Delayed Product
Differentiation
Ahu SOYLU
Outline
Definition of Delayed Product
Differentiation
 Literature Review
 Proposed Methodology

Introduction


Firms have to increase product variety in order
to be profitable in the market.
Increased product variety makes predicting
demand extremely difficult
 Forecast
errors are much greater at individual product
level than at aggregate level
 As product variety increases, the likelihood of
correlation among product forecasts increases,
making forecasting more difficult.
Difficulties





Deciding how much inventory to carry
Predicting equipment capacity requirements
Forecasting component requirements
Increase in the number of suppliers
Shorter product life cycles
Increased variability makes inventory,
equipment capacity, component, supplier
and product changeover management
more difficult.
The Challenge
To minimize the extent in which product
variety increases variability in the
operating environment.
 Standardization is the answer.
 Swaminathan(2001) describes four
standardization approaches.

Non-Modular
Product
Modular
Standardization Approaches
Part Standardization
Process
Standardization
Maximize component
commonality across
products
Delay customization as late
as possible
Product
Standardization
Procurement
Standardization
Carry a limited number of
products in the inventory
Leverage equipment and
part commonality across
parts
Non-modular
Modular
Process
Standardization Approaches
Process
Standardization
Delay customization as late
as possible
Delayed product differentiation
benefits the manufacturers by,
Increasing their flexibility by
enabling them to commit their
WIP to a particular product at
a later time
Decreasing their costs of
complexity by reducing the
variety of components and
processes within the system.
Delayed Product Differentiation
Multiple end-products may share some common components or
processes at initial stages. At some point, specialized components or
processes are then used to customize WIP into different end products.
1
2
Common operations
k
Literature Review



The concept of delayed product differentiation
was first introduced in the marketing literature by
Alderson (1950).
Shapiro and Heskett (1985), Zinn and Bowersox
(1988), Zinn (1990), van Doremalen and
Zinn(1991)
Lee et al.(1993) exemplified delayed product
differentiation by means of deferring the
localization process for the deskjet printer at
Hewlett-Packard.
Lee et al. (1993)

North
American DC
Vancouver
Plant

1 month
European
DC

Far
East DC
Inventories are kept in
finished goods form.
With factory localization,
because of long lead time,
the DCs had limited ability
to respond to fluctuations in
the demand for different
versions of the product.
With DC localization –a
generic product customized
at DCs- a reduction of 18%
in total inventory
investment was achieved.
Literature Review



Lee (1994) showed that inventory savings are
greater when the demands for different products
are negatively correlated.
Lee (1996) described a model for capturing
inventory reduction in an adaptation of multi
echelon system.
The model assumes no buffer stocks, the
inventory reduction comes from finished goods
inventory.
Literature Review

Lee and Tang (1997) developed a model which
complements Lee’s(1996) model in the following
ways:
 Holding
inventories at different points is allowed
 Not only decrease in the finished goods inventory but
also other factors (i.e. design cost, processing cost,
inventory cost, lead times) were also examined
 Specific approaches such as standardization,
modular design and process restructuring are
examined.
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
the standardization are low.
Modular Design
Divide a part into 2
modules-the first module is
a common part and the
assembly operation of the
second module is deferred.
The number of modules increases.
However, this approach 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- the first step is
common to all products
and the execution of the
second step is postponed
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
Effective when deferring the high valueoperations. As a result, the
added operation by reversing the
first operation is common
operations
to all products.
Literature Review

Garg and Tang (1997) are first to examine
delayed product differentiation with multiple
points of differentiation.

Product
Differentiation
Point
T1
Family
Differentiation
Point
T2
T3
The effects of early and
late postponements are
examined in both
centralized-single
decision maker for WIP
and finished goods- and
decentralized control
models.
Multiple Points of Differentiation

In centralized control model;



Both early and late postponements results in inventory savings
which increase as the amount of time by which the point of
differentiation delayed is increased.
Early postponement is preferred when the demand correlation is
high.
In decentralized control model;



Lead times determines the decision of early or late
postponement.
If T2<T1, early postponement, if T3<T2 late postponement is
beneficial.
If T1>T2>T3 both early and late postponement are beneficial.
Literature Review



Aviv and Federgruen (2001) examine the design
for postponement concept under unknown
demand distributions.
Yan et. al. (2002) examine the effect of
sequencing and merging operations on the
reduction of safety stocks.
Further research is welcomed on models
covering other cost factors with less
assumptions.
Proposed Model


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The model I propose incorporates both the
benefits of delayed product differentiation and
supply contracts.
The product is shipped to the retailers without
customization.
The retailer is equipped with the customization
knowledge and performs the customization step.
The manufacturer takes the unsold goods back
at the end of the period.
The benefits of risk pooling are also put in use.
Proposed Model

Generic
Products

Manufacturer
Retailers

The manufacturer is
supplied with full
information on demand
patterns.
The centralized control
benefits can be achieved
with supply contracts.
The returned goods to
manufacturer can be
shipped to another
retailer or customized.
Proposed Model
The reliability between the retailer and the
manufacturer should be high in order to
prevent technology.
 The setup cost of customization should be
small, customization step should be easy
to perform.

Questions
&
Answers