Koren Y. The Global Manufacturing Revolution: Product-Process-Business Integration and Reconfigurable Systems
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The market share with these four (4) sizes is shown in Figure 5.11. The market
share is now 275 of a potential of 350, namely 79%.
If an additional size, 31, is added, the distribution is shown in Figure 5.12. The
market is now 300, or 86%. It is not economical to add the size 31 just to capture
additional 7% of the market, since the incremental additional handling cost is larger.
The calculation that proves this point is shown below:
Assuming the same cost model as before, y ¼ 30 þ 30v, one may calculate
the expansion of the market share for this example. The results are shown in Table 5.3.
The results of Table 5.3 are drawn in Figure 5.13. From the table and Figure 5.13,
one can see that the max imum profit is achieved at v ¼ 4, namely when all the
even sizes (30, 32, 34, and 36) are stored, and after that the profit starts to go down.
This result verifies what the stores are doing in practice—carrying only the even sizes
of men’s pants.
The differential equation in this case is
Dm
Dv
ffi 0:35ð350mÞð5:4Þ
This means that a ¼ 0.35 whereas in the first part of the example, when sizes were
introduced by a different strategy, the coefficient was a ¼ 0.3. We see that larger a is
reaching the maximum profit with a smaller number of variations.
Figure 5.11 The captured market share m% as a function of the product size.
Figure 5.12 The captured market share for five sizes.
ECONOMICS OF PRODUCT VARIATION 141
TABLE 5.3 The Captured Market Share m% and the Profit as a Function of v
V Size m Dmm% zyProfit
1 32 100 100 28.6 100 60 40
2 36 190 90 52.8 190 90 100
3 34 240 50 68.6 240 120 120
4 30 275 35 78.6 275 150 125
5 31 300 25 85.7 300 180 120
6 33 325 25 92.9 325 210 115
7 35 350 25 100 350 240 110
In bold: four variations (v ¼ 4) yield the maximum profit (125).
Figure 5.13 The captured market share as a function of the number of variations.
We see by this example that the company profit is affected by the order in which the
product variety is introduced to the market.
“I have never thought of the economies of product variations. However, this
explains why I always had such a difficult time finding size 33 jeans (before I
gained weight to force me to buy 34!)” BJ Baker (a student).
5.5 MATHEMATICAL ANALYSIS OF MASS CUSTOMIZATION
In this section, we offer a simple mathematical analysis of the relationships between
cost and the number of product variations that are needed to expand a company’s sales.
5.5.1 Cost of Complexity Associated with Variety
It is true that increased variety with mass customization methods expands markets
and sales. Nevertheless, mass customization, and especially product personalization,
is adding complexity to the firm, and handling complexity costs money. Product and
142 ANALYSIS OF MASS CUSTOMIZATION
process complexity also adds cost due to management of the portfolio of products over
their entire life cycle. Specifically, the added cost and confusion arise from the effort
required and potential errors arising out of the need to switch from one product variant
or option to another, during
.
Product development
.
Product manufacturing
.
Logistics and product distribution
.
After-sales service and warranty support
.
Disposal of the products
To be more specific, product variety increases the cost because of the following
reasons:
1. Increased variety increases the produc t development cost because the product
has to be designed differently, for example, with a modular architecture.
2. Increased variety increases the manufacturing cost because
.
Cost increases due to small-batch operation.
.
Downtime for conversion between products may be needed.
.
People who are doing the final assembl y make more mistakes when the
number of variations or op tions is larger.
.
Machinery cannot be the inexpensive dedicated type, and flexible-reconfi-
gurable equipment is needed.
3. Increased variety increases the marketing, logistics, and product distribution
cost. More manual s are needed. Larger display spaces are needed. More effort
and coordination is needed to send the right product to the right customer.
4. Service given to more product versions requires workers with more skill, which
also increases the cost.
5. Disassembly for disposal of the products at the end of their lifetime may be
more complex when more product versions are produced.
5.5.2 Variety-based F eedback Model
Figure 5.14 shows a block diagram o f a market model. Here we assume that offering
new product variants of a product family allows the manufacturer to penetrate
new market segments—the customers that did not buy the existing product variants.
The total market size can continue to grow as new product variants, with their own
varieties, penetrate to new market segments and increase the total dem and for the
product. In order to penetrate to even more market segments, what is needed are more
product varieties. This creates a positive feedback loop as shown in the figure.
According to the variety-based positive feedback model in Figure 5.14, demand
can always grow if new variants of the product family are offered, because there will
always be customers to whom the new variants will offer a better fit to their needs.
MATHEMATICAL ANALYSIS OF MASS CUSTOMIZATION 143
Figure 5.14 Mass customization production is modeled as a closed feedback loop.
The major difference between the positive feedback loop of mass production and
the one shown here for mass customization is that the former is a volume-based loop
whereas the latter is a variety-based loop. Alternatively, we can say that the mass
production loop is based on economies of scale, and the mass customization loop is
based on economies of scope.
5.5.3 Calculating the Number of Variations for Maximum Profit
The drawback of the feedback model is that it does not take into account the costs
associated with handling the expanded variety and the growing numb er of product
variants and versions. The simplistic variety versus cost model that was introduced in
Section 5.4 assumes that the manufacturer (or retailer) costs increase linearly with the
number of product variations offered. It also assumes that the total market size has an
upper boundary (m ¼ 100%). According to this model an optimal point can be
calculated in which the profit is maximum. For example, in Figure 5.15 the optimal
point is achieved for offering four variants, namely v ¼ 4.
Although revenues continue to increase beyond the optimal point, the extra costs
associated with manufacturing and handling the variations are larger than the sale
profit margin, and therefore it is not economical to offer a larger number of product
variations beyond the optimal point. Based on our simplified mathematical model, we
below offer a simple method to calculate the number of variations that will result in the
maximum profit.
We have shown that the number of variations, v, that will result in the maximum
profit may be calculated by the following simplified mathematical model:
Profit ¼ C:ð1e
av
ÞABv ð5:5Þ
where a is a parameter that depends on the type of variations that are introduced and
the buyers’ attitude toward them, C is the maximum potential revenues with an infinite
144 ANALYSIS OF MASS CUSTOMIZATION
number of variations (i.e., market size), and A and B are parameters that depend on the
costs associated with manufacturing and handling the product variations. The optimal
product variety, v
m
,is
v
m
¼ð1=aÞ:ln½aC=Bð5:6Þ
Calculating the optimal product variety is a critical business decision. Manufac-
turers should be mindful of the number of product variations that will bri ng the
maximum profit margin.
The above analysis does not and cannot take into consideration the new market
segments, both locally and globally, that may open when competing product
varieties and options are introduced. As long as products can penetrate new market
segments, and do it before competition arises, there can be additional profit for the
company. With increased global competition, the windows of opportunity are
getting smaller and companies mus t act very quickly in penetrating any new market
segments.
5.6 SUMMARY
The goal and the enablers that make mass customization possible are
Goal: Offering product variety at affordable prices
Enablers:
Figure 5.15 The captured market share m% as function of the number of variations v.
.
Modular products.
.
Fulfillment system for getting customer orders directly to the manufacturing
plants.
.
Flexible/reconfigurable manufacturing machines and systems that allow rapid
changes in product mix and volume.
SUMMARY 145
A major strategic decision in mass customization relates to variety versus cost.
Manufacturing companies should establish the number of cost-effective product
variants or options at which their profit margin is at its maximum. Companies should
also bear in mind that profit is affected by the order in which variety is introduced,
namely, which options or sizes should be introduced first, which should come second,
and the sequence in which options and sizes affect the total profit. Similarly, it is
important to dete rmine which options and sizes should not be offered at all because
incremental costs associated with the offer may be larger than the profit from
additional market share. Products must always stay in sync with the ever-changing
desires of customers. Also, a company’s manufacturing facilities must be able to
respond quickly to take advantage of new market opportunities.
As a summary, Table 5.4 compares mass production with mass customization in
terms of market type, product variety and lifespan, and the type of manufacturing
system needed to cope with the paradigm requirements.
Finally, note that if the firm’s business model is for mass customization...
.
The product design
.
The manufacturing system, and
.
The business model
...should all accommodate cost-effective product variety.
PROBLEMS
5.1 Do you agree with the following statement by Mr. Lutz (see Section 5.1): “It’s
the manufacturer who’s supposed to decide, and don’t leave the creative work to
the consumer!”
5.2 Determine mathemati cally the number of variations that result in the maximum
profit in Figures 5.10 and 5.13.
TABLE 5.4 Comparison of Two Major Manufacturing Paradigms
Mass production Mass customization
Market Demand > Supply Demand < Supply
Conditions Homogeneous markets Fragmented markets
Product A few products Variety of products
Long product lifespan Short product lifespan
Business strategy Economies of scale Economies of scope
Ignore niche markets Sell to niche markets
Mfg. system Dedicated lines Flexible and reconfigurable
146
ANALYSIS OF MASS CUSTOMIZATION
5.3 Dishes and Silverware Company (D&S) needs to determine the number of
variations of a popular dish set to sell in their store. The plates come in four sizes:
6, 8, 10, and 12 inches. Demand for each size is equal at 100 units. Revenue from
each plate is $10.
Sixty percent (60%) of customers, not being able to find their preferred size,
will buy one size larger and 40% of customers will buy one size smaller if the
exact size of their preference is not available. For example, if only 6 and 10
inches are offered, in addition to the normal demand of 100 units for each of
these sizes, 60 people initially requiring 8-in. plates and 40 people initially
requesting for 12 in.-plates will also buy the 10–in. plate. Regardless of the
number of variations, the fixed cost is $750 and there is an additional $500 cost
per variety offered.
Determine the number of variations (1, 2, 3, or 4) and which plate sizes D&S
should offer in order to maximize its profits.
PROBLEMS 147
Chapter 6
Traditional Manufacturing
Systems
Manufacturing companies in the twenty-first century face increas ingly frequently
changing and unpredictable market imperatives caused by increased competition and
globalization. Th ese include rapid introduction of new products, constantly varying
product demand, and changing government regulations. To stay competitive, com-
panies must use manufacturing systems that not only produce their goods with high
productivity but also allow for rapid response to market pressures and changing
consumer needs. Can traditional manufacturing systems, many of them designed in
the 1980s, cope with these new requirements?
6.1 MANUFACTURING SYSTEMS
A manufacturing system is defined as a collec tion of manufacturing machines (or
stations) that are integrated to perform a controlled set of repeatable operations on raw
materials, which alter that material to achieve a desired final form, or to assemble
a final product (Figure 6.1). Assembly systems and machining systems are particular
cases of manufacturing systems. In machining systems every operation is done by
a machine tool that has many cutting tools deployed from either large tool holders or
a tool magazine. In assembly systems, the manipulative operations may be performed
by robots, people, or combinations of both.
Examples of manufacturing machines include milling, turning, drilling, and
grinding machines for machin ing, robots and welders for assembly, presses for
The Global Manufacturing Revolution: Product-Process-Business Integration and Reconfigurable Systems
By Yoram Koren
Copyright 2010 John Wiley & Sons, Inc.
148
metal forming, laser processing equipment for metal cutting and heat treatment,
injection molding for plastic manufacturing, and more. Machining systems typically
remove material in order to shape parts into a finished or refined state. Examples of
machined parts include engine bloc ks, pump housings, and compressors. Assembly
systems are used to fit parts together in order to make a finished product. They are
utilized, for example, to assemble computers or build automobiles from given sets
of parts and sub-assemblies. Chemical manufacturing systems apply complex
chemical processes to produce, for example, pharmaceuticals and semi-conductors
wafers.
When building complex products, many manufacturing processes are needed. For
example, one machining system will receive rough castings of transmission cases as
input and mill and bore the finished shells. These are then transferred to an assembly
system where the various gears, shafts, and other components are installed into the
transmission case. The assembled transmission is then sent to a car assembly system
that asse mbles the whole car.
Multi-stage Manufacturing Systems: Manufacturing systems for production at
medium and high quantities are composed of multiple stages, with each stage
containing a piece of equipment that performs a given set of operations. When the
operations in one stage are comple ted, the partially processed product is transferred to
the next stage, and so forth until all needed operations are completed and the product is
finished. Examples of multi-stage systems may be for machining, assembly, semi-
conductor fabrication, paper production, etc.
Multi-stage manufacturing systems can be configured in many different ways,
defined by (1) the way that the machines are arranged in the stages and (2) the way that
the part is transferred between machines (with the aid of material transport systems,
such as conveyors or overhead gantries). Many manufacturing systems are arranged
sequentially, in serial lines, as depicted at the top of Figure 6.2. Serial assembly lines
are very common in many industries. When large quantities of the product are needed,
or when a set of operations takes an especially long time to complete, multiple
machines (or assembly stations) may be installed at a stage to perform identical
operations (Fig. 6.2, bottom).
Figure 6.1 A manufacturing system converts raw material to a useful part or product.
MANUFACTURING SYSTEMS 149
6.2 PRODUCTION OF COMPLEX PRODUCTS
In this section, we present two examples of manufacturing operations flow in the
production of complex products. Both examples involve several manufacturing
processes that must be synchronized to avoid large buffers (inventories) between
operations and between processes.
6.2.1 Production of Automobiles
Your car or truck is the most complex product that ordinary people buy. It is by far more
complex than your computer or TV set. The production of automobiles is multifaceted
and requires expertise in a variety of manufacturing areas: sta mping, casting, injection
molding, welding, machining and assembly, as shown in Figure 6.3.
*
Automobile production begins at the stamping plant where huge presses stamp
sheet metal into metal dies to create the panels that make up the automobile. The
various panels are shipped to an auto-body automated assembly plant, in which
welding robots join the metal panels and create the overall shape of the car, what is
called the body-in-white. In parallel, the doors are manufactured in another stamping
plant and then transferred to the auto-body assembly plant and assembled manually
onto the body-in-white. The automob ile is then sent on a moving line for spray
painting, which is performed by robots.
Simultaneous with the auto-body fabrication, powertrain plants manufacture the
major drive components—engine blocks, cylinder heads, crankshafts, and transmis-
sion cases—by machining operations (the left side of Figure 6.3). The raw parts for the
machining operations arrive from casting plants. The powertrain plant primari ly
uses high-precision machine tools arranged in multi-s tage systems (often 50–100
Figure 6.2 Examples of multi-stage manufacturing systems: a serial line (top), and a
four-stage hybrid system (bottom).
*
The flowchart of automobile production was composed by the author.
150 TRADITIONAL MANUFACTURING SYSTEMS