Modularization

It implies a product design approach whereby the product is

assembled from a set of standardized constituent units. Different
assembly combinations from a given set of standardized units give
rise to different end-product models and variations. Thus, modular
design effectively combines flexibility (of the end product) with
standardization (of constituent parts). It provides opportunities for
exploiting economies of scope and scale from a product design
perspective. The key issue here is to design for efficient linkage
mechanisms in the constituent units so that any required
combination can be conveniently assembled. This implied flexibility
has other related advantages in a manufacturing context. In
particular, the higher the level of modularization, the easier it is to
outsource manufacturing or its constituent components. In this
context, the notion of outsourcing as leveraged through
modularization assumes an important role in the developed
framework.
 Postponement
The Postponement concept was initially discussed, where it was
observed that products tend to become differentiated as they
approach the point of purchase, i.e., as it flows down the supply
chain. Although this “differentiation” improves the marketability, the
“manufacturability” of the products become more complex.
However, by moving the “point of departure” for the differentiated
product-models in the manufacturing process closer toward the
point of purchase, benefits of consolidation could be exploited which
reduces the complexity in manufacturing. This also helps to
substantially truncate uncertainty and leads to a reduction in
forecast errors by delaying the date at which one must make a
production decision associated with a particular demand. In this
light, postponement may be defined as a value added process for a
set of end products whereby the common processing requirements
among them is maximized. The customized or unique processing
requirements for each product variety is delayed (or postponed) as
much as possible in the value added process. This, in turn, provides
scope for exploiting scale advantages without compromising the
variety of products (scope advantages) from a process design
approach.
From the above definitions it may be noted that the fundamental principle in the
two concepts is essentially the same - combining the advantages of scale and
scope. While modularization does this from a product design point of view,
postponement attains it from a process design perspective. Modularization
essentially characterizes supplier responsibilities in terms of the outsourcing
function. An integrated product-process approach offers an increased potential
for obtaining greater advantages. Most firms may be better off making combined
modularization (outsourcing) and postponement decisions, as opposed to
separate decisions, which is the current norm.
A product's manufacturing cost (i.e., inbound logistics) is largely determined
by its design. For instance design alone determines 80% of the final production cost
of the 2,000 parts in the making of a Rolls Royce, and 70% of the cost of
manufacturing truck transmissions at General Motors.
The process should go beyond manufacturing and incorporate issues about order
fulfilment (i.e., outbound logistics). The companies should design for supply chain
management more so than design for manufacturability. Concurrently, consumers
are forcing companies to increase the diversity of products. This acute condition is
further intensified by a reduction in product life cycles for most existing products. The
result is an increase in requirements on the flexibility of manufacturing systems that
limit the improvements in productivity. Such requirements from consumers are
increasing both in the number of details and in diversity which make it difficult for
companies to anticipate demand.
It should be recognized that the implications of these concepts (modularization/
postponement) extend far beyond the immediate value addition processes. The
associated benefits include the logistics function in its integrity, inbound and
outbound: plant layout, capacity planning, new product development, outsourcing,
reductions in inventory levels and distribution of products to different market
segments.
For instance, the principle of modularization/ postponement has been effectively
used in designing plant layout. Magneti-Marelli, an international automotive
component manufacturing giant, has reorganized its layout at its manufacturing
facilities in France into two broad sections, namely, basic products and model-
specific lines. The basic product section manufactures component modules (basic
products) which are subsequently used in multiple (model-specific) end product
lines. This layout pattern simplifies material flow and control as it further amplifies
the benefits of low inventory in a just-in-time environment.
The capacity planning approach of Texas Instruments (TI) also illustrates another
potential benefit. The two broad semiconductor categories of TI are low-cost DRAM
chips and expensive customized microprocessors and other integrated circuits.
Quick delivery and service are very important in this business. TI has developed
an ``ingenuous'' capability to ``stretch'' its capacity to accommodate manufacturing
of high-end customized microprocessors. This is effected through a specialized
product and process design whereby 90% of the production process (placing
transistors and chips) is identical for the two product categories; i.e., customization
through expensive refinement is ``postponed'' to the end of the process. With this
set-up, TI always operates its plant at full capacity by using production of memory
chips as buffer: adjusting its volumes in correspondence to the demand for the
customized chips. Thus it increased its output of customized chips from 10% to 60%
of the capacity. This gives TI a strategic and competitive edge in all customer
segments. It effectively and efficiently caters to its customers of specialized products
without affecting the DRAM market segment, which is a commodity
item sold by 13 other manufacturers.
Companies that have successfully exploited the benefits of modular design and its
consequent standardization of parts include the Japanese car maker Suzuki. It has led
the industry in standardizing auto parts and reducing variations. Two of its product
models, the Wagon R minivan and the Alto, share 70% of their parts with other Suzuki
models. This ``frugal'‘ design strategy is ideally suited for periods of economic
downturns when companies are strapped for resources but are still unable to scale
down their innovative efforts. Additional case examples include Dell Computers, IBM
and General Motors.
Many companies have also strategically used the benefits of modularization and
outsourcing. One such example is the automobile manufacturer Chrysler which
designs its cars to be built in modules. It involves a modular design approach: the
interior is composed of four easy-to-install units that are delivered ready as built by
separate suppliers. This facilitates ``consolidated'' outsourcing activities which, in turn,
are oriented towards exploiting advantages of low production costs and advanced
technology.
Postponement taken together have strategic and tactical implications and advantages.
A classical case in the logistics advantages of using modularization and postponement
is Benetton which uses a very convenient combination of contract manufacturing in
their operations strategy. For Benetton, 90% of its sales are of standardized items with
a seven month advance committed order which are conveniently contracted out based
on known stable plans; the remaining demand pattern of 10% is unpredictable and
hence postponed under in-house manufacturing until just five weeks before delivery.
This offers the company strategic and operational flexibility.
Application of the postponement principle to innovative packaging design and process
could result in increased efficiency in materials handling, storage and transportation,
while providing the customer with a better looking package and continued service by
maintaining the high fill rate targets. This has been applied to the case of HP DeskJet
printers, whereby the packaging of market specific (which resulted in 26 versions of 2
basic models) manuals, software and other accessories were ``localized'' by using the
basic principle of ``substitutability'' between generic models (i.e., modularization). The
benefits included a 187% rise in material handling productivity and a 47% reduction of
storage space requirements. A case example concerns with the benefits of
postponement through an application to the distribution of HP printers. Minimal
changes in the location of value addition has led to substantial proficiencies through
inventory savings for the company. Standardized products may be rolled out from a
centralized facility and then routed to destination markets where a minimal market
specific value addition is undertaken.
In light of the aforementioned examples the link between these two concepts becomes
quite evident. Simply, this link implies a close relationship between product and
process design. As products have to be designed to maximize the number of common
standardized constituent units among a set of end-products, processes must allow
for a flow of discrete steps in the supply chain in order for the postponement to take
place. The implication is then clear that outsourcing and postponement should not be
viewed as independent decisions. The ideal situation is to have the best of both
worlds, economies of scale and scope. Of course, it is not possible to obtain the
maximum level of modularization and postponement in every case. There are either
technological restrictions that impede modularization (e.g., steel manufacturing), or
organizational structures that constrain coordination (e.g., decentralized organizational
structures that constrain integration).
Toward characterizing the different supply chain structures, the inbound and
outbound logistics are considered to capture the degree of modularization and
postponement. Thus, inbound modularization is the dimension that captures the
degree of outsourcing and the usage of subcontractors for making the components. A
low inbound modularization represents a supply chain with a high degree of vertical
integration. It may be constrained by either product design specifications or by
industry structure. A high inbound modularization, however, is a supply chain highly
decentralized which outsources many of the components from multiple suppliers.

Outbound postponement captures the extent of customization the supply chain is

offering. Therefore, a high outbound postponement is a supply chain basically
organized around a make-to-order environment where customer demand triggers the
completion of the final product. A low outbound postponement is characteristic of a
make-to-stock environment where an inventory of finished products is maintained to
satisfy customer demand. Outbound logistics involves a form transformation since it
moves products from the plant to the customer.
In time postponement, one refers to delays in product movement, while form
postponement refers to the delay in the product's final configuration. The logistics
flow pattern is divided into three distinct steps: manufacturing, assembling and
packing. Manufacturing involves the production of the component parts. Assembly
requires putting together the different components for creating the product. Packaging
involves the actual packaging and labeling of the final product to satisfy customer
demands. In this context, the assembly step is viewed as a separating buffer that,
essentially, links inbound (manufacturing) with outbound (packaging) logistics. The
distinction among these steps is not trivial: postponing manufacturing
is quite different from assembly and packaging. That is why manufacturing is
associated with modularization and packaging with postponement.
On the basis of the previous depiction of the two dimensions of inbound and
outbound logistics, four supply chain structures are shown in Fig.:
Rigid, Flexible, Postponed and Modularized. The Rigid structure represents the
classical vertically integrated supply chain where the objective is to exploit
economies of scale in production of large runs by maintaining large inventories of
finished products. The other extreme is the Flexible structure where many
subcontractors are used to make the different components and the assembly of the
final product is in response to a specific demand. Economies due to the commonality
effect are expected with respect to inventory.
There are also two intermediate structures. The Modularized structure, which has
multiple sources for the components but the output of the assembly process is the
finished product. This is probably the most typical supply chain structure for most
industries. Finally, the Postponed structure that exploits economies of scale in the
making of components but customizes the finished product to satisfy specific
customer or market demand.
 Framework for supply chain structures
M: manufacturing, A: assembly, P: packing.

High
P M P

M A P M A P

Outbound P M P
Postponed Flexible
Postponement

M A P
M A P

Rigid M
Low Modularized

Low
High
Inbound modularization
On this basis, it is not intuitively clear what supply chain structure best suits the
needs of a company. We see very rigid structure which is vertically integrated and
basically purchases all the raw materials used in the production of its products.
Others may be more flexible, like BMW which buys 80% of its car's components.
Rolls Royce customizes production and does not assemble or distribute a car until a
customer's order is received. Arguments in favor or against these concepts can go
in either direction: from functional specialization and operational flexibility to losing
control and information leaks. In the computer industry, for example, Apple, IBM and
Dell contract their needed components from other companies. Compaq, on the other
hand, manufactures all of its computers in-house. In the car industry, GM is the
most vertically integrated of the car companies by producing 70% of its components
in-house. Chrysler, however, buys 70% of the materials used in each car from
suppliers.
So, what supply chain structure is the most appropriate choice for a company. In
answering this question appropriately, one should note that there is an explicit trade-
off in cost and service levels that has to be accounted for. When companies
increase the level of inbound modularization (e.g., by using more modularized
contracting), it becomes possible to significantly reduce the fixed costs involved.
Dell, for example, takes $35 of sales for every dollar of fixed assets while for
Compaq the figure is $3.
The trade-off has to be in the variable cost (i.e., the per unit variable cost is higher)
since some level of margin to the subcontractors has to be accounted for. For the
postponement case the situation is reversed. By allowing for a higher outbound
postponement, companies may incur the extra fixed cost of maintaining multiple
equipment for packaging and labeling (e.g., warehouse facilities with machines to
label). However, the variable cost is reduced because of centralized inventories, less
risk associated with lower finished goods inventories, and/or bulk shipping from the
plants.
 Illustration of the framework
Inbound modularization
Low High
Outbound postponement High Postponed Flexible
Texas Instruments, Dell
Computers,
Rolls Royce Benetton,
Suzuki,
Hewlett-
Packard

Low Rigid
Modularized
Compaq, IBM,
BMW,
General Motors Chrysler
Under the Rigid structure the company makes two (packaging) runs of ice cream for
each of the markets based on the expected demand for each market (i.e., incur a
fixed cost and a variable cost for labeling in one location). Under the Postponed
structure, the company postpones packaging by having a separate labeling process
in each of the countries (i.e., incur a fixed and variable cost in each country). Under
the Modularized structure the company subcontracts ice cream production to
different dairy companies though, packaging and labeling for the final markets is
performed in-house. Finally, under the Flexible structure the company subcontracts
making the ice cream, packages it in-house and has a labeling machine in each of
the countries where the postponed shipments are labeled according to the market
specifications.
The bulk of savings from postponement will arise from a reduction in the variability
of demand when the company decides to package “later”. However, a higher fixed
cost will be incurred by having two labeling processes as opposed to one. When
subcontracting with other (dairy) companies, the fixed cost of production is lower but
the variable cost will be higher. At the inbound logistics, Rigid and Postponed
structures will mainly use their existing equipment for manufacturing the products,
while the Modularized and Flexible could use different suppliers and even change
them from time to time (i.e., they have more options). At the outbound logistics, the
Rigid and Modularized structures will finish the final product earlier than the
Postponed and the Flexible structures. The Postponed and Flexible structures delay
the actual finishing of the products until more information about final demand is
known and therefore have more options for changing the mix of finished products.
 s 
TC (S )  F V (S )  H  (S  x) f ( x)dx  B  ( x  S ) f ( x)dx
i i i
0 s

For comparison purposes, assume that the resulting fixed cost for the flexible
supply chain structure is equal to the fixed cost of the rigid supply chain
structure, so that an increase in postponement cost is equally offset by a
corresponding decrease in subcontracting expense. Similar assumptions can
also be made regarding the variable costs. The other two supply chain
structures (Modularization and Postponed) are reflective of
intermediary situations as presented in the Table.

Supply chain structure Fixed cost Variable cost

Rigid F V
Postponed F + ∆F V - ∆V
Modularized F - ∆F V + ∆V
Flexible F V
 Supply chain flexibility (SCF)
• The cost, time, quality, and service aspects have
been discussed in the context of SCM.
• In addition, flexibility in the vital success factors
is a critical turnkey in the actual business
environment.
• Flexibility is the ability of a system to perform
proactive and reactive adaptations of its
configuration in order to cope with internal and
external uncertainties.
• It is important to consider that it is
insufficient to improve flexibility in only one
company of a supply chain.
• An improvement in the flexibility of an
entire supply chain is necessary to
achieve remarkable performance results.
This is called as the flexibility of supply
chains, or SCF.
 Resources, objects and parameters of SCF

Parameters
Resources Objects Results
of SCF

Structure Transparency
Processes Higher
Manufactur- degree of
ing/ Simplicity supply chain
Logistics flexibility
Technology Products/
Services and
Information Responsive-
Technology ness/ Agility better
Information performance
Human Security/ in various
Potentials Reliability areas
 n
∑ known SC elementsj
j=1
T= X 100
m
∑ SC elementsi
i=1
Flexibility potentials in strategic supply chain networks to gain SCF

Configuration and
Co-ordination
Structural Technological
flexibility flexibility
potentials potentials
High
degree of
SCF
Configuration and Configuration and
Co-ordination Co-ordination
Human
flexibility
potentials