Modular Systems Support Agile and Flexible Supply Chains
In a recent Gartner survey, only 21% of respondents stated that they have a highly resilient network today, meaning good visibility and the agility to shift sourcing, manufacturing, and distribution activities around fairly rapidly. It suggests that increasing resilience will be a priority for many as they emerge from the current crisis. More than half expect to be highly resilient within two to three years.
Supply Chain Optimization has been around since the industrial revolution. Companies continuously work on eliminating waste, consolidating volumes, and negotiating for the best supply. In recent years, other factors have also surfaced in the drive for optimization: resilience, flexibility, and agility. A supply chain that is optimized to the extreme will still fail to be efficient if it cannot tolerate external disturbances such as border closures, labor strikes, and local shortages of components. In addition, it will fail in efficiency if it cannot quickly introduce new products and markets, and it will fail if it cannot be flexible for seasonal or stochastic variations in demand.
Lean, Procurement Excellence, Supply Chain Optimization, are all excellent strategical tools run by most global businesses. What not all businesses succeed in is aligning the supply chain strategies to the business and product strategies. Different functions in the organization can, with the best intent, drive in different directions and work against each other.
A modular system is an excellent structure for aligning strategies across functions. By working from a common basis and using that to drive strategy execution, the functions will self-align and communicate much more efficiently. This blog post will highlight some key concepts for how a modular system accelerates supply chain strategy and how you can utilize it.
What is a Resilient Supply Chain?
Over the past decades, the supply chain paradigm has been lean, just-in-time, and high throughput. An efficient supply chain has no unneeded buffers that hide inefficiencies and ties capital that can be better utilized elsewhere. However, recent external disturbances have put the lean supply chain through a stress test. Companies that haven’t been prepared for pandemics, border closures, and silicon shortages have had a tough time during the 2020s. We are not blaming lean methodologies for this; a lack of material is, of course, also waste. Nevertheless, leaders striving to be lean in the 2020s must carefully analyze what parts of their supply chain pose a critical risk and must be made resilient.
Lean methodology is about removing unnecessary buffers and other inefficiencies. However, increasing the supply chain resilience for critical components is far from unnecessary. It is imperative to win in the market. The challenge ahead is increasing resilience without accelerating the cost of complexity.
A resilient supply chain can handle external disturbances and still operate efficiently. For example, if a component cannot be supplied from a specific region or supplier, it needs to be provided by another region, supplier, or from safety stock. If a shipping route is blocked, use other available routes. If an assembly site must be closed temporarily, set up other assembly locations to fill the need for capacity. There are many options available to create resilience:
- Shared modular systems – enabling flexible assembly lines that can share capacity
- Harmonization of components – having fewer variants of critical components enables more efficient buffering and multisourcing
- Nearshoring – keep assembly close to the final market with local supply of components reduces reliance on global supply
- Multisourcing – standard interfaces enables multisourcing without the added cost of complexity
- Manufacturing footprint diversification – by not focusing all supply to one region, robustness is increased
- Buffers for critical components – the obvious solution, but it, of course, has downsides with tied-up capital and that the buffer levels are not high enough for major global events.
Aligning Business and Product Strategies to Module Strategies
Modularization is the activity of subdividing a system of products into modules. The process should first take the customer needs into account, but also the needs are driven by technology and company strategy. Defining a strategic reason for each module to exist is documenting why the interfaces around it should be kept stable over time. The definition of a module that Modular Management use is:
A Module is a functional building block with specified interfaces driven by company-specific strategies.
There are three main strategic reasons to isolate a module with interfaces: To enable future development without affecting surrounding modules, enable flexibility to configure the product to specific customer needs, and enable commonality and stability over time for modules that will have positive supply chain effects from this. We call these reasons Product Leadership, Customer Intimacy, and Operational Excellence.
Product Leadership: Development. What is the need and plan for product improvements? What modules can be used for achieving this?
Customer Intimacy: Flexibility. Is there a need to meet varying product performance levels to satisfy market and customer needs? Having different module variants can fulfill this requirement.
Operational Excellence: Stability. Where in the product can we keep the development and complexity to a minimum? Stability over time is essential for production and supply chain. It can push down the total cost significantly. Are there specific areas that would have extraordinary benefits from this?
Aligning Module Strategies to Supply Chain Strategies
A modularized product will be divided into three strategies as established earlier. This division opens opportunities for a tailored supply chain approach aligned with the module strategy.
Product Leadership: Invest in capability. This competence could be a core technology developed in the module internally and manufactured in-house to keep it close to R&D or a strategic supplier to create and supply the module. Performance driving modules should always be kept close, if possible, for speed and protection of unique values.
Customer Intimacy: Invest in flexibility. This investment can be in a local supplier close to the end customer to cover needed regional variants.
Operational Excellence: Invest in efficiency. Stable design and increased volume per part enable best-cost-country sourcing and/or automation opportunities.
Strategies and impact on Supply Chain
The Interfaces are the Key to the Modular Supply Chain
With a non-modular product, the variations are more remarkable due to non-standardized interfaces and fewer possibilities to deal with the variations in sub-assemblies. Not having these issues are significant benefits with a modular product structure.
When modules are defined on the right level, you can benefit from standardized interfaces in the assembly line because you will assemble interface to interface. Since they are standardized, there will be low variance in this operation. The variance in the assembly will be minimized when standardized interfaces have been defined. The performance, color, size, etc., might differ per module variant, but the tools and assembly operation will be standardized. The planning will also be simplified as the variance in the assembly process will be reduced.
To meet the change in volume demand or change in design, modularity will enable agility in operations supported by module strategies and standardized interfaces. In addition, the supply chains can be tailored to the strategy to match capabilities for external suppliers or internal production.
Why a Modular Supply Chain is Resilient towards External Disturbances
Earlier, we described the three fundamental strategies for modules and interfaces that can be leveraged by the supply chain if properly aligned. In the past few years, resilient supply chain has been a trend. Supply chain managers have nightmares about the covid-19 pandemic closing borders and shutting down supply chains. Capacity shortages in electronics components have caused shockwaves through basically all industries.
If the supply chain management is involved early in the product design, areas susceptible to external disturbances can be pointed out. From the beginning, the modular system design can be aligned to the needs of the supply chain. If, for example, a microcontroller or a memory chip is seen as a high-risk component that could put the whole production volume at stake, the possibility of isolating this component by a standardized interface should be evaluated. Suppose the modular system can use two sources for these components rather than one. In that case, it will be more resilient towards disturbances, without spreading the differences to all other parts of the products.
These architectural decisions must be evaluated long before actual problems surface. Of course, interfaces will come at a cost both in material for interfaces, resources to develop software for different MCUs and added cost of complexity to carry multiple variants of a module without a customer-driven need. But these added costs must be evaluated towards having a supply chain that is a bit more resilient towards external disturbances.
From Mass Production to Mass Customization – Flexible Lines
Based on the strategy defined above, the production layout can be organized as “module factories” within the factory.
Product Leadership modules are linked to planned product development, which means the module production will be subjected to frequent changes. Close cooperation with R&D departments is crucial for the regular introduction of changes. Since the future is uncertain heavy and inflexible investments should likely be turned down in favor of more flexible solutions.
Customer Intimacy modules imply that the module area must be able to manage many part numbers. Internal logistics and effective order systems are essential to reduce lead times and thus work in progress. If a slow process is selected for high variance modules, this will inevitably lead to the locking of significant capital in production to avoid long lead times.
Operational Excellence modules consolidate increased volume per part enabled by increased re-use across the assortment. Since higher stability is to be expected, the outlook for higher capital investments for efficiency is better.
Module areas in the factory: From left – Flexible area with the ability to adapt to planned changes. Middle – Many variants and material to handle. Right – Few variants and high volumes
A modular system also enables greater flexibility in separating sub-assemblies from the main assembly line. Even if the main assembly line is superior in efficiency, protecting the main assembly line balance can be advantageous by lifting out modules with varying assembly time to decoupled pre-assembly areas. The pre-assembly area produces different variants in the main assembly line sequence, or Kanban, without variance losses. And since all variants are assembled on the main assembly line, in the same way, total system performance is optimized without variance losses.
Where the variance is high or changes frequent, separate pre-assembly areas should be used to protect the main assembly line from losses and frequent design changes – even if the main assembly line has superior theoretical efficiency. The best modular product enables variance, uniqueness, and frequent refreshing, both in agreed areas of the product and according to agreed rules. And the modular system, with its standardized interfaces, is an asset so valuable for the entire company that significant changes should be governed by top management.
Three Common Supply Chain Mistakes
1. Mass production mode
It is always most efficient to produce large volumes of the same module or component, assuming the operation is highly focused on reducing waste. That will still be valid for the Operational Excellence modules with few variants, few changes, and consolidated volumes.
However, the modules that are subject to change as the market asks for different performance levels in other properties will not be efficiently produced if the production setup is difficult to adapt in capabilities and capacity. The Customer Intimacy and Product Leadership modules are not “attractive” to make from a mass-production standpoint as the changes are frequent and the number of variants is high. To stay competitive, producers have worked hard on renewal rates and product variance – but production is not aligned and still in mass-production mode:
- Too many production lines are used to produce different product families.
- Many lines are sub-optimized. Some run with low efficiency due to low demand and under-utilization. Others suffer varying quality (third shift symptom), significant re-planning, and long lead times due to over-utilization. Long lead times are often the most damaging consequence, with volumes lost when customers turn to competitors instead of waiting, and nonavailability costs are high as a result.
- Batched production and poor responsiveness to actual customer demand, plus extended downtime when changing a line between products.
- Major pains when phasing in new products.
2. Insourcing to fill capacity at downturns
Many companies insource purchased parts when market demand weakens. This approach is a dangerous action since it contradicts the supply chain strategy; some parts have been analysed and strategically found best to be purchased. Later, when market demand increases, the same components will be outsourced.
The justification for insourcing and outsourcing is to load the factory, keep the occupation level high, and have more volume to distribute the fixed cost.
This way of working will have some short-term effects, but often the long-term effects are underestimated, such as
- The supplier will experience a double effect from the decreased market demand - lower volume from the market and volume loss from the purchasing company. The supplier will face a difficult situation with increased costs that eventually will have to be compensated for, the increased price for the purchasing company, and possibly lower quality.
- Long-term efficiency improvement work will stop.
- Quality issue work will have lower priority.
- Supplier involvement in development project will not be possible.
Since the supply chain strategy is not followed, the understanding in the organization is that it was not a good strategy, and it will fall apart.
3. Hiding product complexity by Outsourcing
The complexity of producing the components to a non-modular product is often visible: It will drive many issues in the internal operation such as material shortages or high inventory levels because of uncertain planning. Low utilization of production equipment of low-runner components, quality issues when introducing changes, for example.
To handle the complexity of a non-modular product, outsourcing and letting a supplier produce the components could be attractive. This strategy means that the supplier will inherit the complexity and charge for the time spent on handling many parts, variance in assembly, and adaptation needs to meet changes in demand. Short lead time requirements will show up on the invoice since someone must pay for the capital required for the components kept in stock just in case.
Outsourcing will never be a solution to a complex product structure. It will only hide the problems and make the cost show up in another income statement section, hidden in the direct costs.
A Modular Supply Chain for a Modular Product
Few companies manage to completely align their market and product strategies towards their business and supply chain strategies. But for those who do, the rewards are ample: Supply chains that are increasingly efficient, flexible, and agile at the same time. By introducing alignment controls into your product development and supply chain development processes, you can ensure that the benefits are governed over time.
Please read our guide “How to Design for Agile Line Production,” which will dive deeper into these topics and also give three case examples on Mass production Versus One-piece Flow, It’s Not Just About Direct Material Cost, and Dedicated Versus Flexible Lines
Want to know more?
Please contact us directly if you'd like to discuss the topic covered in this blog or looking for a sounding board in general around Modularity and Strategic Product Architectures.
Modular Management Sweden
T: +46 8 456 35 00
Vice President & Partner
Modular Management Sweden
T: +46 8 456 35 00