Optimization of strategic planning processes for configurable pro

Wayne State University Wayne State University Dissertations 1-1-2013 Optimization Of Strategic Planning Processes For Configurable Products: Considerations For Global Supply, Demand, And Sustainability Issues Edward Lawrence Umpfenbach Wayne State University, Follow this and additional works at: http://digitalcommons.edu/oa_dissertations Part of the Industrial Engineering Commons, and the Sustainability Commons Recommended Citation Umpfenbach, Edward Lawrence, "Optimization Of Strategic Planning Processes For Configurable Products: Considerations For Global Supply, Demand, And Sustainability Issues" (2013). Wayne State University Dissertations. This Open Access Dissertation is brought to you for free and open access by DigitalCommons@WayneState. It has been accepted for inclusion in Wayne State University Dissertations by an authorized administrator of DigitalCommons@WayneState.

OPTIMIZATION OF STRATEGIC PLANNING PROCESSES FOR CONFIGURABLE PRODUCTS: CONSIDERATIONS FOR MARKETING, SUPPLY CHAIN, AND SUSTAINABILITY by EDWARD LAWRENCE UMPFENBACH DISSERTATION Submitted to the Graduate School of Wayne State University, Detroit, Michigan in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY 2013 MAJOR: INDUSTRIAL ENGINEERING Approved By: Advisor Date © COPYRIGHT BY EDWARD LAWRENCE UMPFENBACH 2013 All Rights Reserved DEDICATION Dedicated to my friends and family for all their support ii ACKNOWLEDGMENTS I would like to thank my advisor, Professor Ratna Babu Chinnam, for the incredible amount of dedication and support during my time as a student of his. He has inspired me to be a better student and person. I would also like to thank Dr. Ekrem Alper Murat and Dr.

Evrim Dalkiran for invaluable advice when my progress stalled out. It was greatly appreciated. Next, I would like to thank Gintaras Puskorius and Dean Pichette for providing great insight into the automotive industry and helping to keep my work practically significant. I would like to thank the remaining members of my dissertation committee, Dr.

Leslie Monplaisir and Dr. Yinlun Huang, for their support and recommendations throughout this journey. Last but not least, I would like to thank my mom, dad, and two sisters for always being there for me whenever I needed them. I could not have done this without you all.

iii TABLE OF CONTENTS Dedication. iii List of Figures. vii List of Tables. viii Chapter 1: Introduction.

3 Chapter 2: Integrated Automotive Assortment Planning Model .1 MNL Demand Model .3 Product Flow Decisions .5 Final Objective Function .6 Structural Properties of the Solution .7 Transformed MNL Model .6 Conclusion and Future Research. 43 Chapter 3: Packaging and Assortment Planning Implications .1 Single Run With and Without Packages .2 Packaging Examined Under a Channel Inventory Constraint .1 Packaging Heuristic Introduction .2 Packaging Heuristic Performance .6 Conclusions and Future Work. 64 Chapter 4: Sustainability of Configurable Product Assortments .3 Mathematical Modifications for Sustainability Modeling .4 Data Considerations for Sustainability Modeling .1 MPG Requirements and Product Use Emissions .2 Supply Chain Emissions .1 Program MPG Target .2 Program Product Use Co2e Target.3 Program Supply Chain Co2e Target .6 Conclusions and Future Work. 93 Chapter 5: Conclusions and Future Research.

106 vi LIST OF FIGURES Figure 1: Graph of Scaled Sigmoid Functions for Powertrains in the Base Case. 34 Figure 2: Sample from Ford 2011 Annual Report. 35 Figure 3: Pie Chart Representing the Costs Incurred in the Base Case. 38 Figure 4: Effects of Changing the Level of Outside Competition.

40 Figure 5: Effect of Packaging on Profit under a Channel Inventory Constraint. 60 Figure 6: Effects of an MPG Requirement on Profit, Sales, and MPG. 75 Figure 7: Effects of an MPG Requirement on All Co2e Emissions. 76 Figure 8: Effect of a Product Use Co2e Requirement on Profit, Sales, and MPG.

81 Figure 9: Effects of a Life Cycle Co2e Requirement on All Co2e Emissions. 82 Figure 10: Effects of a Supply Chain Co2e Requirement on Profit (Assortment Fixed). 86 Figure 11: Effects of a Supply Chain Co2e Requirement on All Co2e Emissions (Assortment Fixed). 87 Figure 12: Effects of a Supply Chain Emissions Requirement on Profit and MPG (Assortment Free).

89 Figure 13: Effects of a Supply Chain Emissions Requirement on All Co2e Emissions (Assortment Free). 90 vii LIST OF TABLES Table 1: Base Case Results. 35 Table 2: Results of Modified Base Case Without Packaging. 54 Table 3: Results of Modified Base Case with Packaging.

56 Table 4: Summary of Heuristic Performance over Random, Equally Sized Problems. 62 Table 5: Heuristic Time Performance over Five Differently Sized Problems. 63 Table 6: Fuel Efficiency of Powertrain Variants. 71 Table 7: Product Use Co2e for Powertrain Variants.

72 viii 1 Chapter 1: Introduction There are a few key questions that businesses need to consider when developing a strategic plan defining how they will compete and be successful in today’s economic climate. These broad questions include (not exclusively) “what products will the firm provide to our customers to reach an appropriate level of customer satisfaction?” and “how can the firm supply and price these products to customers in a way that leaves costs low enough to provide adequate profit for its shareholders?” Despite being simple questions, the answers can be incredibly complex in today’s environment of rapid technological changes and rising consumer expectations. Shrinking product life-cycles and a proliferation of products has subjected companies to tremendous pressure in planning, developing, and offering their product to fragmenting segments. Companies that deal with highly engineered, configurable products such as automobiles can face especially difficult and complex decisions.

Henry Ford’s famous statement “Any customer can have a car painted any color he wants so long as it is black” (Ford and Crowther 1924) may have been the idea that jump started the Ford Motor Company down the path to becoming one of the largest companies in the world, but it clearly would not work in today’s automotive sales environment. Recent trade articles in the automotive industry have presented evidence to suggest that in the absence of objective and comprehensive strategic planning models, companies seem to be struggling with decisions regarding their products, in particular, the size and variety of their product configuration assortments. A product assortment is the set of orderable configurations for the product and can be rather large depending on the number of core options (e., number of engine, transmission, and seating choices available for an automotive model) and optional content (e., navigation system and moon roof) available for the product. Some companies have dramatically reduced the size of their product assortments, while others are offering increasing 2 product configuration complexity.

In 2007, Volvo introduced the C30, a vehicle expected to sell approximately 10,000 units, with the slogan “The car you can customize 5 million ways to be just like you.” At nearly the same time, Ford Motor Company announced a reduction in the ordering complexity of the F-150 truck by more than 90%, with most car lines offering fewer than 1,000 combinations (Wilson 2008). In order to achieve these goals, Ford has taken such actions as reducing the number of global seat frames from twenty-eight to two and the number of six-cylinder engine families from eight to two (Wilson 2008). We believe that the auto industry is lacking in models to make the tradeoff between supply chain complexity (we utilize the definition of supply chain from Chopra and Meindl (2007) – “all parties involved, directly or indirectly, in fulfilling a customer request,” – not simply logistics ) and assortment satisfaction, instead relying on managerial experience and heuristics to expand or decrease the number of configurations they offer to their customers in an attempt to increase profitability.1 Research Objective The objective of this research is to develop assortment planning models that holistically address the needs of companies producing configurable products by explicitly accounting for both supply and demand considerations. We believe that these models can significantly improve profitability over existing heuristics, such as a sequential planning process.

In a sequential planning process, a marketing group might first make a projection of demand without knowledge of the effect that the assortment might have on the complexity and cost of the supply chain. A supply chain group then takes that demand projection as input, and works to develop a supply chain that meets the projection, with some limited feedback between the two groups. By taking the decisions jointly, we aim to find a more profitable solution for the firm as a whole. The models must scale to the levels required by a producer of configurable goods – sometimes tens of 3 thousands of configurations.

In addition to the fundamental idea of this research that integrated strategic planning will improve profitability, we extend our model to apply it to two more important decisions in the automotive industry today – 1) The effect these decisions have on the sustainability of the product, both during its production and life cycle and 2) The effect that packaging has on both demand and the supply chain (we use the term packaging instead of the popular term “bundling” by choice). Throughout the dissertation, we mostly focus on configurable automotive products. However, the models and tools developed can be relevant for other configurable products (e., computers, tablets, printers, cell phones, copiers, televisions, play sets). The models mostly assume an assemble-to-stock production environment and would need significant modification to support a mostly assemble-to-order environment.2 Dissertation Organization In the second chapter, we introduce our model to integrate assortment planning and supply chain management decisions.

We utilize a multinomial logit (MNL) demand model, which through the Charnes-Cooper transformation can be transformed into a linear programming problem under certain conditions. Through the MNL model we model assortment based substitution (substitution occurring from whether a product is offered or not) but cannot handle stock-out based substitution (where a product is offered, but is temporarily out of stock). On the supply chain side of the problem, we explicitly model the costs associated with developing components, manufacturing them, assembling them into finished configurations, and the associated complexity cost in the supply chain (defined in detail in chapter 2). We model a centralized supply chain, where the goal is to maximize the total profit across all tiers (i., all supplier plants are owned by the configurable product assembler and work for a total combined profit).

Throughout the dissertation, select data elements will be presented where appropriate, 4 with full data explanation left for the appendices. The effect of packaging on the assortment and supply chain of a configurable product manufacturer is the subject of Chapter 3. Chapter 4 studies how sustainability can be incorporated into our model and the effects that it has on the assortment and supply chain. Chapter 5 concludes the dissertation and offers recommendations for future research.

5 Chapter 2: Integrated Automotive Assortment Planning Model 2.1 Introduction Assortment planning is a field of research where decisions regarding the set of products to offer to customers are made. It is a highly strategic decision and impacts nearly every subsequent decision a firm will make. Demand is often treated endogenously, and the objective is to either maximize revenue or profit with consideration for substitution effects subject to some constraints, usually a fixed cost for stocking a product or a limit on the available shelf space. We make a set of broad claims about the current process of strategic planning in large automakers.

These claims might apply more strongly to some automakers than others, but we believe that all face the same problem in some form – Assortment planning decisions are usually relegated to a marketing group. Although top level leadership tries to set incentives and motivate marketing professionals to act in a way to maximize profitability of the firm as a whole, their success is often based on traditional marketing metrics – sales, revenue, conquest sales, and market share. Thus, marketing professionals often have incentives that push them to expand the number of product offerings to the customer.