply chains, the rigid adoption of lean manufacturing principles, flexible layout and new production technology, and, last not least, the right operational organisation.

References

Cox, W. Michael (1999): Mass Customization, Federal Reserve Bank of Dallas Expand Your Insight, September 1, http://www.dallasfed.org/eyi/tech/9909custom.html

Federal Reserve Bank of Dallas (1998): The Right Stuff, 1998 Annual Report

Holweg, Matthias; Pil, Frits K. (2001): Start with the customer, MIT Sloan management review, Fall 2001

Holweg, Matthias; Pil, Frits, Successful Build-to-Order Strategies Start With the Customer, Sloan Management Review, Fall 2001, Volume 43, Number 1, pp. 74-83

Lampel, Joseph; Mintzberg, Henry: Customizing Customization, Sloan Management Review, fall 1996, Volume 38, Number 1, pp. 21-30

Piller, Frank Thomas (2003): Mass Customization, 3 rd Edition, Deutscher Universitäts- Verlag

Piller, Frank Thomas; Ihl, Christoph (08/2002): Mythos Mass Customization, Arbeitsbericht Nr. 32 des Lehrstuhls für Allgemeine und Industrielle Betriebswirtschaftslehre der TU München

PTW, McKinsey (2003), Endbericht Projekt Herausforderung Automobile Wertschöpfungskette, PTW TU-Darmstadt, McKinsey & Comp. Inc., 2003

Toyota (2003): official Website

Zipkin, Paul (2001): The Limits of Mass Customization, Sloan Management Review, Spring 2001, Volume 42, Number 3, pp. 81-87