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The value of postponing product differentiation until final distribution for manufacturers who market a family of product derivatives through multiple channels is examined. A model is developed of a supply chain that distributes many short-lived products through different channels. Using the model, we find the postponement is particularly valuable for managing short-life products. Postponement increases distribution service levels while reducing costs and order fulfillment risk. Postponement is particularly valuable when there are many derivative products and forecast error is high. Trade-off curves are presented, that allow managers to evaluate the benefits of investing in postponement strategies.
Manufacturers in many industries are facing the supply chain challenges of product proliferation [1]. For global firms, specific local requirements such as language, conventions, and government regulations mean that any single product must have multiple product derivatives. In the U.S., market segmentation by business and consumer channels, price, and feature set further increase product variety. For example, consumer electronics and PCs are often customized for each retail channel allowing Wal-Mart to sell a slightly different product than Best Buy or Office Depot. Satisfying the customization needs of each channel creates many supply chain complexities as manufacturing and distribution struggle to manage a wide range of product derivatives [2]. Even forecasting the volume of multiple niche products is ever more difficult. Many supply chains rely on large inventory holdings to reduce the risk of poor product availability. However, this is costly and unsustainable in highly competitive markets.
To further complicate the situation, technology advances have shortened the life cycles for many products, especially in electronics and computers. The short life cycles drastically increase the penalty of holding obsolete finished goods inventory. For example, at Hewlett-Packard, the average life cycle for a Desk]et printer product is approximately 18 months, with some derivatives lasting only a few months. In PCs, six months is more typical, with some products lasting only a few weeks in the channel! The annual cost of holding inventory of printers or PCs may approach 50% of the product cost since products lose value every day and old products must be deeply discounted or sold through alternative channels. Moreover, in computer and peripheral markets, manufacturers face constant price competition and narrowing margins, requiring both low inventories and high...