DYNAMIC TIME-BASED POSTPONEMENT:
CONCEPTUAL DEVELOPMENT AND EMPIRICAL TEST DISSERTATION
Presented in Partial Fullfilment of the Requirements for the Degree Doctor of Philosophy
in the Graduate School of The Ohio State Univeristy
By
Sebastian Javier Garcia-Dastugue The Ohio State University
2003
Dissertation Committee:
Approved by
Professor Douglas M Lambert, Adviser
Professor Keely L Croxton
Professor Thomas J Goldsby C 2 ⁄Z C===~—
Adviser
Trang 3Copyright by
Trang 4ABSTRACT
The purpose of this research was to present the conceptual development
of dynamic time-based postponement and empirically test the concept in the
context of the management of short-lived products in a supply chain formed by
independent firms The conceptual development of dynamic time-based
postponement was based on a review of the literature The empirical test was performed with actual data from past limited-time offers in the quick-service restaurant ousiness
Pastoonement, the deliberate delay of activities, is used to reduce the
acquisition, manufacturing and logistics costs while maintaining or increasing
customer service levels Traditionally, postponement is implemented by changing the sequence in which activities are performed The sequence of activities is
changed by modifying the design of the product or ihe manufacturing processes,
or by reconfiguring the supply chain network structure In this research,
postponement is implemented without changing the product, the manufacturing
processes or the network structure
Dynamic time-based postponement is an extension of postponement to situation where the extent to which postponement is used is adapted to the business environment Postoonement as described here is time-based because only the time when activities are performed is affected; that is, the sequence in which
activities are performed is not changed Dynamic time-based postponement Is
dynamic because if represents a method for capturing a number of managerial
Trang 5product, speculation is the strategy of choice for positioning inventories across the
supply chain Soeculation is used to minimize the risk associated with running out of stock If is generally more expensive to speculate than not to because inventory Is
held at a higher cost and products are differentiated Later in the life cycle, uncertainty of demand is to a considerable extent dissipated and the focus is cost
minimization as for a standard product Finally, close to the end of the life cycle, obsolescence becomes a considerable cost driver, and shorter and more expensive lead times are used in order to reduce inventory investment at risk of obsolescence
The use of shorter lead times allows management fo delay activities and fo maintain
product in a non-commitied status for longer In this research setting, product is maintained in a non-committed status by holding raw materials instead of finished
goods in stock and/or by delaying ifs geographic differentiation The objective for
dynamic time-based postponement is to reduce safety stocks wherever itis possible by determining the tactical locations of safety stocks across the supply chain which might be different at different phases of the life-cycle of the product
Data for the quantiative test were provided by four independent companies In a supply chain operating in the restaurant industry The four companies were
two manufacturers of ingredients, one distributor with nine disinlboution centers, and
quick-service restaurants owned by a franchisor These four companies had supplier- customer relationships, worked closely, but were independent from each other
and did not share ownership
Collected data included manufacturing runs, interplant transportation,
shipments to nexi-ler customers, sales fo end-customers, emergency transshipmenis,
and cost data These data were integrated into a single database and used to
estimate the size of the business opportunity for the supply chain as a whole They were used also as input to an optimization mode! used to determine the tactical locations and levels of safety stock across a supply chain Conclusions were drawn by comparing various scenarios produced with the optimization software
Trang 6The major conclusions of this research were:
The main conclusion of this study was that adapting inventory policies across a supply chain from speculation to postponement in short-time periods has potential to produce cost savings to the supply chain This allows managers to
integrate apparently conflicting objectives such as to guarantee product
availability even with uncertain demand, reduce costs as demand becomes
more predictable, and minimize obsolescence as the end of the life-cycle draws
near Dynamic time-based postponement represents a method to focus on each of these objectives at different ohases of the product's life-cycle
The assessment of dynamic time-based postponement was presented here in
detail This dissertation includes a detailed description of the data that were collected, now these data from a number of sources were integrated to analyze the supply chain as a whole, the issues that were encountered in this process,
and the quantitative analyses performed This dissertation was meant to provide
managers willing to integrate activities beyond the single frm with a roadmap for assessment of the business opportunity and for ts implementation
In this research setting, dynamic time-based postponement could produce a cost saving of between $5.3 and $6.9 milion annually while improving product
availability from approximately 92% to 99.5%
Despite the closeness of the relationships among the members of the supply
chain, there was reluctancy to share data Confidentiality concerns seemed to be the single most critical factor to evaluate supply-chain-wide inifiatives This was a problem even in this research setting, in which companies work as
extensions of each other at many organizational levels There was considerable
openness to share transactional data; there was reluctancy to share cost data suppliers felt they were at risk of giving away information that could be used to
negotiate better deals in the future
Trang 75 Dynamic time-based postponement represents an approach to a true implementation of collaborative replenisnment Traditionally, the channel captain sets static inventory policies with which other supply chain members have to comply Dynamic time-based postponement requires that activities are integrated across key supply chain members to reach its full potential and make the supply chain as a whole more efficient
There are three key differentiating aspecis of this dissertation First, this
dissertation is research in supply chain management, that ts, research that views a supply chain formed by several independent organizations holistically and that extends beyond a dyad The second aspect is that postponement is viewed as a dynamic approach based on information sharing and the managers’ willingness
to coordinate activities beyond a single firm: and that if is implemented without
Trang 8Este trabajo esia dedicado a mis padres, Ines y Juan Carlos, quienes siempre se esforzaron por darme lo mejor de ellos (9)
A la memoria de mi cadre, Juan Carlos, a quien tendré presente por siempre (°}
a) Dedicated io my parents, who always have provided me with their best 6} To my father wno will be in my memory forever
Trang 9ACKNOWLEDGMENTS
Several people interacted with me during the writing of this dissertation To
all of them lam extremely thanktul for their support and their help A clissertation grants a doctorate to a person, but there is at least a bit of this enterprise that
belongs to each of these individuals
Iwould like to thank to the executives of the companies that participated in this research, who dedicated their time Without their help this research would not
have been possible They not only provided the data, but explained (sometimes
several times} many aspects of their industry
Ta the members of The Global Supply Chain Forum at the Fisher College of Business, who listened to reports of my progress at several meetings Their comments, questions, general feedback, and reactions to those presentations certainly made me be better orepared to continue making progress
To Professor Douglas M Lambert, Director of The Global Supply Chain Forum and Chairman of my dissertation committee; who saw my potential early in ihe doctoral program: who taught me endlessly; who heloed me grow professionally
and personally by providing me with challenges in teaching, writing and presenting
my research interests; and who let me know when | could do better There is not a
doubt in my mind that this journey would not have been as exiting and stimulating
if Professor Lambert had not given me his full support and dedicated time to my education when | needed it
To Professors Keely L Croxton and Thomas J Goidsoy, who, together with
Professor Lambert, formed my dissertation committee Their guidance through the
Trang 10helping me ride the emotional rolier coaster of writing a dissertation Their openness
and accessibility made this process tolerable,
| also want fo express my gratitude to Professor Sean Willems from Boston University Professor Willems not only let me use the software used for the quanittative
analysis for this research, but also dedicated his ime fo answering my questions
and guiding me in the use of the optimization software | will never forget the Time, when even though he was working late ai night, he soent more than an hour on
the phone with me working together to find a solution fo a problem
Lalso want to thank Professors Martha C Cooper and Walter Zinn, from the Marketing and Logistics Deparimeni at the Fisher College of Business They with the three members of my dissertation cammitiee, provided the environment to learm
an enormous amount inside the classroom, doing research, or during informal conversations on the corridors | had the good fortune to interact with all of the
logistics faculty Unquestionably, this interaction was the best feature of my doctoral Program
To my fellow doctoral students who heloed to make everyday a fun day
and with whom i shared both exiting and frustrating moments To the staff of the Department of Marketing and Logistics, at the Graduates Office at the Fisher College of Business, and at the Office of international Education
To ignacio and Victor, who belived in me Without their motivational sparks,
|never would have pursued my doctoral degree This dissertation represents the
end of a wonderful journey and the beginning of another one | decided to accompany ignacio in his encieavor to build a world class logistics program In Argentina several years ago, because | belleved that being with great people makes great things happen So far, this belief has been reinforced strongly
To Stan, my past office-mate and my friend, wno passionately heloed me
improve my English, who patiently guided me through learning the academic
Trang 11environment of the United States, and from whose experiences, both good and
bad, | learned plenty
To a fnend, who was always there (and | am sure that he always will be} to
help, listen, or argue wnatever was needed at the time To this fiend who taught me both with his actions and his words; wno demonstrated, countless times, how
to implement his first law of consulting: “help is defined by those who get it, not
those who give if” To my dear frend Sieve
Atlast, but certainly not least, to Cecilia, wno followed me to the other side
of the world leaving behind her family ties and putting on hold everything just to be by my side, To the mother of Valentina, our first daughter who is growing up
beautifully thanks to Cecilia's love To my caring wife, | owe her the most because
Trang 12Education
TT EE ME EME HEUTE UH EU MEE RUSE REERE URE HEUEEYD
POOP EAE HORSE EMOTE HOEH OE HOH DEH DEH OES OURO EDEN OES OY
EP OE ROAR OH AED OE HOR POE AE MOE SOE DOE DOH IES DE SOE DPORIE DD
SERCH EE MEME HOUSE EEH EEO OE EUD 2000 - present Professional Experience 1997-1999 4 ĐO P2 C60640600460G00600460049 04006006 04626062 ODE roe roe rosreeoesos 1997-1999 (part time} 1996-1999 (part time} Ce POR ODER OED Or OOD VITA
Bachelor of Ars, Management Information
Systems, Universidad C.A.E.C.E., Buenas Aires,
Argentina
Master in Business Administration, Instituto de
Altas Estudios Empresariales (AE), Universidad Austral Buenos Aires, Argentina
Master of Arts, Business Administration, Logistics, Fisher College of Business, The Ohio State
University
Research Associate, The Global Supply Chain
Forum, The Fisher College of Business, The Ohio
State University
Change Agent, Cementos Avellaneda,
Buenos Aires, Argentina
Consultant to ING Systems, Buenos Ares,
Argentina
Faculty, Instituto de Estudios para la Excelencia Competitiva, Buenos Atres, Argentina
Trang 13s22 Logistics Engineer, Ryder Argentina,
Buenos Aires, Argentina
199 ĐÁ ch ng kh nào Information Systems Engineer, Solutions
informatiques Francaises, Buenos Ales,
Argentina
222 information Systems Technical Support, Sud
Amercia Seguros, Buenos Aires, Argentina
PUBLICATIONS
| Croxton, Keely L., Sebastian J Garcia-Dastugue, Dougias M Lambert and Dale S Rogers, “Supply Chain Management Processes,” The International Journal of
Logistics Managemen?, Vol 11, No 2 (2001), pp 13-36
2 Dole $ Rogers, Dougias M Lambert, Croxton, Keely L., and Sebastidn J Garcia-
Dastugue, “Supply Chain Management Processes,” The infernational Journal of Logistics Management, Vol 13, No 2 (2002), pp 1-18
3 Croxton, Keely L., Douglas M Lambert Sebastian J Garcia-Dastugue, and Dale Ss Rogers, “Demand Management,” The International Journal of Logistics Management, Vol 13, No 2 (2002), pp 51-66
4, Garcia-Dastugue, Sebastidn J and Douglas M Lambert, “Internet-enabied
Coordination in the Supply Chain,” industrial Marketing Managemenf?, Vol 32, No 3, 2003, op 251-263
FIELDS OF STUDY
Major Field: Business Administration
Areas of Specialization: Logistics and Management Information Systerns
Trang 14TABLE OF CONTENTS AD SỈ QC Cu th no ngọn ki ng 9.0.0 009 9900.05.00 0095.01.8009 08099 89.8 li D@CHCOHON nh vi ACKNOWIEAGEMENTS .ccscccsccsocsscesccccensscescesccssecsscescessecsscescensecsscescerseescescesces vii Z 2 7 x 1.) 8m : an ẽ xvi 1.8.0 3 nh ẽ xvii Choplers:
T HAH OCUCTION n7 ae 1 BOCK OLOUING 0 Ố.Ố.ỐốẮŠ .a 3
II SG?005021c mien -3133 -Ầ 4
IS S:0a-199eosii0A0IäẽẻiidiiiiadÝỶÝỶÝỶ 5 IS oi san i99 5 ae e/‹/ (.(ldLBầ 9
RESECICI ODISCTIVES ooo 6 6 - //‹4 1] 5c 9/00a86/0-3:i9020nnn =3 1] TNE SCOPE OF TNE RESEOICH ooo eeccecccccccccscccssseeescccessecessscessseeesccessseeenseeesss 12 8002911 12 8M601/200//9000940/0600i592 2 e5 (a4 13 0/22/29 14
RETETONCES occ an 15
2 Conceptual Foundations: a Review of the Literature oo duoc 16 Management of LIMMPEC-TIME OHELS Le chen HH vu 17 Uses of 8aa oi 16-11 a Ả Ố 19 The Cholienge of Moanddng LTOS chen gàng 22 Management Throughou† †ne Liie Cycle oí Q LÔ su cuc cccveekve 23
Trang 15Forecasting ANC INIT! OFC sing ou eeeecccscecccccceseesssstseeeeeeceeesssseeeees MarkKGOwWNS DUFING GO LTO u.ceeecccsccccccccceeesessssceeceeeeeessssseeeeeesesersssseeees
Replenishment TArOUQGNOUT CO LTO .eeeccecccccccecesesesseeeeeceeceserssseeeees
SuMmMary Of MANAGEMENT OF LTOS oo eeecececcccccceceeesssseeeeeeeeeeesssssseeeeeees 909) /1021eia0(eiee.-( a0 ằằằằ
Supply Chain MANAGEMENT FramewOrKksS 5c 2c << +++++sss Supply Chain Management and the Management of LTOS
Modeling Inventory Management in the SUupply Chơïn Pos†bonemenÏ -. ccc c1 H112 11101 n HH nu HH ch
Evolution of the Concept of Pos†ibonemen .- cà TWwo Views of Pos†lboonemenT c1 2 2222313111111 reo To Postpone or No† †o Pos†booneế:
Thot† Is No† the QU©STIOP 21H HH H HS HS SH 2 21x,
Number of Decoupling Points in the Supply Chơïn Postponement: Half ConCe@pT† -cc che How Is Pos†bonemen† Meosuredl2 S222 22222222
Summary of the Review of the Literature in Postponement Postponement and the Management of Limited-Time Offers Supply Chain Management Opportunities in Postponement Dynamic Time-based Postponement: Conceptual Develooment Summecory of LilerO†Ur© R©VÏOW L- c0 HH HH cv vớ X©¡- ae
3 Resedrch DesÏQn - -.- - c0 000 0 0 00000399 868 Xe e/ea ae Description of the Supply Choin Usedl for †his Reseorch Meief®o)i-eoie a0 ad
Descripbtion of the AnOVSÏS - c2 n HH HH nh ren The Obtimizdtion-bœsed SUpbpor† SysÏem c2 Brief Descrip†ion of the OptimizoTtion Algorithm 555 5
S†oTionory Single-S†aoe lnven†ory Model .-.-
Mechanics of the Optimization Algorithm -5 5
S409 -đ
XâĂ- ae
4 Data Andlysis and Findings . - - - G1111 111 55 Meief®o)i-eoie a0 ad
Creating a Single Database for the SUupbply Choin
Trang 16DOCUMENTING TRE DOTAIDASE Looe cccccccccccceceeestsssseeseecesentssseaeeeeess 133 Communication with DOT1Q OWS cu ch ng này, 133
Description of the Data Collected oo 44 134
FOP COST oo 134
Actual Transactions Form Information Syst@ms wees 138
Scaling Data Of TRE SUDDIV CHIA cuc ch 211 211 ra 139 initial Diagnostics of the Supply Chain DyYNQmMics uc cccesececeseees 144
Inventory ls Built Early in the Life-Cycle of the LTO su uc cu và 144 00s 8moo 0n eS ẻe< 149
PICHIA 0 dd 149
0s 9 S A1ãBB 152
Assessing the Cost of a LTO fo the Supply Chi cv 153
INVENTOLY HOIING COSTS ooo ccccccsccsssssseeseessseesoesesseseesesnessecseesseesenseeesensd 154
Obsolescence of Product Left V€Y ccccescceseccecesseessnseeseecseentenses 154
He 10113 117 155
Determining the Size of the Visible Business Opportunify 157 Mogeling Dyndamic Time-Dbosedl POsiDonemiÏ cv ccccvecekssexsse lá
Limits fo the Use Of POSTOONGMENT oo “44 16]
Degree of Predictability Of DEMON cuc càng xen 163 Ho e0059s.1is 1050 ve- 9.15 g lá5 2yndmic Time-bosed Posioonemeni in Thịs SGTIHDQ cv láa Developing The Optimization-Dased MOE] oo cccccssccessccesecceescceeseees 17] Modeling the Business OD DOMUNTY ae 175
# e0i9iie o0 o0eo 8a 175
Metrics Used in Modeling the Business OODOrTTUnITV .cccce 177 Assessing the Benefits from Dynamic Time-based Postponemer? 178 THING OF LTO 4 178 m9 :-99 090011095 adiiũĂă 179 Modeling the Three Periods 0109)/019/40108/1/41.-0.9.-00n9.1i99/a.-00.-aàUMaiẦẢ 183 The /9011s e0 sisann-isen na 189 H203 0 nẽ-i9e mẽ 4A4.L.Œ.ŒLŒLœ¬œƯẼƯÊƯẰ⁄%.ä 193
The Plan for Termination PTO’ oo a 198 Benefits from the implementation
of Dynamic TIM@-DASEC POSTPONEMENT o ccccecccccccccsseseccecccuseeecceaseuseses 209
"541119 213
X-:-¡0102- 0 213
Ki ẽe an 9a na he 215
Sửưmmory of ReseorCh PUTDO SỐ cuc HH HH HH nen tk kh ca 215 Review Of RESEQrCh QUESTIONS GING FINGHNGS oc ca ksre 216
Is There an Opportunity for Omplementing
Dynamic TIM@-DASEC POSTPONEMENT Ee La cv nh ng na 216
How Does Having Better Knowledge of Demand Influence Total Logistics Casts and Acquisition Costs
for the SUDDly ChơIn MOITTIOGV SỐ LH HH khen nành ngu 22 |
What Prevents Management from Performing Holistic Analyses of Supply Shain Dynamics¢
Trang 17How are These CONCEINS GACrESSEMS Lc ccsccsecsecseseetessessesesteenenes D1019 81G19/4610)5.-19)4:aadđađaiỎ.ỐỔỐỒÕ MCNCGETIAL ITIP CATIONS 0n 6 S Ả LirTOHO TS cu ch nh Hà nh tà họ TH ng nan C99 th Extension and Future Research ODDOOTIUnIITOS su ch
002 -2ie a0 na ae
Trang 18LIST OF TABLES
Chapter 2
2.1 Limits to the Use of POSIDONGINIENT oo cc cccccccccesecseceseneseeserseenerteneenes 48 22 Selected Definitions Of POSTOONEME!N ooo cccccccccccsecsessessssstsenserereenns 50 2.3 {ssues Identified in the Literature Review and the Conceptual
Develooment of Dynamic Time-bœsed PosiDonemienl 83
Chapter 3
SN HA è se CONGCHOM ooo S 106 3.2 Determining Days of Exposure Based on Local information oo 118
34.3 Determining Doys of Exposure s†rolegicolly Across the SUpbply Chơin 119
Chapter 4
Al Site Visits GNC INTEPVIOWEES 123 4.2 Data Collected: Description QGNO SOUTC 5 cu c1 2 nh reo 124
43 Number of Restaurants Participating In the R©S€CTC]H uc ccve 140 4.4 Percentage of Product Flow for Which There Was Data Availabie
at Each Tier of The SUPDIY CHIN ooo iccesccsessessssessesnessessesesecsesceseesenses 14] AS Residourơonits Includedl In The MOOI su cuc co ch n TH ng tk v2 1 sec 144 4é Size of the Visible BUusiness COHODOTTUTHÍV cu cuc nành hà e nếp 160
47 Supply Chain Modeling Input Parameters oo cece cccccsessserseeeseeseesensues 174 48 Typical Timeline for a Limited-Time OFF OP oc ccecessecsccceccnsstsscceeceseesensas 180 A? initial Coefficients of Variation of Demand Used for Modeling 182 4.10 Modeling Dynamic Time-based Postponement:
Scenarios Developed with the Optimizahon SOI]ÏWOI© .c vece 183 4.11 Days of Exposure by Stocking LoCaHion - MOtUmty oc ccccesccesecceeennennes 185 4.12 Days of Exposure: Maturity and Full Soeculation Periods wee 19] 4.13 Comparison of Coordinating the Use of Speculation
across the Supply Chain and Using Speculation Internally
Trang 194.14 Comparison of Using Full Soeculation for the Entire LTO
and Combining Full Speculation and Maturity Periods
0) 09)/010/49/00//10-10i9 -o0ne.3isoa-00- 0B nh nHAIA<ẠI 194 4.15 Example of the Impact of Updating the Forecast on
Total inventory Investment ana Total Supply Chain Cost 197
4.16 Expected Variability of Demand — Plan for Termination eee 202 4.17 Plan for Termination — Supply Chain Cost Excluding Obsolescence
©-Ssfn-¡e6196-8sn0.s 0o e 202
4.18 Toiol InvenT†ory Inves†men† ~ Plan for TerminOTIOD .c co cccccccceeve 204 4.19 Break-Even Analysis: Obsolescence Rate ~ Plem for TerrmingTion 205
4.20 The Effect of Using Shorter Lead Times in Days of Exposure by Stage 206 4,2) Camparison of Combining Full Speculation and Maturity,
and Uisng the Three Periods of Dynamic Time-based Postponement 208
4.22 Expected Improvement in Product Availabilty at Restaurants
œng Expec†ed Number o† Transshibpmenis Neededl co 209
4.23 Summary of BUSINESS CODOMUNY nớnda4 219 4.24 Expected Coast Savings from the Implementation
of Dynamic TIME-DASEC POSTDONEGMENT oo nh Ha 212
Trang 20LIST OF FIGURES
Chapter 1
11 Adapting the Fastponement-Speculation Strategy
Throughoul †he Lie Cycle Of G PTOOUCI cu cv nh xnxx xà
Chapter 2
2.1 Typical Phases in the Life Cycie of a Limited-Time Offer oe
2.2 Collaborative Planning, Forecasting and Replenishment 23 supply Chain Management: Integrating
and Managing Business Processes Across the Supply Chain Z4 THE DEMANA MANAGEMENT PLOCESS cuc c ng nh th re, 2.8 Modeling Inventory Management in the Supply Chain oo ee
2.6 Postoponement by Changing the Sequence of Activities
I0811-910/9i9)03 s0
2/7 Exoample of Demond Aggreggfion EÍÍQCT Live ng ngào
2.8 Postponement by Delaying Changes in Inventory Location
[®>19111®):7401:.9)%iiiaiiảẳaắẳiúỎ 2.9 Strucfunng the Benefits rom POSIDOnEImiefÍ su ch cày
2.10 Inventory Value increases in the Supply CHIN ooo cuc kệ
Chapter 3
3.1 Mapping the Supply Chain: Locations Participating in the Research 3.2 Information Distortion in the Supply CHIN cu 2c c1 việc
3.3 The Supply Chain with an Information HUD uc cuc nh dc iàu
3.4 Determining the Size of the Visible Business Opportunity 0 eee 3.5 Developing the Optimized SCENAPMOS ooo ccccccsssssecseecesensetssceesceseesenses
Chapter 4
Trang 2143 Creating a Dynamic Supply Chain Map of Product Flow we 135
N53 À2 so nhe 189
4.5 Distribution of Restaurants Based
on the Standardized Weekly Total ŠOÌ@S uc cuc Hành hàn hen nen nhe, 143
4.6 Daily Stock Levels by Tier of the Supply Chain — Ingredient A wu 146 47 Daily Stock Levels by Tier of the Supply Chain — IngredieniB 147
48 Daily Stock Levels for the Whole Supply Chain Ingredients A and B 148 49 Order Placement INGrPediGnt A wo aaạýnŨ 150 4.10 Order PlIACEMENT INGFECIENT Boo ceccsccsscceccescetsssceeeeescesenssseeeeeseeeneaes lỗ] 4.1] Proportion of Restaurants that Disengaged Eorly rom LTO-l1 166
“VAN s0 s2 le 102aa0n vo 9.18 e 169
4.13 Dynamic Time-based Postponement: AN OVEIVVIEW cu ch hào 170
“N99 (900-1010 -1909ooai0dgjiiiiii 176
4.15 Determining the Expected Variability of Demand oo cuc 182 4.16 Safety Stock Levels of Ingredient B
by Stocking Locolion —- OÔriginol PÏOS ch ng ng xe 188
4.17 Updoling the Forecos†t: Senstfivfdy of Coefficient of Variation of Demand on Total Safety Stock Cost
and Total Safety STOCK INVESTMENT ooo ecceccccccccsecssssnseeseceecesssnsecsesseseesenses 197 4.18 The Effect of Sharing Information on Variability of Forecast Errors 200 4.19 Plan for Termination — Updating the FOrG@COSĨ cuc sào 201
Chapter 5
5.1 Summary of Benefits from Dynamic Time-based Postponement 226
Trang 22CHAPTER 1 INTRODUCTION
Postponement, the deliberate delay of activities in the supply chain, is used to reduce the total cost to the supply chain while maintaining or increasing customer
service levels Traditionally, postponement is implemented by changing the design of the products, the design of the manufacturing processes or the structure of the
supply chain network These changes are static in the sense that once postponement is implemented, activities are performed in that way until the next structural change The traditional view of postponement usually is implemented by changing the sequence in which activities are performed In contrast, the objective of dynamic time-based postponement is to delay the execution of activities It is dynamic because the use of postponement is adapted to environmental factors over a short time horizon Dynamic time-based postponement offers the greatest potential when executives manage the relationships with other supply chain members and coordinate activities beyond individual firms
Dynamic time-based postponement occurs when supply chain members shift from speculation, performing activities prior to observing demand, to postponement, delaying activities to the latest possible point in time, dynamically
based on changing environmental conditions, such as demand uncertainty and total cost trade-offs, or for strategic reasons In general, the objective with
postponement is to delay manufacturing and logistics activities to the latest time possible while maintaining a targeted service level When uncertainty of demand is high, managers may use speculation by positioning safety stocks close to the
end-customer to minimize replenishment time and meet the target for in-stock availability As uncertainty of demand is reduced, supply chain members may shift
Trang 23their focus to cost minimization and postpone activities by coordinating order
placement and tactically locating safety stocks and reducing safety stock levels in the supply chain Ultimately, this effort leads to reducing acquisition and logistics
costs from a total supply chain standpoint
The motivation behind this dissertation is fo develop the concept of dynamic time-based postponement and empirically test it This view of postponement is implemented without changing any aspect of the products, the manufacturing process or the supply chain network structure It relies on active sharing of demand information across the supply chain as well as managers’ willingness to integrate activities beyond the boundaries of individual firms Dynamic time-based postponement was empirically tested in the context of products with life cycles of 8 to 10 weeks, such as limited-time offers or seasonal products
As the life cycle of products shortens, coordinating the product flow across
firms in the supply chain becomes more critical Collaborative replenishment, and other quick response systems such as Automatic Replenishment or Collaborative Planning, Forecasting and Replenishment, are frequently cited as ways to coordinate product flow across the boundaries of individual firms The reach of collaborative replenishment in practice generally is limited to a dyad and, more
frequently than not, it is not collaborative because the channel captain sets static
inventory policies within which the other supply chain members must operate
Research efforts in the management of limited-time offers (LTO) and seasonal
products tend to be focused on the beginning and the end of the LTOs giving little guidance on how to implement collaborative replenishment over the course of
the LTO
This research was designed to make a contribution in collaborative
replenishment through the development of a methodology to implement dynamic
time-based postponement including measurement of the benefits and
documentation of the challenges of coordinating replenishment beyond a dyad
Trang 24The holistic analysis performed in this dissertation suggests a change in
business practices The implementation of dynamic time-based postponement will lead to a shift in who makes some decisions, such as order placement decisions,
and a shift in costs, such as inventory holding costs Issues regarding implementation were documented providing a road map to assist managers in the successful
implementation of dynamic time-based postponement
BACKGROUND
Postponement by changing the design of the products, the manufacturing processes or the supply chain network structure has captured considerable attention since the early '90s, after the benefits from postponement achieved by HP with the
redesign of the DeskJet Plus printer were published This is usually called “designing
product and process for postponement” [1] and involves changing the form or
identity of products at the latest possible point in the marketing flow as suggested
by Alderson [2] This view of postponement is implemented by changing the sequence in which activities are performed
In his seminal study in postponement, Alderson also suggested that postponement can be implemented without changing the structure of the network or the design of the product by delaying the point in time when activities are performed This view of postponement has received sparse attention However, in
light of the central role that supply chain management (SCM) has in business and given the extent to which information technology facilitates information sharing
among supply chain members, delaying the point in time when activities are performed becomes an opportunity that leaders in SCM should exploit This opportunity is enabled by both the potential information available in the supply
Trang 25Postponement by delaying activities in time offers significant potential,
particularly in situations where knowledge of demand increases (or demand
uncertainty decreases) in short periods of time and where inventory carrying costs increase due to increased risk of obsolescence or perishability In these situations,
delaying activities in time might produce considerable cost savings to supply chain
members by reducing the costs associated with uncertainty This is the case with LTOs and seasonal products Managers can reduce the total supply chain cost of
managing a LTO by capitalizing on the knowledge of the demand gained
throughout the life cycle of the offer and reevaluating the location and levels of safety stocks holistically across the supply chain for the remainder of the LTO
Past research shows that as the LTO progresses, uncertainty of demand can be reduced by updating the forecast [8] Each forecast update can be shared with key supply chain members so that each member plans based on lower demand
uncertainty Less uncertainty of demand calls for less safety stock, permitting supply
chain members to coordinate inventory deployment in a leaner fashion by delaying
manufacturing activities, moving inventory, and changing ownership Ultimately,
these efforts lead to lower costs of managing the LTO for the supply chain as a whole
THE BUSINESS PROBLEM
Management can use LTOs as: a strategic marketing tool; a limited-time orice discount to liquidate end-of-season products; a price discount to drive customers into their stores; a price discount to “flush the pipeline”; and/or a way to improve the financial results for end-of-quarter reports In general, all these types of LTOs affect the normal product flow Dynamic time-based postponement is possible
because the time when changes in demand will occur is predictable even though
Trang 26During a LTO, an item is offered in a specific configuration and price for a limited time The item can be a standard product offered at a special price; a set of standard products that are bundled together; a standard product or group of products that are packaged in a distinctive manner for a season; or a product that is specifically developed to be offered during a short period
The use of each type of LTO will affect the revenue, costs and profits of the
members of a supply chain differently and managing the LTO efficiently is critical
for the success of many firms in diverse industries Consultants to members of the
Grocery Manufacturers of America reported that the expenditure for LTOs is not effective and manufacturers estimate that only 35% of their LTOs are profitable [4]
In addition, it has been estimated that managing LTOs more effectively could lead
to an increase in profitability of 2.5% by increasing service levels [5] An industry expert from the consumer packaged goods industry estimated that roughly 60% of sales are some sort of LTO in the form of a product tailored for the season, a limited-
time presentation, or a bundle customized for a retailer
The members of The Global Supply Chain Forum, a consortium of leading
practitioners and academics at the Fisher College of Business, The Ohio State
University, were interviewed to assess the importance of LTOs to their companies They asserted that LTOs can represent more than 30% of revenues, that managing LTOs is substantially more difficult than standard products, and LTOs more frequently
than not are unprofitable All executives interviewed agreed that the use of LTOs is increasing and that there is a lack of tools to manage the product flow of LTOs more effectively because they are managed in the same way as standard items
Dynamic time-based postponement has the potential to facilitate the management of the product flow during LTOs
THE BUSINESS OPPORTUNITY
Increasingly, LTOs that are a customized product offered for a limited period
Trang 27management standpoint, the objective is to have high in-stock availability for the
product and run out of stock precisely when the offer ends Managers may know
when demand is going to change throughout the LTO and should coordinate
activities accordingly across multipole members of the supply chain, planning at each phase of the LTO for the remaining phases
For example, a heart-shaped box of chocolate candies has much less value to the eyes of the sweetheart on February 15th than the day before This fact shapes the demand of St Valentine’s Day products Supply chain members start
manufacturing and deploying inventory in advance of the LTO The candies are
available at the stores for a number of days before St Valentine’s Day At this point, planning is based on past experience, marketing intelligence, and other forecasting parameters with the expectation that these plans are imprecise After some demand is observed, managers may use demand data to plan for the rest of the offer The objective is to have no inventory of St Valentine’s Day products after February 14th
Management needs to develop an inventory deployment strategy that
captures the characteristics of the business environment that change throughout the life cycle of the LTO In each of the periods, both management objectives and
cost considerations should be taken into account to determine the best inventory levels at each of the potential stocking locations in the supply chain Figure 1.1 represents the life cycle of a LTO which Is divided in three periods The business environment of each period is different and, therefore, a different postoponement-
speculation strategy fits best Figure 1.1 summarizes the characteristics of the
business environment and the postponement-speculation strategy for each period Considerable resources are needed to launch a LTO Investments in marketing, such as advertising and point-of-sale displays, are made before the LTO Manufacturers reserve capacity to produce the promotional products and
Trang 29period of the LTO, not only predictability of demand is low, but also the risk of
stockout is high Managers need to forecast a wide confidence interval and position
inventory as close to the end-customer as possible to cope with the risk of stockouts associated with the early phases of the LTO Therefore, the strategy of choice is speculation
There are two distinctive characteristics of the use of speculation during
the first period of the LTO One is that cost to the supply chain will be higher than if management does not force inventory to be positioned forward in the supply chain The other characteristic is that using speculation during the initial phase(s) of the LTO is not proportionally as costly as following this strategy throughout the entire LTO Early in the life cycle there is virtually no risk of obsolescence, so inventory
holding costs are lower than closer to the end of the life cycle
In the second period, the perceived uncertainty associated with the
performance of the LTO in part is dissipated after observing some actual demand
data Supply chain members reevaluate inventory deployment and the managerial focus becomes cost minimization similar to a standard product During this period, management does not impose any inventory policy constraints and optimizes inventory locations and levels across the supply chain
During the third period, two factors become dominant: obsolescence and
gathering information about termination If the changes in demand are
predictable, then obsolescence could be factored in inventory cost calculations
starting from a determined point in time That is, managers could determine a particular point in time from when supply chain members have to start considering
obsolescence This deterministic view of obsolescence contrasts with defining a stochastic process or a mathematical function to model obsolescence throughout
the life cycle of the LTO The increase in inventory holding costs might affect the
original total cost trade-offs and indicate that the use of standard lead times is no
Trang 30The use of premium, shorter and more expensive, manufacturing and logistics lead times will enable management to postpone by delaying manufacturing and
logistics decisions If manufacturing decisions are delayed, then instead of holding safety stock of finished goods, manufactures will hold safety stock of undifferentiated raw materials If logistics decisions are delayed, then the
transportation of product to locations closer to the end-customer and the geographic differentiation of product will be delayed
In sum, for the third period of the life cycle of the LTO, managers need to update the forecast based on actual demand data and local information about the behavior of the demand Additionally, since obsolescence becomes a key cost driver, inventory needs to be held at the lowest cost by delaying the forward
movement of product as much as possible This will be achieved by using premium lead times and will enable management to maintain inventory undifferentiated
for as long as possible
This research was intended to capture the dynamic nature of management's decisions during the life cycle of the LTO It is unlikely that managers plan at one point of time and follow the plan exactly despite changes in the environment Changing the inventory deployment strategy in such a short time horizon requires the integration of activities beyond the boundaries of a single firm in order to benefit
the supply chain as a whole Dynamic time-based postponement will assist management in the implementation of the combination of speculation and
postponement within short time horizons
THE RESEARCH PURPOSE
The purpose of this research was to present the conceptual develooment of dynamic time-based postponement and empirically test the concept in the
Trang 31context of LTOs The conceptual development of dynamic time-based postponement was based on the review of the literature presented in Chapter 2 and it is presented in the last section of that chapter
The empirical test of dynamic time-based postponement was performed with actual data from past LTOs in the quick-service restaurant business As part of this test, a methodology for the implementation of dynamic time-based postponement was developed The cornerstones for this methodology are to revise the location and levels of safety stocks and to plan for the rest of the offer as many times as needed during the life cycle of the LTO, and to coordinate order placement across the members of the supply chain It was expected that the empirical test would show that as the LTO progresses safety stock needs to be shifted backwards
in the supply chain This serves as evidence that dynamic time-based postponement
works and that it represents a sizable business opportunity
The goal was to integrate recent developmenis in planning and forecasting LTOs with the application of an optimization-based tool for determining the tactical locations of safety stock across multiple tiers of the supply chain This aoproach to management of LTOs provides unique insight because the majority of optimization-
based tools are used as static models In the context of LTOs, the use of a static
model means that the locations and levels of safety stock for the LTO are determined once before the LTO starts and remain the same for the duration of the offer
In this research, the location and levels of safety stocks are assessed several times during the LTO to plan for the rest of its life cycle using the knowledge of the
demand gained from earlier phases This enables supply chain members to plan
every phase of the LTO, including disengagement, in contrast to planning for the total duration of the LTO before it starts By planning the remainder of the LTO as needed throughout its life cycle, the members of the supply chain are able to delay manufacturing and logistics activities This is in contrast to the way LTOs have
been managed in the past, and should lead to more efficient and less costly management of LTOs
Trang 32RESEARCH OBJECTIVES
The specific objectives of this research were:
1l To present the conceptual development of dynamic time-based
postponement
2 To combine data from independent firms in a supply chain, that included two manufacturers, one distributor, and a retailer with multiple retail stores
3 To determine from these data the size of the business opportunity for the supply
chain as a whole
4 To estimate the potential cost savings for the supply chain based on an optimization-based model that determines the locations and levels of safety
stocks across the supply chain
5 Toidentify the challenges of implementing dynamic time-based postponement ina multi-company supply chain
6 Todescribe other business setting in which dynamic time-based postponement
has potential
7 To identify future research opportunities
RESEARCH QUESTIONS
The research questions for this study were the following:
1 What is the magnitude of the opportunity associated with the implementation of dynamic time-based postponement?
2 How does having better knowledge of demand influence total logistics costs
and acquisition costs for the supply chain members?
3 What prevents management from performing holistic analyses of supply chain
Trang 33THE SCOPE OF THE RESEARCH
A distinctive characteristic of this research is that it was meant to capture the time-varying behavior of the product and information flows in a supply chain, understanding that a supply chain is formed by a number of independent companies The analysis of this problem within the boundaries of a single firm is less interesting because of the existence of a central authority, the firm's top
management, who can make coordination of activities simpler
It was expected that this holistic analysis would indicate different inventory
positions and levels than those based on traditional decision-making internal to a
single firm Moreover, these differences happen in later phases of the life cycle of the LTO as knowledge of demand is developed Coordination of order placement
is acentral element to achieving the expected benefits from dynamic time-based
postponement
LIMITATIONS
A limitation of this research, the extent to which the results can be extended
beyond the participants of the study, Is intimately related to its strengths: the depth
of analysis and usability of the methodology developed Nevertheless, the objective of this dissertation was to present the conceptual develooment and empirically
test dynamic time-based posiponement in an actual supply chain context The companies that participated in the research and provided data might be top performing organizations The managers from the participating firms not only have demonstrated strong interest in striving for the best for the total supply chain but they have revealed a remarkable commitment to maintaining and fostering the growth of relationships with the other supply chain members
Trang 34POTENTIAL CONTRIBUTIONS
1
The research makes a number of contributions to knowledge:
It broadens the concept of postponement by showing how postponement can be implemented without affecting the design of the product, the manufacturing process or the supply chain network structure This means that postponement can be used as a Management tool to adapt the supply chain
to changing environmental conditions
It represents actual supply chain management research Most of the research proclaimed as “supply chain management” studies are actually single-firm logistics and operations management studies [7] This research represents a step forward in the right direction
It illustrates how an optimization-based tool can be used to facilitate supply
chain management Optimization-based tools have been used successfully to incorporate objectivity into decision making [6] Using an optimization-based
model provides objectivity to decisions that effect supply chain members
differently and could be used as a starting point to negotiate risk and reward sharing
It includes the development of a method for managing LTOs more efficiently by having the members of the supply chain practice collaborative replenishment This contrasts with traditional practices in which suppliers and distributors are limited to following the static inventory policies that the buyer considers appropriate
It extends the application of an optimization-based decision support tool to
determine the locations of safety stock and levels by including following features:
parameters that are updated within short periods of time; inventory carrying
Trang 35cost percentages that vary by location in the supply chain [8]; the increasing risk Of obsolescence as the LTO approaches the termination stage; and the
use of fransshipomenis and rush orders to avoid customers facing stockouts
ORGANIZATION
The remainder of the dissertation is presented in Chapters 2 through 5 Chapter 2 is a review of the relevant literature to support the develooment of the
research and includes literature in the management of LTOs, management of
promotions and products with short life-cycles; supply chain management; modeling inventory management problems in the supply chain; and postponement This
erature has been published in academic journals from a number of fields of study,
including supply chain management, logistics, marketing, operations management, operations research, information technology, management, and production economics Chapter 2 also contains the conceptual develooment of dynamic time-based postponement
In Chapter 3, the research design is presented This includes the
operationalization of ihe constructs, the description of the research setting, a
description of the optimization algorithm, the data gathering process, and the
procedures to be used for the analyses that address the research questions
The results of data collection, including the description of the database
developed from each of the research participants, are presented in Chapter 4 Also, the analyses that support the research propositions are part of this chapter
Chapter & contains a summary of the resulls and conclusions, and the managerial implications of the results Suggestions for future research and a concluding commentary are presented
Trang 36References
[1] Lee, Hau and Corey Billington, “Designing Products and Processes for Postponement” in Management of Design: Engineering and Management, Kiuwer Academic Publisher, 1994, pp.107-122
Alderson, Wroe, Marketing Behavior and Executive Action: a Functionalist Approach to Marketing Theory, Homewood, Illinois: Richard D Irwin, Inc., 1957
Fisher, Marshall L., Janice H Hammond, Walter R Obermeyer and Ananth Raman, “Making Supply Meet Demand in an Uncertain World,” Harvard Business Review, Vol 72, No 3 (1994), pp 83-89
Fairfield, Daren, Karen Ribler and Ralph Drayer, “CPFR and Collaboration — Our industry Opportunity”, Presentation to the Grocery Manufacturers of America IS/LD Conference, April 2001
Haedicke, Jack and Jeff Mitchell, “The ROIT Benefits of e-Marketplaces’, Presentation to the Grocery Manufacturers of America 1S/LD Conference, April 2001
Camm, Jeffrey D., Thomas E Chorman, Franz A Dil, James R Evans, Dennis J Sweeney and Glenn W Wearyn, “Blending OR/MS, Judgement, and GiS: Restructuring P&G's Supply Chain,” Interfaces, Vol 27, No 1 (1997), pp 128-142
Tan, Keah-Choon, Vijay R Kannan, Robert B Handfield and Soumen Ghosh, "Supply Chain Management An Empirical Study of Its Impact on Performance,” Infernational Journal of Operations & Production Management, Voi 19, No 10 (1999), pp 1034-1052 and Narasimhan, Ram and Soo Wook Kim, “Information System Utilization Strategy for Supply Chain Integration,” Journal of Business Logistics, Vol 22, No 2 (2001), pp 51-76
Mallen, Bruce, “Functional Spin-Off: A Key to Anticipating Change in Distribution Structure,” Journal of Marketing, Vol 37 (1973), pp 18-25
Trang 37CHAPTER 2
CONCEPTUAL FOUNDATIONS: A REVIEW OF THE LITERATURE
The review of the literature relevant to the management of LTOs serves as
the theoretical background for this research, The areas reviewed are: management of LTOs such as seasonal and fashion products, supply chain management (SCN},
modeling inventory management problems in the supply chain, and postponement The last section in the chapter contains the conceptual development of dynamic
time-based pastponement?, the first objective of this dissertation
In the first section, the importance of LTOs is assessed and the issues related to the management of LTOs that nave been identified and stuciied in the past are summarized This section focuses on the management of the product flow throughout the life cycle of LTOs and includes planning and forecasting, ordering decisions, replenishment, markdowns, and disengagement of the LTO Second,
supply chain management is defined and a brief comparison of three frameworks In supply chain management is shown This research accepts the view of supply chain management provided by The Global Supply Chain Forurn and the goal is
to coniribute fo the development of the Demand Management process, one of the eight SCM processes identified by The Forum [1] The Forum's view of SCM is the
most comprehensive framework available and provides a structure fo manage the relationships with other supply chain members
Since the empirical test of dynamic fime-based postponement includes the
analysis of whether safety stocks are shifted backwards in the supply chain as the LTO progresses, in the third section, the key aspects of modeling inventory
management problems in the supply chain are described This section contains
the description of the approach to modeling the Inventory management probiem
Trang 38described in the business opportunity The optimization model used for the analysis is described in the next chapter The fourth section includes a review of research in postponement and addresses studies in the fields of logistics, operations
management, and operations research
The fifth section of the chapter oresents the conceptual development of dynamic time-based postponement which, together with the empirical test of the concept, is the purpose of this research
MANAGEMENT OF LIMITED-TIME OFFERS
During a limited-time offer (LTO}, a specially developed item is available for
g limited period The em can be a producti specifically developed for the LTO, a
standard product offered in a particular presentation or a ouncle of standard
products Limited-time offers are common business practices in many industries
such as consumer packaged goods {CPG} (also called fast moving goods in Europe}
and apparel in which many products are seasonal or fashion ttems The demand for short lived products, such as personal computers and consumer electronics, can be treated as LTOs as well
LTOs are unique in that demand for the products in the offer change in a
rather short time horizon While demand might be difficult to predict, when the changes in the demand will occur can be easier to predict Figure 2.1 illustrates typical phases in the life cycle of a LTO in which three periods have been identified
Usually, Period | is characterized by filling up the pipeline with products and learning how to handle them During the setup and initiation phases, product starts flowing
and supply chain members are learning to deal with the new products; for example, retail store staff needs jo learn how to assembie ana replenish producis in a point-
of-sale disolay; cooks need to learn how jo cook the promotional meal
During the growth phase, some demand data are observed which may be
the response to advertisements During the maturity phase, Period 2 in Figure 2.1,
Trang 39Period 1 Period 2 Period 3 aN Maturity Decline = â 3 ơ TS Đ a8 S 2 ¬ Growth 5 Initiation Setup & Termination & Training Disengagement Lư =m mm mừn A +7 `" >4 >2weeks 1 Week 5 weeks 2+ weeks ) Time ) Figure 2.1 Typical Phases in the Life Cycle of a Limited-Time Offer
the highest demand is observed, the focus is on product availability [2], and advertising is atits highest Period 3 in Figure 2.1 includes the decline, and termination
and disengagement phases, which are characterized by products losing value or risk of obsolescence increasing
Despite the focus on the management of LTOs, the conceptual development
and findings contained in this dissertation are readily applicable to standard products for which demand changes in a short time horizon, and when these changes are predictable
The Newsboy Problem offers a starting point to study the management of LTOs [3] The problem the newsboy has every day is to decide how many newspapers to order for the next morning This is challenging because if the newsboy runs out of newspapers, there is not time to reorder newspapers and he will lose
Trang 40sales On the other hand, if the newsboy does not sell all the newspapers he ordered, the remaining newspapers will not sell because they become obsolete the next day The unsold newspapers add to the costs, reducing the newsboy’'s profits
Managing LTOs presents a similar challenge, which depends on the characteristics of the LTO such as the duration of the selling season, the
replenishment cycie time, and the soeed at which the product loses value as the
season comes to an end In general, managers find it difficull fo forecast demand
accurately throughout the duration of a LTO However, managers can predict accurately when demand is going to change That is, managers may know when demand will increase as well as when if will decrease This is the fundamental difference between a LTO and other situations in which demand is wholly uncertain
For example, in the case of a special meal offered by a pizza restaurant, advertising shapes the demand: when the featured pizza is advertised on TV, it is expected that demand willbe higher than when the pizza is not aclvertised
Since the changes in demand are predictable, managers should consider these changes when planning There are different types of LTOs that are used for different objectives; however, ithe effective and efficient management of any kind
of LTO requires proactive demand management and coordination of activities throughout the supply chain
This section on LTOs is organized as follows First, ine uses of LTOs are described
second, the challenges in managing the product flow for LTOs are presented In the third section, the latest developments reiated to the management of LTOs are summarized The last section presents the area in which this dissertation is intended to contribute,
USES OF LIMITED-TIME OFFERS
Some businesses use LTOs as a strategic marketing tool Others use limitecd- time price discounts to liquidate end-of-season products Many use price discounts