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

10 Nk

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 Di(t) ~ N(μi,σi

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

NotationSi = average investment cost per period if operation i became a common operation

ni(k) = lead time of operation i when operation k is the last common operation

Pi(k) = processing cost per unit associated with operation i when operation k is the last common operation

hi(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 = nμ

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)

12

nz

1)()(

2)(

1)(2

)(

))(()(

)()()(

21

21

1

1221

1

211

2111

knz

kh

knzkh

knkh

kpSkZ

i

k

ii

i

k

ii

i

N

ii

N

ii

k

ii

Optimal last common operation k* = argmin(Z(k): )10 Nk

Standardization

With Delayed Product Differentiation

PCA

FA&T

Customization

Color Printer

Mono Printer

No Delayed Product Differentiation

PCA

Customization

Customization

PCA

Mono Printer

Color Printer

FA&T

FA&T

Customization

Standardization (continued)

)()(1

11)(

))((

)2

(3)()0()1(

21112111

32211

3

1211

2112111

bbnz

nnz

n

SZZ

ii

Modular Design

Fab.

Fab.

Integration+Shipping

Integration+Shipping

Integration+Shipping

Distribution

Distribution

Distribution+Pan.Assembly

Distribution+Pan.Assembly

Black Dishwasher

White Dishwasher

Black Dishwasher

White Dishwasher

Before Modular Design of Metal Frame

After Modular Design of Metal Frame

11)(

)(1)(

)())((

)2

()()1()2(

3333

21221122

213333

21212

nbnb

znzb

bnbn

SZZ

Modular Design (continued)

Process Restructuring

A) Postponement of Operation

B) Reversal of Operations

A) Postponement of Operation

Component Mfg.

Bundling+Shipping

Bundling+Shipping

Distribution

Distribution

Device A

Component Mfg.

Bundling+Distribution

Bundling+Distribution

Shipping

Device A

Device B

Device B

No Delayed Product Differentiation

With Delayed Product Differentiation

Postponement of Operation (continued)

11)(

1)(1

)2

)((

)()()(

)1()2(

33213

22122121

2121

21132212

nnzb

nbnbz

bb

bbnbbS

ZZ

B) Reversal of Operations

Red Sweater

dye knit distribution

Blue Sweater

dye knit distribution

Red Sweater

Blue Sweaterknit

dye

dye distribution

distribution

With Delayed Product Differentiation

No Delayed Product Differentiation

Reversal of Operations (continued)

))(()(1

)2

)((1)(

))((

)0()1(

21211222

21121212

2121121

bbnz

nz

nnS

ZZ

Basic Approach

Redesign Process for Delaying Product Differentiation

Conditions for Effectiveness

Standardization Design a part that is common to all products

Effective when the investment cost and incremental processing cost required for standardization are low

Modular Design Divide 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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