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Managing finished-goods inventory under capacitated delayed differentiation

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  • Tang, Dong
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    Abstract

    Delayed differentiation or postponement is widely advocated to mitigate conflicts between product diversity and inventory cost savings. Manufacturers practicing postponement often suffer from severely constrained finishing capacities and noticeable finishing lead times. Therefore, inventories are still needed for finished products. Using the concept of inventory shortfall, this paper studies base-stock inventory models with and without demand forecasting and provides a computationally efficient method to set optimal inventory targets for finished products under capacitated postponement. Computations show inventory-saving benefit quickly vanishes after the capacity reaches a certain level. The value of forecasted advance-demand information (ADI) to postponement is justified, but can easily be overstated. Finishing capacities usually force manufacturers to build ahead according to demand forecast. When capacity limitation becomes severe, intuitions often guide producers to build to forecast even more than finishing lead times ahead. Results of this research indicate that these intuitions may be invalid and build to forecast more than finishing lead times ahead may not be a good practice. Further studies reveal that under capacitated postponement the forecasted advance-demand information is useful only when the variance of demand forecast errors is less than that of demands, and show that the optimal forecast lead time can be obtained in the same way as if the capacity is unlimited.

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    Bibliographic Info

    Article provided by Elsevier in its journal Omega.

    Volume (Year): 39 (2011)
    Issue (Month): 5 (October)
    Pages: 481-492

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    Handle: RePEc:eee:jomega:v:39:y:2011:i:5:p:481-492

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    Keywords: Capacity Delayed differentiation Forecasted advance-demand information;

    References

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    1. Gregory A. DeCroix & Antonio Arreola-Risa, 1998. "Optimal Production and Inventory Policy for Multiple Products Under Resource Constraints," Management Science, INFORMS, INFORMS, vol. 44(7), pages 950-961, July.
    2. Jayashankar M. Swaminathan & Sridhar R. Tayur, 1998. "Managing Broader Product Lines through Delayed Differentiation Using Vanilla Boxes," Management Science, INFORMS, INFORMS, vol. 44(12-Part-2), pages S161-S172, December.
    3. Ernst, Ricardo & Kamrad, Bardia, 2000. "Evaluation of supply chain structures through modularization and postponement," European Journal of Operational Research, Elsevier, Elsevier, vol. 124(3), pages 495-510, August.
    4. Chen, Liang-Hsuan & Chen, Ying-Che, 2010. "A multiple-item budget-constraint newsboy problem with a reservation policy," Omega, Elsevier, Elsevier, vol. 38(6), pages 431-439, December.
    5. Rema Hariharan & Paul Zipkin, 1995. "Customer-Order Information, Leadtimes, and Inventories," Management Science, INFORMS, INFORMS, vol. 41(10), pages 1599-1607, October.
    6. Hau L. Lee & Kut C. So & Christopher S. Tang, 2000. "The Value of Information Sharing in a Two-Level Supply Chain," Management Science, INFORMS, INFORMS, vol. 46(5), pages 626-643, May.
    7. Li Chen & Hau L. Lee, 2009. "Information Sharing and Order Variability Control Under a Generalized Demand Model," Management Science, INFORMS, INFORMS, vol. 55(5), pages 781-797, May.
    8. Hallgren, Mattias & Olhager, Jan, 2009. "Flexibility configurations: Empirical analysis of volume and product mix flexibility," Omega, Elsevier, Elsevier, vol. 37(4), pages 746-756, August.
    9. Guillermo Gallego & Özalp Özer, 2001. "Integrating Replenishment Decisions with Advance Demand Information," Management Science, INFORMS, INFORMS, vol. 47(10), pages 1344-1360, October.
    10. Fangruo Chen, 2001. "Market Segmentation, Advanced Demand Information, and Supply Chain Performance," Manufacturing & Service Operations Management, INFORMS, INFORMS, vol. 3(1), pages 53-67, February.
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    Cited by:
    1. Garcia, C.A. & Ibeas, A. & Herrera, J. & Vilanova, R., 2012. "Inventory control for the supply chain: An adaptive control approach based on the identification of the lead-time," Omega, Elsevier, Elsevier, vol. 40(3), pages 314-327.

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