The impact of delayed differentiation in make-to-order environments

Abstract

To cope with the challenges of product proliferation, many firms are shifting their supply chain structures from make-to-stock (MTS) to make-to-order (MTO). An MTO strategy comes at a price however, as customers must wait longer for their configured products. Incorporating delayed differentiation (DD) in an MTO environment offers the potential of reducing the customer's waiting time, since the generic part/component of the products is made available before receiving customer orders. In this paper, we quantify the trade-offs involved in implementing DD in an MTO environment using both customer waiting time and system cost as performance metrics. We show that under common conditions, the introduction of DD results in shorter waiting times and higher cost over a pure MTO strategy. These results are as expected. However, we also derive conditions where DD results not only in shorter customer waiting time but also lower cost, thus dominating a pure MTO strategy. Through a simulation experiment, we test the robustness of our results for the case where the customer arrivals and production times are generally distributed. For firms with the capability of estimating the customer waiting cost, we derive the optimal base-stock level of the generic component to minimise the total cost.

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