Hewlett Packard “Postponement Strategy” (Delayed Differentiation)

• Risk pooling via delayed differentiation 1. Standardization

• Application of multi-period inventory models 2. Process restructuring
3. Modular design

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Delayed differentiation with process re-sequencing:

Standardization Example of Benetton

Dyed Yarns Finished Sweaters

Def.: Use common components across different products
(e.g., product platforms in car industry)

“Benefits” Dyeing Knitting

• Economies of scale
• Risk pooling
• Higher service levels White Garments Finished Sweaters

• Easier to service
• Rationalization of SKU base
Knitting Dyeing

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Delayed differentiation with modular design:

Other examples of delayed differentiation
Example of retail paint

• Private label soup manufacturer:

– Problem: many different private labels (Giant, Kroger, A&P, etc)
– Solution: Hold inventory in cans without labels, add label only when
color pigments, retail sales demand is realized.
paint mixing,
packaging
• Black and Decker:
– Sell the same drill to different retailers that want different packaging.
– Store drills and package only when demand is realized.

color pigments retail sales, • Nokia:

paint mixing, – Customers want different color phones.
packaging
– Design the product so that color plates can be added quickly and locally.

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1
 When does delayed differentiation make sense? Supply Chain for Desk Jet Printers

external suppliers other HP divisions

• Customers demand variety.
• There is less uncertainty with total demand than demand for
individual versions. Manufacturing
(Vancouver, Washington)
• Variety is created late in the production process.
• Variety can be added quickly and cheaply.
CDC CDC CDC
• Components needed for variety are inexpensive relative to the
US Europe Far East
generic component.

retailers retailers retailers

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HP Case Inv. – Service Tradeoff

Problems? 100%
Service
• Forecasting difficult
(Fillrate)
• High product variety
• Long lead-times
• High inventory costs …
• … and high shortages
• Obsolescence cost
inventory investment

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Suggested Solutions Current Policy:

1. New system to determine safety stock Policy?

– To far too right or left on curve? Periodic Review Policy

2. Air shipments P = 1 week

L = 1+4 = 5 weeks --- no inventory at factory
– Adv.: Reduced lead time ⇒ pipeline inventory and safety
stock decreases
– Disadv.: increased transportation costs Product “AB”

3. Generic model / postponement Monthly demand Weekly demand

mean = 15,830 mean = 15,830 * (12/52) = 3,653
– Adv.: Risk pooling ⇒ safety stock decreases
– Disadv.: higher manufacturing costs (component costs, std. dev. = 5,624 std. dev. = 5,624 * √(12/52) = 2,702
integration at DC)
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2
 Costs to Consider? Inventory Calculations: Product AB

RxP
• Inventory cost • Cycle Inventory = = 1827 units
2
– Cycle inventory • Pipeline Inventory = R x L = 18,265 units
– Safety stock Why important here
for comparison? • Safety stock calculations:
– Pipeline inventory
– Cycle service level target = 98%
• Shortage costs
• Shipping costs – Z = Normsinv(98%) = 2.0537
– Safety stock = z · σ · √(P+L)
= 2.0537 · 2702 · √6 = 13,593 units

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Total Inventory Cost Shortage Costs:

H = i x C = 60 % * $200 = $120 What does i include ? Shortage cost/unit = 300-200 = $100/unit

Annual Inv. Cost = H * Cycle Inv. Why maybe lower? (buy different HP printer?)
+ H * Pipeline Inv. Cost Why maybe higher? (loose sales on cartridges?)
+ H * Safety Stock Cost
= $6,227,346 Annual shortage cost
In reality: = cost of shortage/unit x shortages/cycle x cycles/yr
Need different H for inventory in factory (WIP less valuable), on = 100 x {L(Z) · σ · √(P+L)} x 52
ships, and in warehouse (e.g., including shipping costs). Make = $434,204
some reasonable assumption…

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Cost of Shipping: “Total” Annual Cost

Container cost = $5000 = Inv. costs

Volume = 2500 cu. ft. + Shipping costs
Box volume = 3 cu. ft. + shortage costs
Unit cost = $6/unit
= $8,325,369 / yr
Annual shipping cost = $6 x annual demand
= $1,663,819
Across all 6 products for European DC

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3
 “Shipping by Air” Lesson on choosing transportation modes

Do not only look at unit transportation costs…

L = 1 + 1 = 2 weeks
Choice of transportation mode
Cycle inv. cost = $319,965 • has a large impact on pipeline inventory and safety stock
(For light but expensive items, the seemingly more expensive air
Safety stock cost = $1,914,653
shipments are often cheaper!)
Pipeline cost = $1,279,861 • requires tradeoff between responsiveness (frequency and quantity
of shipments) and efficiency (total cost including inventory costs)
Shortage cost = $307,028
• should not be exclusive – consider sea for regular shipments plus air
Shipping cost = $14,419,766 for emergency shipments (similar to FedEx example in Norton)

Total cost = $17.93 MM ⇒ Match supply chain strategy and product type !

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“Postpone Differentiation” Total demand for “generic” printer

Develop a generic printer Mean = Avg. for “A” σ 2generic = σ A2 + σ AA

2
+ L + σ AY
2

• Standardization + Avg. for “AA”

design of dual voltage network +
.
σ generic = σ A2 + σ AA
2
L + σ AY
2

• Process Restructuring
. = 6157.5
first ship, then customization at CDC
+ Avg. for “AY”
• Modular Design
= 23,108/month
easy to assemble power supply module

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“Generic” “Postponing Differentiation”

Helps manage product variety

Cycle Stock Cost = $319,965 at lower inventory costs
Safety Stock Cost = $1,785,660
100%
Pipeline Cost = $3,199,652 Service 1
(Fillrate) 3
Shipping Cost = $1,663,819 2 1: Can increase service level
with same inventory costs.
Shortage Cost = $286,343 2: Can decrease inventory costs
with same service level.

Total = $7,255,441 / yr 3: Can increase service level

and decrease inventory costs
Savings = $1,069,929 / yr at the same time.

inventory investment
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4
 Limitations of product pooling Summary of risk pooling strategies

• A universal design may not provide key functionality to
consumers with special needs:
– High end road bikes need to be light, high end mountain bikes need to
be durable. It is hard to make a single bike that performs equally well in
both settings.
• Forms of risk pooling: capacity / resource pooling (class 3), location pooling
(Norton case), lead time pooling / consolidated distribution (Norton case),
product pooling / delayed differentiation (HP case)
• Advantage: possible to lower inventory and increase service simultaneously

• A universal design may be more expensive to produce because
additional functionality may require additional components.
• But a universal design may be less expensive to produce /
procure because each component is needed in a larger volume.
• A universal design may eliminate brand / price segmentation
opportunities:
– There may be a need to have different brands (e.g., Lexus vs Toyota)
and different prices to cater to different segments.
• Downside: might result in higher transportation or manufacturing costs
• Manage downside by pooling selectively:
– Pool unpredictable items with low or negative correlation
– A little bit of risk pooling goes a long way:
• With location / product pooling the biggest bang is from pooling a few
locations / products.
• With capacity pooling a bit of well designed flexibility is very effective.

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Friday: Beer Distribution Game Friday: Beer Distribution Game

1 Brewery 1 Distributor 1 Wholesaler 1 Retailer Consumers • Make sure to be here – 10% of grade
• You will receive email with link to game, as soon as I get it... Please prepare
– but do not spend a lot of time for a sophisticated ordering system…
• Meet in room H 306 for brief reminder of rules of game.
• We split up in 2 rooms (H 306 and H 308) and play the game.
• Goal: Experience difficulty of managing a supply chain and • Meet in room H 306 for short debriefing & to see who won.
something called the bullwhip effect • Next class writeup due (2 pages, bullet points – less is fine!)
• Every period you need to place orders; period length = 1 week, lead time = 3 – Concepts used
weeks (information + shipping lead time). – What worked well and what did not work well? (Describe problems and
reasons for them.)
• Beer is shipped based on your customer orders; unmet demand is
BACKORDERED! Good Belgian beer – customers wait… – Imagine that the beer game with all its rules represented the management
of a real supply chain. What changes would you make to the structure of
• Balance underage and overage costs – what service level should you aim the supply chain and to the “rules” by which the supply chain is managed
for? What ordering system is this? to improve the performance of the supply chain?

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