Where To Differentiate Your Product When Stocking Levels Are CoupledReport as inadecuate


Where To Differentiate Your Product When Stocking Levels Are Coupled


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A critical assumption of Lee and Tang’s 1997 analysis of where in the productionprocess a company should delay differentiation of its product is the independent treatment ofinstallations in the production network. We show this -decoupling- approach gives rise toinaccuracies in assessing the value of delayed differentiation, frequently overestimating but alsopotentially underestimating the savings in inventory costs by failing to appropriately exploit therisk pooling effect. By doing so, we reveal a previously hidden factor in determining the optimaldelayed differentiation strategy: the pattern of holding costs assessed for the various stages ofwork-in-process, which we refer to as the holding cost profile, plays an important role in thedetermination of the optimal strategy. Prior work has established the importance of the absoluteholding cost at each stage in this decision but the relative holding costs are also important; assharp increases in the local holding costs indicate potential cost reduction opportunities. Finally,we provide insight on the conditions when the decoupling assumption may lead to significant errors and cause a firm to make a costly mistake when determining where in the process to differentiate its product.



Operations Management -



Author: Ferguson, Mark E. - Lystad, Erik D. - -

Source: https://smartech.gatech.edu/







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