| Abstract: | Customer satisfaction can be achieved by providing rapid delivery of a wide variety of products. High levels of product variety require correspondingly high levels of inventory of each item to quickly respond to customer demand. Delayed product differentiation has been identified as a strategy to reduce final product inventories while providing the required customer service levels. However, it is done so at the cost of devoting large production capacities to the differentiation stage. We study the impact of this postponement capacity on the ability to achieve the benefits of delayed product differentiation. We examine a single‐period capacitated inventory model and consider a manufacturing system that produces a single item that is finished into multiple products. After assembly, some amount of the common generic item is completed as non‐postponed products, whereas some of the common item is kept as in‐process inventory, thereby postponing the commitment to a specific product. The non‐postponed finished‐goods inventory is used first to meet demand. Demand in excess of this inventory is met, if possible, through the completion of the common items. Our results indicate that a relatively small amount of postponement capacity is needed to achieve all of the benefits of completely delaying product differentiation for all customer demand. This important result will permit many firms to adopt this delaying strategy who previously thought it to be either technologically impossible or prohibitively expensive to do so. |
