Modeling the Costs and Benefits of Delayed Product Differentiation Eren Anlar

Introduction Expanding product variety and high customer service provision are major challenges for manufacturers Delaying the point of product differentiation (i.e. the stage after which the products assume their unique identities) is becoming an emerging means to address these challenges This strategy requires redesigning of products and processes Simple model that captures the costs and benefits associated with this strategy is developed. Three different product/process redesign approaches are formalized

Three approaches for delayed product differentiation 1)Standardization 2)Modular design 3)Process Restructuring

Standardization using common components or processes reduces the complexity of the manufacturing system increases the “flexibility” of use for the work in process inventories improves the service level of the system (due to risk-pooling)

Modular Design decomposing the complete product into submodules that can be easily assembled together enables the manufacturer to delay the assembly operation of certain “product-specific modules”

Process Restructuring resequencing process steps of product making possible to rearrange the manufacturing process so that the common process steps shared by multiple products are performed before the product specific process steps

Model allows for holding inventories at different points of the process incorporates other factors that would normally be affected by delayed product differentiation (e.g: design cost, processing cost, inventory cost at intermediate stages, lead times etc.) an existing manufacturing system that produces two end- products, where each end-product processes performed in N stages is considered the manufacturing system has a buffer that stores work-in- process after each operation k = the last common operation products are considered to be “distinct” after the last common operation k discrete time model

Assumptions assume that the demand of product i (i = 1, 2) at the end of period t is denoted by an i.i.d, where D i (t) ~ N(μ i,σ i 2 ) assume that “sufficient” buffer inventories are held at each buffer located immediately after each operation so that the entire system can be “decoupled” into N single-stage systems assume high service level, 90 percent or higher, at each intermediate stage, which leads to assuming adequate to control the production “locally” for each of the N stages assume that the safety stock at each buffer is replenished each period according to an “order-up-to level” policy assume that the safety stocks are replenished according to an order-up-to level policy assume service levels for different buffers are the same assume that the quality of the output at each stage will not be affected by delayed product differentiation

Notation S i = average investment cost per period if operation i became a common operation n i (k) = lead time of operation i when operation k is the last common operation P i (k) = processing cost per unit associated with operation i when operation k is the last common operation h i (k) = inventory holding cost for holding one unit of inventory at buffer i for on period when operation k is the last common operation z = “safety factor” associated with the service level for each buffer Z(k) = total relevant cost per period for the case when the operation k is the last common operation

Suppose a buffer faces normal demand with mean μ and std. dev.σ and that the buffer replenishes its stock by following the order-up- to level policy Average on-order (WIP or “in transit”) inventory = n μ Average “buffer” inventory = Assume that the (WIP or in-transit) inventories are valued as the same as the output of each stage. Then that we apply the same safety factor z for each of the buffers in the system Notation (continued)

Optimal last common operation k* = argmin(Z(k): )

Standardization With Delayed Product Differentiation PCA FA&T Customization Color Printer Mono Printer No Delayed Product Differentiation PCA Customization PCA Mono Printer Color Printer FA&T Customization

Standardization (continued)

Modular Design Fab. Integration+Shipping Distribution Distribution+Pan.Assembly Black Dishwasher White Dishwasher Black Dishwasher White Dishwasher Before Modular Design of Metal Frame After Modular Design of Metal Frame

Modular Design (continued)

Process Restructuring A)Postponement of Operation B) Reversal of Operations

A)Postponement of Operation Component Mfg. Bundling+Shipping Distribution Device A Component Mfg. Bundling+Distribution Shipping Device A Device B No Delayed Product Differentiation With Delayed Product Differentiation

Postponement of Operation (continued)

B) Reversal of Operations Red Sweater dye knit distribution Blue Sweater dyeknitdistribution Red Sweater Blue Sweater knit dye distribution With Delayed Product Differentiation No Delayed Product Differentiation

Reversal of Operations (continued)

Basic ApproachRedesign Process for Delaying Product Differentiation Conditions for Effectiveness StandardizationDesign a part that is common to all products Effective when the investment cost and incremental processing cost required for standardization are low Modular DesignDivide a part into 2 modules-first module is a common part, second module is deferred The number of modules increases. However, is effective when the incremental lead time, incremental processing cost and unit inventory holding cost are low Process Restructuring: Postponement of Operation Divide an operation into 2 steps-first step is common to all products and execution of the second step is deferred Effective when the lead time of the common step is significantly longer than the second step that is being delayed. In addition, this approach is effective when the second step is a high value-added activity Process Restructuring: Reversal of Operations Reverse the order of 2 operations.Hence, the first operation is common to all products Effective when deferring the high valued- added operation by reversing the operations The Implications of Three Basic Approaches for Delayed Product Differentiation

Conclusions product differentiation can be delayed through product/process redesign. This may incur additional processing cost and investment cost. However, this redesign will lower the buffer inventories. Benefits: reducing the complexity of the manufacturing process, increasing the “flexibility” of use for the buffer inventories, and improving the service level of the system. it can be seen as a strategy for a company to reduce inventories and improve service level when dealing with product proliferation.

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