Mass Customization Strategy in Global Supply

Master of International Business Administration 12 Mass Customization International Supply Chain Management Yuliya Samokhina, Olga Baranova, Yuliya Pronkina, Alexander Manzhosov Content The basic concepts of mass customization. Principles and goals. (by Yulia Samokhina) Introduction3 Mass Customization: main definitions3 Evolution of mass customization………………………………………………………... 4 Mass customization strategies: advantages and disadvantages………………………….. 4 Mass customization as a process…………………………………………………………6 Conclusion8 Postponement strategies (by Olga Baranova) What is postponement? Postponement typology based on value chain activity9 Benefits of using postponement strategy13 Critical success factors and ideal candidate for postponement strategy14 Modular concepts (by Yulia Pronkina) Definition of modules in the framework of global supply chain management15 Types of modularity18 Benefits and drawbacks of modularity. Requirements for implication of the concept modularity19 Modularization in automotive industry (Volkswagen’s modular strategy) 21 Shared platform strategies (by Alexander Manzhosov) Introduction23 Platform concept 24 The reasons of implementing platforms25

Advantages and disadvantages of implementing shared platform strategies26 Shared platform strategies 28 Volkswagen Group. MQB strategy 29 Conclusion29 References The basic concepts of mass customization. Principles and goals. By Yuliya Samokhina Introduction Today, people live in the world with developing technologies, where everyone wants to be distinguished. Companies compete with other similar firms, because they want to attract customers as much as possible. Mass customization can satisfy customers’ demand to help them buy products with necessary characteristics.

Previously, mass production systems can’t be sufficient for manufacturer and consumers. However, mass customization decided this problem to create comfortable conditions for all to provide individual product. For example, nowadays retailers don’t want to have more collections per season, but they want to possess more styles within the season. Companies produce new lines of clothes to their shops every four to six weeks. H&M and Zara have increased production to use computer technology. «Zara uses data from its 426 stores to spot new trends, and offers 10,000 new products a year.

TopShop sells as many as 30 pairs of knickers a minute, 6,000 pairs of jeans a day and 35,000 pairs of shoes every week». Why it occurs? The answer is very simple: supply chain in mass customization business model has to be flexible and responsive to consumer demand. Main issues will be considered in the essay below. Mass Customization: main definitions Usually, mass customization requires very advanced and flexible network, because the original purpose of mass customization is adapting one-to-one. Now, everyone can make products by themselves.

Here, I want to give more successful definitions of Mass Customization: «Mass customization is not a pure but a hybrid manufacturing concept, which joins the efficiency of operations and differentiation by providing highly value added products». «Mass customization refers to a customer co-design process of products and services, which meet the needs of each individual customer with regard to certain product features. All operations are performed within a fixed solution space, characterized by stable but still flexible and responsive processes. As a result, the costs associated with customization allow for a rice level that does not imply a switch in an upper market segment». (Piller 2005c, p. 315; emphasis in original). Thus, now each buyer can acquire any goods, but the price for it will be higher. Commonly, it isn’t problem, because each person wants to be allocated from crowd. For instance, if two girls come in school-leaving party in one dress, it will be catastrophe for them. Fortunately, our generation has got a lot of articles with topic mass customization, and then we can consider mass customization from different foreshortenings. Evolution of mass customization

First, I think it is necessary to briefly describe the development of mass production to mass customization. Mass customization has been one of the causes of the economic growth in the 21st century. Below, you can see figure, which shows evolution of mass customization: Fig 1: Evolution of mass customization1 The first time our civilization has faced with mass customization in pre-industrialization era. In spite of this fact, today we also have started to develop it. Of course, these times are very different, because today people use modern technologies.

Between these periods we can observe mass production, which come in vogue with fundamental benefit of economy of scale and it was peak in mid century. For example, it was time of Soviet Union, and then companies produced a lot of similar clothes, shoes and etc. In late twentieth century, mass customization was back. Manufacturers offer different variation of products and customization is possible. Methods of application will examine in the next section. Mass customization strategies: advantages and disadvantages It is very important to understand how the mass customization works in practice.

Generally, scientists mark out four strategies: transparent, cosmetic, adaptive and collaborative. A few words about each strategy: * Cosmetic strategy: companies produce a standard product but present it differently to different customers. Thereby customers satisfied with the product, and if they want, they can change packaging, for instance, the color, accessories, and other customer personalities. * Transparent strategy: this strategy is used by companies, which have specially knowledge of desires and preferences of customers. For transparent strategy is actual E-business.

For example, service in website can analyses purchases, then it can recommend something based on previous purchases. * Adaptive strategy: producers try to modify standard product for the needs of customers. Thus, companies try to plan and represent of almost all possible combinations of product modules, like Microsoft. Then somebody buy software, he/she can add necessary functions. * Collaborative strategy: in this case companies don’t know what customers eventually want. Companies have to understand needs of customers and help to determine with necessary product, as in result to create its.

It is very often, then strategy depends on industry there company worked. For example, companies which produce food and beverages use cosmetic and transparent strategies. In my opinion, manufacturers have to estimate their possibilities; if they want have mighty profit. Why are companies interested in mass customization? The answer to this question is presented in the benefits of the above strategies: * Maximized market share by maximizing customers’ satisfaction and number of customers. * Cut cost of inventory and material waste: production has to work as a just in time.

Companies should avoid large inventories of finished goods. * Increase cash flow: lower inventories, prepayment (thus lower receivables) increase cash flow. * Shorten time of responsiveness (accumulative time from receiving orders to delivering): organization structure and flexible manufacturing in mass customization allows the company to adapt to different demands rapidly. * Ability to supply a full line of products or service with lower costs: the purpose of mass customization is to differentiate products to particular demands, resulting in broader product lines of the company and a much lower risk of obsolete inventory.

It is obvious, that companies can’t have only positive sides. It is important to understand, which problems may arise: 1. In mass customization costs are usually greater than in mass production. In some cases the product may not be different from standard product, but the price will be higher. Buyers will be unhappy, thus mass customization is inefficient. 2. Increasing of information in the production of individual goods could lead to costs. In this case the probability of production of defective goods rises. 3. Requirements for employees should be higher. Educated employees have to offer the optimal variant responding to the ustomer’s needs, otherwise, company can lose the loyalty of customers. 4. The production process can have difficulties with flexibility. Mass customization as a process I think that it is very important to know how the customization process can be divided into many sub-processes including the main stages of the value chain. Moreover, it can help us to understand mass customization in details. First, I want to enumerate all sub-processes and explain at greater length. * The development sub-process; * The interaction sub-process; * The purchasing sub-process; * The production sub-process; * The logistics sub-process; The information sub-process. 1. The development sub-process. The product always should develop, if company wants that the mass customization will be successful. Requirements of buyers will be satisfied and costs of production will be reduced. The modularity is quite effective decision as it allows achieving the economy of scale and economy of scope. On the other hand, the modularity can be simple for imitation by competitors and development is more expensive. Other strategy, such as a commonality and platform strategies help to work to the companies to increase reusability in mass customization.

Thus, product development in the mass customization is carried out through design engineers. Very high effect is reached, when the client participates in development of products himself. Companies should use customers’ innovative abilities. 2. The interaction sub-process. This process is also elicitation process. Thus, customer has to find the product that exactly fulfills his requirements. Company has to understand that everyone wants. Usually, to identify four types of elicitation process: identification (e. g. name and address), customers’ selections from menus of alternatives, physical measurements and reactions to prototypes.

Usually, customers buy products in the Internet (in different Internet-shops) or go to the retail center and also buy necessary thing. Today, it is very quickly and easily to use Internet. For example, Adidas offers to buy sneakers in their web-site, there everyone can create own style. The interaction process is associated with electronic features. Another important thing that in mass customization consumers are actively involved in production process. It is normal then customers are often called «coproducers» or «prosumers». 3. The purchasing sub-process. Suppliers in mass customization are the very important part in reducing costs.

Companies with good suppliers have got really competitive advantage. It is fact that the achievement of high profits lies in an effective and efficient component and material purchasing. Outsourcing strategies have been formed due to the modular architectures. The modular sourcing applies to reduce difficulty in purchasing process. In this case, companies have to trust each other and closely cooperate, if they want to achieve incredible results. 4. The production sub-process. Companies should focus on the economic order quantity (EOQ). Thus, the processes of production in mass customization should be minimized.

The optimization of the production is the main task in the process. If a company wants to meet all the needs of customers, the production must be flexible. Companies need to understand then they want to make individual product, I mean, at what stage. Producers have got two important key terms: delayed product differentiation and postponement. They are two related concepts, whereby the means placing the decoupling point at later stages in the production processes. Another one describes that some production activities are not initiated until customer order arrives. 5.

The logistics sub-process. This process includes work with clients and suppliers, plus accompanying. Usually, it call terms upstream and downstream. Upstream logistic is transportation, warehousing of materials and components for production and consolidation. The downstream logistics is the packaging and shipment of end products to customers. Unfortunately, these types of logistics face serious problems in mass customization, because costs of individualization increase. The all logistic has very heavy costs. Companies spend a lot of money for transportation and warehousing equipment.

It is a reason why these companies use outsourcing. Mass customization doesn’t have inventories of end product. The companies try to work individually with each person. Nobody wants to resemble another. 6. Information sub-process. This process cooperates with all processes described above. The purpose of the information sub-process is the providing of information stream. The effective information system should capture following stages: customers needs, develop a list of product requirements, determine manufacturing specifications with respect to routing, material processing, assembly and etc.

Radio Frequency Identification can help to make identification. In spite of the fact that modern technologies are very useful, it remains very expensive. Another useful method for the coordination in mass customization is Vendor Managed Inventory (VMI). Any supplier has got timely information about stock levels of modules and components. In addition, the integration of ERP (Enterprise Resource Planning) helps to improve the agility and adaptability to unforeseen events. The mass customization will make profit if the software is constantly developed and updated.

Finally, companies should work with a large number of data very accurately. I try to consider mass customization not only as one whole process, but separate sub-processes. It helps to understand the nature of mass customization. However, I should mention interrelated strategies such as postponement and modularization, because usually these strategies allow the companies to work successfully. In my essay I will give short concepts of strategy as below in this work other students will describe them in details. Modularization is necessary for the success of mass customization where set-up costs are critical.

Also, modularization allows making rapid assembly and costing efficiency. Modularization usually uses in this field such as computer science, construction, design engineering and production. The main idea in modularization is the breaking down of the product into standardized components or group of components, which is called modules. The second strategy is postponement: «Postponement means delaying activities in the supply chain until customer orders are received with the intention of customizing products, as opposed to performing those activities in anticipation of future orders». These strategies are quite often used.

Every year, the mass customization will be more popular in the companies. Conclusion of this part In this essay, I consider the most important aspects of mass customization. First, it was given the basic concepts of mass customization. I tried to examine the most important definitions and to explain the essence of mass customization. After that, I described a little history from mass production to mass customization. History has shown that the mass customization has already been applied to date. Now companies are using modern technology, so the result of up-to-date mass customization is different.

Companies produce products more quickly than ever before. Information technology is used in all stages of production, which helps companies to satisfy consumer preferences. Also, I examined mass customization not only as a single process, but also to separate the process in parts, included development, interaction, purchasing, production, logistic and information sub-processes. Each sub-process has to be adjusted in order to avoid stagnation in the production and filing warehouses. In the essay, I also mentioned the main advantages and frequently used strategies.

The company chooses the strategy which it thinks it is the most appropriate strategy. Usually, the strategy depends on the industry in which the company operates. In my opinion, the mass customization is developing and is very useful for manufacturers and consumers. First, customers are satisfied with goods with necessary characteristics. Second, company in the event of mass customization has lower costs compared to if it was made for each customer a totally unique product. Finally, I want to emphasize that the mass customization has both advantages and disadvantages. The company has to make a choice itself.

Postponement strategies By Olga Baranova What is postponement? Effective management of a supply chain includes thinking creatively about how to integrate and perform logistics and manufacturing activities. Postponement strategy offer opportunities to achieve delivery of products in a timely and cost-effective manner by rearranging the conventional production and logistics structures, which are often designed and managed autonomously. Thus, postponement, also known as "delayed differentiation," is a supply chain strategy that delays product differentiation at a point closer to the customer.

This involves designing and developing standard or generic configurable products that can be customized quickly and inexpensively once actual consumer demand is known. Postponement also entails the implementation of specific inventory strategies to deploy inventory farther away from the customer while fulfilling service level objectives and reducing inventory costs and minimizing risk, strategies for holding the right inventory, at the right place, in the right form. By pushing the point of product differentiation closer to the customer, postponement can improve customer service levels, reduce inventory costs, and increase top-line revenue.

The postponement strategy is based on the following two basic principles of demand forecasting: 1. The accuracy of the forecast demand decreases with an increase in the time horizon. The farther the time window for which the demand is being forecasted, the more inaccurate it will be. The figure graphically represents this effect as a funnel: as time extends farther into the future, the forecast error grows, showing that the forecast demand will have larger and larger variations as time periods progress into the future. 2.

Demand projections for a product group are generally more accurate than projections for individual products. It is much easier to forecast the total demand for LCD TVs than it is for an individual TV of a specific brand, model, screen size, resolution, and color contrast ratio. Postponement typology based on value chain activity It is based on the review of 15 studies; Table 1 was developed to summarize the terminologies used to define different postponement types. These define postponement on the basis of activities or place to differentiate between different postponement types.

The check marks in front of every study indicate the postponement terminology used for that study. The following section (table 1) summarizes these terminologies under product development, purchasing, manufacturing and logistics postponement. Table 1 Summary of postponement terminologies based on the review of studies Product Development Postponement Strategy Product development postponement is considered extreme form of customization with all activities including product design taking place after the placement of an order.

Moreover in this case, the customers are also involved during the design stage. Product development postponement strategy is preferred in highly volatile environments, involving high levels of uncertainty in terms of consumer demands, technological developments and government regulations. 2 For instance Toyota deals with the high levels of uncertainty by letting their suppliers come up with novel ideas and designs without limiting them with strict specification constraints. The suppliers have total independence to explore different areas within a broad range of design specs.

During that time, people at Toyota continue gathering market data on consumer demands and technological trends, till some convergence is achieved. 3 Purchasing Postponement Strategy In the case of purchasing postponement strategy, the purchasing of raw materials is postponed until the information on downstream demand becomes available. Purchasing postponement strategy is preferred when the demand is highly uncertain, raw material has high obsolescence cost and is of high value in terms of total product cost or ties up huge amount of working capital.

Purchasing postponement would work when the market lead time is greater than the manufacturer’s production lead time plus the suppliers lead time. 3 However, if the market lead time constraints the manufacturer from applying purchasing postponement, it can be adopted selectively for a range of products. This would be possible if the company is able to differentiate between base demand and surge demand. For base demand it can proceed with forecasted demand and purchase raw material or even proceed with production in case of longer production lead times. However for surge emand, the company can wait till demand pattern becomes available and then it can proceed to place orders. In order to manage supplies for the surge demand, the manufacturers can have separate design of supply chain to deal with the surge demand, since under most scenarios regular production lead time for the surge demand would be greater than the market lead time. This design would be based on speed and agility with focus on fulfilling orders quickly rather than focusing lower cost by setting up fast production lines and purchasing raw materials from a different set of suppliers.

However this would be feasible when the increase in cost due to fast paced production would be less than the gains accrued by adopting purchasing postponement strategy. This fact is highlighted by the postponement strategy adopted by Benetton, an apparel manufacturer, which separates between base demand and unpredictable demand. For the base demand, Benetton subcontracts to low cost sources, which have higher lead times, while for the unpredictable part, they utilize their own flexible facilities which have higher operating costs.

However for purchasing postponement to work, it is imperative to have high level of collaboration between the manufacturers and the suppliers. Suppliers are required to respond to the downstream demand in minimum possible time so that the manufacturers can deliver within the market lead times, while resorting to purchasing postponement. In recent times e- market places have sprung up, enabling the manufacturers to get linked with the suppliers without any geographical constraints3. This increases the options of the manufacturers to respond to actual demand.

However, having suppliers or their stock centers in close proximity to the manufacturers would support purchasing postponement strategy. Moreover this type of impulse buying contradicts the approach of developing long-term relationships with the suppliers and could also jeopardize the relationships with the existing suppliers. From a supply chain perspective, purchasing postponement involves shifting the ownership of the goods to the most suitable location. However in case of an imbalanced power structure, a manufacturer might force its suppliers to hold finished goods inventories in order to reduce its own risk and uncertainty cost.

In this situation the suppliers are left with speculating the downstream demand, often resulting in the overall inventory buildup or ‘Bullwhip’ effect in the supply chain, which reduces the efficiency of the entire chain. 3 Manufacturing Postponement Strategy Manufacturing postponement is based on holding products at platform level later to be customized as per demand pattern. This is based on the principle that it is easier to forecast demand pattern at component level as compared to finished product stage3.

It involves delaying manufacturing activities and holding inventory in neutral form till the demand pattern becomes visible. Thus this strategy works where there are multiple product derivatives, which could be due to different cultural, technological or market related issues. High product variation makes it difficult to forecast and hold inventory at finished stage. Manufacturing postponement allows companies to operate without holding finished goods inventory while maintaining bulk of their inventories at pre-customized form.

The inventory at this level has lower risk attached to it because their raw state permits them for wide usage variations. 4 For example, fashion apparel retail business is marked by high product obsolescence costs. This is because of the fact that product are planned long before the actual demand information becomes visible. Zara on the other hand has been able to capture market trends by reducing the time required to introduce new products. Among other steps, Zara uses manufacturing postponement to reduce its lead times.

Zara concentrates its forecasting efforts on the kind 14 and amount of fabric it buys. Zara gains more speed and flexibility by purchasing more than 50% of its fabric un-dyed later to be used for various products and lines (platform based). It reduces the cost as well as the chances of forecast errors. In un-dyed form it is easier to convert fabric to other uses, while it gives Zara the flexibility to adapt to colors close to the selling season based on the immediate market needs. 5 Assembly postponement Strategy

The computer industry selling customizable product especially through the internet practice assembly postponement strategy. The customers select from various options such as color, memory specs, processors, and the companies such as Dell, HP and Compaq assemble the required models from components received from the Original Equipment Manufacturers (OEMs). HP postpones the final assembling step to the last stage at the local distribution centers and once demand becomes visible, final manufacturing/assembly activities such as power supply, packaging and labeling are carried out.

Labeling postponement Strategy Labeling postponement is adopted when the products are marketed under different brand names or are distributed to different markets. For example at times the same OEMs are used by different brands for their products and the OEMs mark the products with labels after receiving respective orders. Similarly certain apparel distribution companies keep products 16 unmarked and upon receipt of orders from various institutions print their logos before dispatching the orders. Packaging postponement Strategy

Packaging postponement strategy is adopted when the products are marketed in different bundles or package sizes. 6 The final packaging is delayed till orders are confirmed. Packaging activities are generally performed in the downstream locations such as centralized distribution centers. Logistics postponement Strategy Logistics postponement involves a delay in the final movement of the goods. Instead of placing the goods at the final point in the supply chain, they are kept at a central location, with the aim of following the demand pattern for the final shipments. This helps to reduce the inventories in the supply chain 17 while at the same time improves customer responsiveness. 3 Maintaining inventories at final locations would increase the inventory costs while at the same time would result in stock outs at some locations and excess stock at other locations. Logistics postponement often involves the repositioning of the final manufacturing activities downstream closer to the end user. This helps particularly where local variations in terms of consumer preferences exist, which could be better, catered to by carrying out the final customization at the local distributer level.

Logistics postponement suits those products, which have higher inventory cost and lower transportation costs. Logistics postponement in most of the cases requires a faster and more responsive transportation system and can result in higher transportation costs. Benefits of using postponement strategy Successful postponement implementations improve customer satisfaction while minimizing inventory costs. By improving their ability to respond to changes in demand from local and global markets, companies are better able to compete on time while remaining cost competitive. Improvement in Customer Satisfaction: Increased ability to offer a wider range of customized goods * Reduced lead time for orders Reduction in Inventory Cost: * Inventory costs shift upstream to less expensive generic products, which also reduces inventory obsolescence costs * Enables better planning and allocation of resources by reducing the forecasting horizon * Reduces inventory costs by as much as 30% to 40% in successful implementations Improvement in Order Fill Rates: * Since finished products are manufactured from generic components, companies are better able to deliver finished goods on time as a result of postponement.

Bottom-Line Benefits: * Overall, postponement’s primary benefits are to reduce the effects of market uncertainty and to meet customer needs, while effectively managing supply chain costs. In many cases, lower overall supply chain costs were achieved by respondents. Critical success factors and ideal candidate for postponement strategy The keys to a successful postponement strategy are to produce standardized products and to incorporate customization at the most advantageous point in the supply chain.

Proceeding from the aforesaid it is possible to allocate the following factors: * Organizational buy-in and support is the primary critical success factor * Implementation of appropriate inventory deployment strategy * A postponement strategy is destined for failure without consistent top-down support from design through implementation * Product design modularity and business process reengineering are critical to ensure smooth execution * Collaboration among all internal functions of the supply chain, as well as with suppliers and customers * Proper metrics and incentives are also important

Resolving the competing interests within a company’s supply chain is also essential. Without collaboration, including changes in the rewards and metrics structures of a supply chain, the changes associated with postponement often result in poor execution. In addition, external collaboration with suppliers and consumers is critical. If suppliers cannot respond to the changes as a result of postponement, and if product design is not tailored to customer requirements, postponement can result in cost overruns and increased lead times.

The foundation of every successful postponement implementation is organizational buy-in. If management is not willing to take risks, implement significant changes, and monitor adjusted metrics, they will be less likely to reap the benefits of postponement. While many industries and companies are prime for postponement, there are certain business conditions that position a company for a more successful postponement implementation. Prominent among these are companies that produce a significant variety of products with short product life cycles and which have a supply chain able to support mass customization.

Regardless of business conditions, effective postponement implementation still requires collaboration, organizational buy-in, concerted effort, and the right information technology backbone. Modular Concepts in the Framework of International Supply Chain Management By Yuliya Pronkina In recent years, the competitive dynamics in general and the demand for product customization in particular have increased considerably in virtually all industry sectors: partly as a result of new low-budget competitors in the global markets and partly by increasing demand for technological performance.

The ability to react quickly to unexpected market changes is one of the decisive reasons for the development of modular product architectures. If a company wants to remain competitive or expand its market share, it is posed to manage the compromise between such conflicting goals as: * low costs; * short lead times; * high quality of product. Modular strategy is intended to resolve this conflict and be able to become a solution to growing complexity of customizable production. It closely links with modular platform systems.

In fact, modularity enables manufacturer to combine advantages of mass production (high volume, large quantity production) and product variety (flexible and versatile manufacturing systems, product tailoring, etc. ) at reduced cost and increased economies of scale. All in all product development strategies such as modularity, product modular platform, etc are the key to achieving low cost customization The modular concept has played significant role in the development of mass customization. This article examines main aspects of modular concept in the framework of global supply chain management.

Definition of modules in the framework of global supply chain management To understand what modular strategy represents we tried to give the definitions of “modules” and find its real position among other strategies of mass customization. According to the Oxford Dictionary, definition of modules in general is following: Module is each of a set of standardized parts or independent units that can be used to construct a more complex structure, such as an item of furniture or a building. There are convenient statements among authors of studies about general meaning of modularity.

According to them we can conclude that modularity refers to an approach to organize complex products and processes efficiently by decomposing complex tasks into smaller parts. It allows the tasks to be managed independently and yet work together as a whole without compromising performance. Thus we can consider modularity as the ability to configure product variants by mixing and matching components within similar product architecture to create variety of configuration without losing its functionality. Examples of modules would include many components in automobiles: engines, transmissions, audio equipment, tire/wheel options, etc.

In electronics, modules would include processor boards, power supplies, plug-in integrated circuits, and disk drives. In software, code could be written in modules (objects) that can be combined into various combinations. In fabrication modular strategy is applied as flexible platforms for creation a significant number of product variations, enabling a firm to gain cost savings through economies of scale from component commonality, inventory, logistics, as well as to introduce technologically improved products more rapidly.

Modular architectures allow firms to minimize the physical changes required to achieve some functional changes. Hence all the physical changes can be easily combined without adding complexity to the manufacturing system and, hence, to managerial system. To explore the concept of modularity and consider it in the framework of supply chain management, we decided to compare the differences between integral and modular product architecture and make further comparisons between corresponding supply chain architecture.

Product architecture. Integral product architectures are those in which each component is provided directly and specifically to overall performance. Parts and interfaces tend to be proprietary. On a highly integrated product like a military aircraft, every part and system has been designed to perform a specific task. Modular product architectures use standard interfaces and can employ off-the-shelf components for much of assembly. Personal computers, clothing, and many other products employ modular architectures12.

Supply Chain Architecture. Integral (traditional) supply chains require vertical integration within a primary firm or tight coupling of several firms in order to meet demanding, proprietary design specifications. Modular supply chain architectures are horizontal, with many competing firms specializing in aspects of the overall product. In other words, modularity in supply chains implies that the various units of organizations are freely divided, can operate independently, may be easily reconstructed.

The concepts of product modularity and supply chain modularity are rather interconnected: changes in the product architecture result in important implications for the supply chain structure and re-distribution of activities across the logistics networks. This figure 2 shows us the simple scheme of interconnections of final assembler and its suppliers in traditional supply chain and modular supply chain. (2) (1) Figure 2. Simplified scheme of integral supply chain (1) and modular supply hain (2) In modular supply chain first tier suppliers are providing modules in the form of subassemblies, are not only components, therefore a modular supply chain is characterized by the presence of value-adding tier-suppliers that coordinate the work of the second tier suppliers. In non modular supply chain the role of assemblier is played only by a local firm. In the result of rather different approach, modular supply chain fosters some distinctions comparing to the traditional one. In the following table we compare the main features of supply chain depending on its mode of organization. Table 2

Main features of supply chain depending on its mode of organization11 | Traditional supply chain| Mass customization supply chain| Interface compatibility effects| * Integrated vertical structure * Long development lead times| * Modular product architecture * Reduction of development lead time| Component customization| * Design and manufacturing focus * In-house product development * Standardized components| * Autonomous innovation in NPD * Customer focus * Design for manufacturability| Value inputs| * Economies of scale * Exploiting advantages of market mechanism * Standardization of operations * Consolidation of outbound logistics| * Outsourcing * Flexibility towards specific customers’ needs * Economies of scale and scope| Supplier-buyer interdependence| * Supplier involvement in development not critical * Multiple sourcing| * Early supplier involvement in NPD * Strategic partnership * Supplier as system integrator * High interdependence| The good example of applying modular strategy in practice is the following.

Two German automotive companies, Volkswagen and Mercedes-Benz decided to develop the auto industry's modularization in the mid-1990s. Their built new plants, which started production in 1996 and 1997 according to the new modular concept on a relatively large scale, specifically at Volkswagen’s plants in Resende (Brazil), Boleslav (Czech), and Mosel (former East Germany), and Mercedes-Benz's plants in Vance (U. S. ) and Hambach (France). These plants had two main features. One is that they have assembled cars from relatively large subassemblies. As we can know a car is a system made up of numerous components. At conventional plants, individual components —— for example, instrument panels, gauges, and wire harnesses —— one by one to a vehicle body on the final assembly line.

Instead, at those new plants, these individual components are subassembled on a separate line, and then installed as a module into a body on the final assembly line14. Suppliers procure their own materials and labor force to create separate modules, while Volkswagen provides the infrastructure and designs the interface between manufacturing units. These measures let companies reduce their costs, because on its new plants there were no need in “blue collars” (administrative staff), for instance, and its modular outsourcing made significant advantages which are resulted in an ability to issue a wider variety of final products in shorter time periods and at lower cost. Types of modularity

There are six types of modularity for the mass customization of products and services: * component-sharing modularity, * component-swapping modularity; * cut-to-fit modularity; * mix modularity; * bus modularity; * sectional modularity. The following characteristics of different types of modularity are done by contemporary authors who are mostly referring to Ulrich and Tung study “Fundamentals of Product Modularity” (1991). We supposed it is convenient typology and decided to base further information on this ground (figure 3). In component-sharing modularity, the same component is used transversely in different products to provide economies of scope.

There is a base unit of common components and changeable part. This kind of modularity never results in true individual customization, but allows reducing costs and increasing variety of products. Figure 3. Types of modularity In component-swapping modularity it is possible to change options on a standard product. Modules are selected from a list of options to can be added to a base product, for example cars. The good example for this is the “Configurator” on the internet site of Volkswagen, where customers can choose additional features which can be added to the base model with several clicks. So customer can make a decision which is convenient for him.

Cut-to-fit modularity is similar to component-sharing and component-swapping modularity, except that one or more of the components is variable. The module can be changed before it is combined with other modules. The good examples for it are eyeglasses, or clothing. Mix-modularity is also similar to component-sharing and component-swapping modularity, but is distinguished by the fact that when combined, the modules lose their unique identity. An example is house paint. When particular colors of paint are mixed together, those components are no longer visible in the end product16. Bus modularity uses a main platform that can add different components to it.

So in the result there is the infrastructure that is really required for each consumer. Sectional modularity is the type of modularity that provides the biggest variety and customization among other types of modularization. Functionally it is rather close to component swapping, but focuses on arranging standard modules in a new, unique form16. In this case each component is connected to another making achievable the configuration of any number of different types of components. The most popular example is Lego. To be able to use this type of modularity a manufacturer has to develop a special interface of its product that allows sections or objects of different types to interlock16.

Benefits and drawbacks of modularity, requirements for implementing of the concept Taking all into consideration we can list main benefits of modular strategy: * Economies of scale and scope which mean an ability to improve overall performance of production concentrating on divided modules. Suppliers and sub-suppliers have an opportunity to produce higher volume of its “modules” and apply its core-competencies to production. * Increased possibility of product/component change and updating. Since each module interface is strictly specified, changes can be made to a module independently of other modules, as so as it is wider open for further product development. * Reduced order lead-time.

Since modules are manufactured in relatively large volume, the logistics of production can be organized so as to reduce manufacturing lead time. Hence, the order lead time can be reduced. * Development of product variety. The use of modules means that a great product variety can be achieved using different combinations of modules. * Separated tasks. Since the interfaces and modules have been standardized, their interfaces enable design tasks and production tasks to be decoupled. This dividing can result in reduced task complexity and in the ability to complete tasks in parallel. For instance it is easier to test it before final assembly, quality management can become more efficient due to separated modules. The ease of product upgrade, maintenance, repair, and disposal. Customer without any problem can change one module to another, for example he can buy an improved video card for his computer, or change an engine module in his automobile17. Although applying modular design provides a number of advantages across the organization, companies must also consider the less discussed drawbacks when evaluating the decision to implement modular design or reviewing existing modular processes. * High Initial Investment. The initial costs to reconfigure existing systems and processes are high. Reconfiguring to the modular design is a complex task, which may disrupt the existing flow of the product pipeline. Lack of Customer-Centricity. Focusing on cost-efficiencies company can lose clear vision of customer needs. * Coordination Complexity. Modular design requires a significant restructuring of processes and can increase product development complexity if companies do not assign clear ownership and collaboration with suppliers in a well-planned implementation process to avoid duplication of processes and inconsistency across product specifications, purchase orders, and manufacturing plans. * Supplier Risk . Companies can experience delays, incorrect specifications, and poor material quality. Hence there is a necessity of well-organized control in this case.

Also, companies may have to share information and technical expertise to ensure suppliers deliver according to new specifications and cost. A company surrendering too much technical expertise, especially in areas that provide a competitive advantage, may lose technical control to the supplier * Intellectual Property Risk. Producing modules simplifies the product architecture, enabling competitors to recognize without difficulty technologies and copy modules. According to that, organizations must increase patent documentation to prevent competitors using key modules in their product architectures. In modular supply chain management, suppliers have a relatively high degree of freedom in production.

However it is possible only with long-term commitments and aggressive cost goals. It is clear, that modular strategy has its basic requirements for the suppliers and manufacturers which enable them work together to create value. To implement modular strategy company should be able to meet such requirements, as following: * Particular organization structure. The organization structure should be flatter with fewer levels, and creates a freedom for the coordination among processes (modules). It focuses on a high degree of cross-functional integration and employee participation. This results in a much higher degree of decentralization in decision making.

Besides, the structure is open to suppliers as well as customers because they (suppliers and customers) are considered extensions of the organization; * Management focuses on three parts: supplier relation, customer relation, and resource management; * Readiness of inputs when needed (this requires an effective supply network), skillful, highly educated employees with excellent technical qualifications; * High standardization of components. Also adjusting a company’s organizational structure with a modular product architecture requires the constant support and enduring responsibility of the top management. The level of quality control and coordination in development of modules should be in a high level.

Effective development and efficient use of modules requires changes in the existing processes in many ways. Modularization in automotive industry (Volkswagen’s modular strategy) As usual, the automotive industry is a leader in implementing and communicating a modularization strategy. The Volkswagen Group is characterized by its global presence and comprises numerous brands. The Volkswagen Group bases its great success on three major modules which are shared on a broad scale. The successfully implemented modularization strategy is one of the key factors which will enable the Volkswagen Group to become the world leading car manufacturer, not only in terms of sold units but also in terms of superior margins8.

Now The VW Group is a large automotive empire encompassing 10 brands, 240 models produced across 94 sites in 153 markets, totaling over 8. 3 million vehicles made each year. The sheer scale of its operations across so many different countries meant that variability of its products is very high. Applying of modular strategy by Volkswagen meets customers’ expectations for a growing variety of vehicle models, equipment features and design. Through the modularization of the body, vehicles can be produced in different stages for the length, width and wheelbase – an approach that benefits the manufacturing process. We’ll discuss the main features of Volkswagen modular strategy created in its “Modular Transverse Toolkit (MQB)” in the next chapter.

To sum up, companies that are striving to be competitive and still want to have a relatively high profit margins and market shares in our case can choose mass customization strategies and modular strategies in particular because: * Modularity makes complexity manageable * Modularity enables parallel work; * Modularity is tolerant of uncertainty. Shared platform strategies in the framework of international supply chain management. By Alexander Manzhosov Abstract The logical order of development of international markets, industries and customers behavior led businesses to a new frontier of competition for manufacturing industries as well as for service industries – to Mass Customization.

The core reason for such a change in the market concept was a dramatically increase in diversity of consumers needs within market segments. And as the world recognized guru of management Peter Drucker once said: «It’s a customer who determines what a business is. It’s the customer alone who’s willingness to pay for a good or for a service converts economic resources into wealth, things into goods. » Translated to the real terms that meant for the manufacturers a new challenge of meeting various customers needs while carrying on following to basic trends of reducing costs and development times of a product and optimizing core business processes.

That’s why platform strategies were designed and applied to increase the efficiency and profitability of manufacturing. This paper seeks to identify the phenomenon of shared platform strategies, research their advantages and disadvantages for supply chains and study the consequences of implementing the strategy on the case of Volkswagen Group. Key words: mass customization, shared platform strategies, supply chain. Introduction Many modern manufacturers are seeking new ways to improve their Key Performance Indicators (KPI) and concentrating their facilities on cost reducing while offering the collection of competitive goods in many different market segments. And one of the methods of achieving this goal is by implementing shared platforms approach.

The benefit is possible to be gained because of coordinating of engineering processes with the actual production system and supply chains. The platform allows companies to share not only components, but also production tools and machinery. Thus our first effort to establish the basis of the concept of sharing platforms among the family of products is to define the term “platform”. After that there is a further problem of realization in which way does the concept affect the company and how the enterprise can get a competitive advantage by mean of implementing shared platform strategies. Platform concept The ideas of sharing platforms have received increasing attention in product development and operations management in the time when mass customization era arose.

So companies had to “produce goods and services to meet individual customer's needs with near mass production efficiency". The platform concept is closely tied to models of product architecture, modularization and standardization. The platform itself can be defined as “a relatively large set of product components that are physically connected as a stable subassembly and are common to different final models”. The definition has been stated above can be clarified by Figure 4. Figure 4. Three different products build on the same platform The figure illustrates the general idea of platforms sharing. Three different products are assembled by combining elements A, B, C, D, E.

According to the illustration it can be concluded, that this product family consists of the element A (platform) and a set of other elements used in a modular way. What emerges from the definition and illustration that in general designing a platform is about creating common shared components and systems throughout a family line, while providing differentiated features and benefits to add value to each production unit (Figure 5). Figure 5. Common principle of sharing platforms . The trick here is that totally different at the first sight products from different brands and from different price segments of the market can be equal in engineering terms.

Still the platform is not a universal cure. And based on empirical evidence there are some preconditions of implementing platforms: * The product family shares basic groups of elements * The product family is supposed to have a long lifecycle * The level of interconnected systems among the product family is relatively high * The technological environment of the market tends to constant updates * The core functionality of the products is stable but variable in the terms of non-core functions All these criteria are not ultimate and the suitability of decisions taken depends on specificity of organizations type and the product characteristics as well.

It also should be added, that depending on criteria mentioned above and the target of the manufacturer, platforms can be categorized into 3 types: * Modular * Scalable * Generational The main difference by such a categorizing emerges owing to the strategy of launching the product line. The modular platform usually allows designing functionally different product variants. On the contrary, scalable one aims at creating functionally equal products of many capacities. And the last one, the generational platform is used to be a basis for new generation development. The reasons of implementing platforms It follows from what has been said above, that the platform concept is a quite flexible approach for manufacturers, moreover sometimes it seems vital for staying competitive on the market.

And now we can pass on to the issues closely related to the platform implementation and it’s consequences for the companies operations and supply chain structure. Nowadays critical issues for consideration in the Supply Chain Management (SCM) are cost containment, development know-how and resources, product quality and logistics. As the supply chain can be represented as the combination of enterprises involved in activities from the supply of raw materials to the manufacturing and delivery of the goods to the customers, the success of the whole supply chain depends on how to generate the most efficient configuration of the products, manufacturing processes and supply sources. In this connection a question is bound to arise whether the shared platform approach is an effective method or not.

This brings us to advantages and disadvantages of such a scheme. Advantages and disadvantages of implementing shared platform strategies The purpose with platform sharing is to reduce the cost and have a more efficient product development process. And according to the purpose announced from m point of view it’s possible to classify advantages of shared platform strategy into three key groups: * Quantitative * Qualitative * Customer-oriented Quantitative advantages by this mean include such factors as: 1. The Global standardization 2. The Economy of scale 3. The rationalization and the reduction of R&D costs The value of the standardizations is quiet obvious.

By creating a common platform for the product line the company creates “flexibility”, which allows not only to produce dissimilar models according to individual customers’ and even countries’ tastes but also provides an opportunity to standardize production facilities and streamline logistics and management as well. The economy of scale in this case follows directly from the previous factor: the commonality of the exploiting components, modules, mechanisms, assembly lines reduce overall costs and simplifies the business and technological processes within the company sparing human and monetary resources. The next important issue concerns R&D costs. The unity of components under one single platform helps dramatically minimize the cost of developing product lines. Once the platform is designed, the company doesn’t need to spend millions on engineering new components.

And platform efficiency - “the ratio between the average R&D costs (or development time) for derivative product over the cost (or time) spent for the platform” increases (the lower the ratio the more efficient the platform is). Such an effect is possible because different products share the same technology process, structure and production mechanisms. Qualitative advantages include: 1. Increased quality and innovations 2. Easer inventory management The proposed components’ commonality is a multi-oriented tool: platform sharing allows manufacturers to design parts with fewer variation. A byproduct of this is increased quality, which results in lower defect rates.

On the other hand, people want value for their money they want new technologies. And eliminating the need to engineer separately thousands of parts allows research and development assets to be focused on fewer technologies fostering innovation and quality improvements in the minor set of technologies. One more critical point is inventory management. It’s apparent that in any supply chain a tremendous amount of inventory is held in the form of components. And it’s essential to mention that the inventory amount corresponds always to the uncertainty of demand for the finished product. In that way by implementing a platform the manufacturer is able to use it in multiple finished products.

So the demand for the platform and all components the platform consists of is an aggregation of the demand for all cross-platform finished products. That’s why “ the use of common components (or set of components – platform) in a variety of products has been a very effective supply chain strategy to exploit aggregation and reduce component inventories”. Another clear benefit concerns the relations between suppliers and manufacturer. By implementing platforms the producer decreases the uncertainty of demand on different components. That creates a win-to-win situation for both business partners by enabling them to build long-term relationships. The last group of advantages is customer oriented and includes: 1. Faster response to changing market needs 2. Greater product variety

It’s critical to mention, that this group of pros can be clearly defined through observation on previous advantages. And faster response to changing market needs occurs because platform sharing allows manufacturers to design and launch new products faster and cheaper. And the trick is here that the development and cost of the original platform for new goods have already been paid for. Such flexibility provides an opportunity to the company to diversify its assortment and satisfy different market shares. However it’s impossible to complete the study without highlighting some possible problems when using platform approach: 1. Product dilution 2. Incompatibility 3. Risk concentration

Product dilution means that a platform, depending on the common machines and systems, can be extended thin if it becomes a source of too many disparate models. Moreover, platforms that span across models of different stature increase the risk of cheapening luxury products or adding unnecessary cost to lower-end segment. Another challenge is incompatibility. A platform’s differentiating technologies must be carefully engineered to integrate with the standardized systems. Otherwise, producers will have to perform modifications to make the two types of technologies compatible. These compatibility regulations first of all are not differentiating modifications and secondly they provide zero value of their own to the finished product. The last but not the least possible problem is the risk concentration.

Producers may face greater overall risk if the underlying platform they’ve developed and implemented is accident-prone. A defect in a standardized technology multiplies the risk across the whole product line, which leads to expensive potential recalls. Shared platform strategies As has been indicated, in general implementing a platform promises much more benefits than negative consequences. And once the decision to implement platforms is considered, there are various strategies for the product implementation (Figure 6). Some of the most widely practiced platform strategies are No Leveraging, Vertical Leveraging, Horizontal Leveraging and the Beachhead Approach. Figure 6. Shared platform strategies

No Leveraging platform is usually designed especially for a single market segment. Such strategy is implemented for high scale goods wi