Staged postponement of committing order specifications

With the ever compressing time to market, demand fluctuations and rapid changes in technology, the timing for committing product specifications becomes very important to buyers and producers alike in improving the overall supply chain efficiency. In recent years, to hedge the risks of market uncertainty, a practice has emerged in which the buyers make staged commitment of product specifications so that the producers can start some manufacturing and purchasing activities. In essence, this practice is to postpone in stages the commitment on product specification as late as possible and producers can concurrently utilize the partial information from the buyer for an early start of production operations. The postponement is conducive to enhancing supply chain responsiveness to the market fluctuation. The expected impacts are reduced inventory and shortage costs and improved capacity utilization. In this research, it is termed as staged postponement of committing order specifications. Staged postponement of committing order specifications has been reported in industries with high complexity products such as automobile, airplane and other infrastructure system products, and products with high market volatility and large production volume such as in the fashion clothing industry. Although the concept is gaining increasing importance, no systematic approaches have been established to tackle these operational issues with significant financial impacts on staged commitment. These critical issues include: What are the right attributes to be postponed? When is the right time for the customer to commit to these attributes? What are the risks and costs associated with staged postponement? Last but not the least, what is the economic value of providing the responsiveness in staged postponement? These and other issues involve thoughtful consideration of a wide range of factors spanning from marketing, engineering and manufacturing. The objective of this thesis is to develop methodologies and decision models to enable buyers and producers to orchestrate staged commitments of custom specifications in order to improve overall supply chain responsiveness and efficiency. Ultimately, staged postponement provides an approach to best match the customer value with the manufacturing capability in today’s volatile market. The first step of this research is to quantify the potential economic value of staged postponement in order to provide incentives and justify its adoption in supply chain management. Essentially, staged postponement enables the buyer with operational flexibility (options) to hedge risks of market uncertainties. Thus a real option based valuation model is proposed in which commitment postponement is referred to as an investment with a series of options to switch among the alternatives of the product specifications. Staged postponement may also undermine production and logistics efficiency and incur various costs. The cost impact of commitment postponement on additional capacity, transportation, rush material/component procurement are analyzed. Then mathematical models are further built to quantify the risks due to capacity loading fluctuation and potential resource underutilization. Based on the model, the optimal strategy to book production capacity can be identified by solving a discrete Newsvendor problem. To reap the benefits from staged postponement with minimum costs, it is most critical to select right attributes and right timing for staged commitment. The research has developed a systematic approach to optimally decide the selection of product attributes and timing of staged commitment in an environment with multiple product attributes and multiple production processes. The approach starts with categorizing product attributes and aggregation of production processes to reduce the complexity. A mathematical model incorporating capacity, interlocking and sequential constraints are built to identify the optimal commitment schema. Scenario analysis is also conducted to study the impact of process structure and placements of additional capacity on staged postponement of committing order specifications. The research results are validated by conducting a case study from the aerospace industry. The reason for choosing this industry as the test case is that on one hand the nature of the air transportation industry is often subject to market and technology risks and uncertainties. And on the other hand, the production lead time for airplanes is extremely long. Hence, staged postponement of committing order specifications has become a powerful method to overcome this dilemma. Moreover, the large scale complexity and huge value involved in an order makes it ideal to validate the research results. Finally, based on the study of available industry practices and systematic analysis, the characteristics of industries for potential applications of staged postponement are also presented