EFFECTIVE INVENTORY AND SERVICE MANAGEMENT THROUGH

PRODUCT AND PROCESS REDESIGN

HAU L. LEE
Stanford University, Stanford, California
(Received August 1992; revision received June 1993; accepted February 1994)
One of the major challenges to operational managers is product proliferation. Product proliferation makes it difficult to forecast
demands accurately, and consequently, leads to high inventory investment and poor customer service. Such proliferation is often
a result of the global nature of the market place. Different markets may have different requirements for the product, due to
differences in taste, language, geographical environment, or government regulations. Another reason for product proliferation is
the expansion of the customer base. Different product versions are often developed for different market segments (e.g., education, personal, business, or government users may have different needs of a product). To gain control of inventory and service,
significant benefits can be obtained by properly exploring the opportunities in the design of the product or the process by which
the product is made. Logistic issues like inventory and service are thus important dimensions that design engineers should
consider, in addition to measures like functionality, performance, and manufacturability. This paper describes how some simple
inventory models can be used to support the logistic dimensions of productlprocess design. Actual examples are used for
illustration.

apid technology changes and increased globalization are two common characterizations of the environment faced by manufacturing enterprises of high
technology products. The immediate consequence of
such an environment is increased product proliferation.
Product proliferation creates a major operational challenge to managers of a manufacturing enterprise. It is
difficult to forecast demands accurately, leading to high
inventory investment and poor customer service.
Product proliferation is often unavoidable in a global
market. Different markets may have different requirements for the product, due to differences in taste, language, geographical environment, or government
regulations. For example, computer products for various countries may diEer in the power supply module to
accommodate local voltage, frequency, and plug conventions. Keyboards and manuals must match local
language. Telecommunication products may also be
differentiated by the communication protocols supported. In some cases, the need for localized versions
of a product results from government-imposed local
content requirements.
Expansion of the customer base may also lead to product proliferation. Different product versions are often developed for different market segments (e.g., education,
personal, business, or government users may have different needs of a product). Finally, rapid technology
changes mean that a company may be selling multiple
versions of the same product at the same time.
To deal with the operational problems of product proliferation, companies have invested in information technology, decision support systems, and transportation
modes. These investments aim at improving the

efficiency of the order fulfillment cycle. Another approach is to redesign the product or the process through
which the product is manufactured and distributed, to
gain control of inventory and customer service for the
product. While this approach is appealing, it often has
not been implemented (see Lee and Billington 1992).
Several obstacles exist (see Lee 1993 for more details),
which are outlined next.
First, design engineers have to take a broader perspective than product functionality, performance, and manufacturability (see Whitney 1988, and Dean and Susman
1989). It also requires enlarging the definition of costs in
the evaluation of alternative designs, which are often
narrowly defined as the material costs of the product and
direct labor for assembly.
Second, redesign of products for inventory and service
improvements often require close collaboration among
multiple functions, such as distribution, sales and marketing, finance, customer support, engineering, R&D,
and manufacturing, within a corporation. The organizational barriers between these functions can be very high.
Third, design changes may require some investment,
such as investing in additional manufacturing capabilities
at a distribution center, higher component costs, and additional vendor management costs.
Hence, management could be reluctant to proceed
with new designs that could result in inventory and service improvements, unless there is a concrete estimate of
the corresponding benefits. Logistic costs, such as
freight, customs and duties can easily be quantified. The
benefits in terms of lower inventory, faster response
times to customers, increased availability levels and increased flexibility, are much more difficult to quantify. It

Subject ckussificutio~zs: Inventoryiproduction, applications: product/process design; multi-echelon; supply chain management.
Area of review: MANUFACTURING,
OPER.~TIONS
AND SCHEDULING
(SPECIALISSUEON NEWDIRECTIONS
I N OPERATIONS
MANAGEMENT)

Operations Research
Vol. 44, No. 1, Janua~y-February 1996

0030-364X/9614401-0151$01.25

8 1996 INFORMS

is here that inventory theories and models can make a

contribution. There will also be benefits, such as increased worker morale, improved quality, and marketing
values, which one may never be able to quantify
appropriately.
In this paper, we present some simple inventory models that can be used to support product/process redesigns
for companies to gain control of inventory and service.
These models were used in actual cases, and these application cases are also described. Although these models
by themselves are not new innovations to the inventory
literature, the development of the models for product1
process design application is new. Highlighting such developments will perhaps stimulate inventory researchers
to link their work to productlprocess designs, and motivate design engineers to look into the inventory and service dimensions of their designs.

1. LITERATURE REVIEW

We will first give an overview of recent developments

regarding concepts that link design and other elements,
such as logistics and distribution of the manufacturing
enterprise. The literature on such subjects is rapidly
growing, and hence we provide only a sample overview.
Some of the recent works that relate to product/process
design to improve logistic efficiencies are then described.
The early phases of design have a major impact upon
cost, quality, flexibility, and serviceability, all critical
factors that affect operational performance (Barkan 1991,
1992). The importance of the relationships between design and the other functional areas of a firm has been
emphasized in recent literature. These relationships, according to Calvin and Miller (1989), are consequences of
the many constraints imposed on design teams through
distribution, service, maintenance, marketing, and manufacturing capabilities. Stoll (1986) defined DFM (design
for manufacture) as a process by which a product is designed taking into account all of the important concerns
of both the customer and the corporate organization, and
using this process to define product designs that facilitate
"global" optimization of the manufacturing system as a
whole.
DFM and concurrent engineering concepts emphasize
the importance of considering more than functionality
and performance of a product in its design stage. Thus,
Whitney advocates "a larger goal for evaluating design
should be reducing costs over the product's entire life
cycle." Winner et al. (1988) defined concurrent engineering as a systematic approach to the integrated, concurrent design of products and their related processes,
including manufacture and support. This approach is described as one intended to cause the developers, from
the outset, to consider all elements of the product life
cycle from conception through disposal, including quality, cost, schedule, and user requirements.

The product design and development process should

thus involve multiple constituents of a company. Cooperation across functional lines (Wheelwright and Sasser
1989), and cross-functional teams (Dean and Susman) are
crucial for successful product development projects.
Sharing and integration of information from different
members that represent different areas of an enterprise in
the design team are also key success factors.
Despite the rapidly growing literature on design for
manufacturability, research that links operational models
to design issues is only emerging. Graves (1988) developed a model that characterized inventory and output of
a single production site. This approach can be used to
analyze the value of flexibility in the manufacturing process as well as parts commonality, both of which are
design issues that can affect the logistical performance of
a product.
A key design concept to gain control of inventory and
service in a global market is delayed product differentiation. It refers to delaying the point in time when a product assumes its specific identity, i.e., a particular model
in a particular region for a particular market segment.
Such a strategy increases the company's flexibility in
meeting uncertain and changing customer demands. The
strategy to delay product differentiation to meet different
local region requirements is also known as "design for
localization," whereas the strategy to meet the needs of
different modelslmarket segments is sometimes termed
"design for customization" (see Lee, Billington and
Carter 1993).
Closely related to delayed product differentiation is increased part commonality and interchangeable subassemblies ("design for flexible manufacture7'). Part
commonality can result in cost savings in part number
administration, inventory reduction, and supplier management. Operations researchers have analyzed the inventory savings that resulted from increased part
commonality (see, for example, Baker 1985, Baker,
Magazine and Nuttle 1986, Gerchak, Magazine and
Gamble 1988, Henig and Gerchak 1986, and Gerchak and
Henig 1989). A more powerful benefit of part commonality, often ignored in the literature, is that it can be used
as a means to achieve delayed product differentiation.
The manufacturing process of a product and its associated multiple versions may involve multiple stages, each
requiring different input parts and subassemblies. Increasing the level of part commonality at the early stages
of the manufacturing process is similar to postponing the
differentiation of the products until after these early
stages. When used appropriately, part commonality can
provide benefits that go beyond the commonly cited
ones.
Another related concept is product modularity, i.e.,
the division of a product into independent modules. Such
an independence allows a company to standardize components and to create product variety from a fmed set of
modules. Hence, modularity is a concept closely linked

to commonality. The costs and benefits of modularity

have been thoroughly discussed in Ulrich and Tung
(1991) and Ulrich (1991).
As mentioned earlier, the logistics costs of moving materials and products can be a significant part of the total
product cost. "Design for logistics" is an emerging concept that is being used at companies such as Digital
Equipment and Hewlett-Packard (Lee). The idea is to
design products that are easy and cost efficient to be
transported.
There is a segment of literature on distribution research that is relevant to product/process design. This
literature is concerned with the impact of changes in the
configuration of the distribution network on the resulting
inventory and service performance of the network. In
many cases, the distribution network can be viewed as
the manufacturing process, so that changes in the configuration of the network are similar to the changes in the
design of the product or the process. Notable examples
include Eppen and Schrage (1981), Federgruen and
Zipkin (1984), and Schwarz (1989).
2. INVENTORY MODELS FOR PRODUCT/PROCESS

DESIGN
In this section, we present two inventory models that can
be used to support product/process design. These two
models were all motivated by real application cases.
Both were used to support analysis of product/process
design to delay product differentiation. One deals with an
environment where an intermediate stage of the product
is built to stock, from which this intermediate product is
then customized into different final products on demand.
We term this a build-to-order model, because final products are built on demand. The other deals with an environment where immediate delivery of finished products
is critical, so that finished products are built to stock. We
term this a build-to-stock model. Both models assume
stationary demands and costs.
2.1. A Build-to-Order Inventory Model

Consider a production process where products can be

made in batches of any size, and where it takes T time
units for a batch from start to finish. The production
process is such that, for the first t time units, the production process is identical for all products. The remaining
T - t time units are devoted to customize the product
into a distinct end-product. A stockpile of inventory is
held right after the products have completed the first t
time units of the generic process. This intermediate inventory can be used to be customized into any endproduct (see Figure 1). Thus, t can be viewed as the
point of product differentiation. The intermediate inventory stockpile is managed as a periodic review order upto-S inventory system, with the review period being one
time unit. The amount of customer orders (for all endproducts) in each time unit is an iid random variable. Let

Generic Production
Process

Product Differentiation steps

A

Different
Product
Versions
for
Customer

Intermediate lnventory
Stockpile (Generic Product)

Figure 1. A build-to-order model.

D(r) denote the total demand for all end-products in r

time units, and F(xlr) denote the probability that D(r) is
less than or equal to x. As a convention, denote
F(xjr) = 1 for r a 0. We assume that demands are
never negative.
The sequence of events at the production site can be
described as follows. At the beginning of each time unit,
customer orders arrive. Intermediate inventory in the
stockpile is then used to customize the products to meet
the customer orders. If there is not sufficient on-hand
inventory in the stockpile to meet all customer orders,
the excess is backlogged until more inventory is available
from upstream production. With respect to customer orders in each time unit, a first-come, first-serve discipline
is used to satisfy their demands. At this point, the
amount of remaining intermediate inventory held at
the stockpile is reviewed. Production to replenish the
intermediate inventory stockpile to bring the inventory
position (inventory on-hand + work in process - backlog)
to S is then initiated. Note that it takes t time units to
complete production of the intermediate inventory. The
batch of items that began production t time units ago will
then have completed production, and are added to the
intermediate inventory stockpile.
Let Y be the response time to all customer orders arriving in a particular time unit. We will focus on Y as our
key measure of performance. An individual order arriving in that particular time unit could have been satisfied
in less than Y time units, and thus Y gives the upper
bound (or worst case) to the actual response time to an
individual order. The specific service measure used here
can either be the expected response time to customer
orders, or the probability that the response time to customer orders in a time unit is less than or equal to some
target R time units. The first problem is to characterize
the service measures in terms of t, T, R, S , and the
demand distribution. Observe first that:
where W is the waiting time if the intermediate stockpile
does not have enough stock on-hand when the customer
orders arrive. The longest waiting time is t , the total
production time of the intermediate product, if production has to start from scratch. Now note that, for x < t,
the event that W > x is equivalent to the event that the
total demand in the previous t - x - 1 time units plus

the current time unit, i.e., the immediate t - x time

units, is greater than S. Thus:
Prob{W a r) = 1 - Prob{D(t - r) > S ) = F(SIt - r).

This means that when t changes, S should be such that

(4) is satisfied. Now, differentiating the continuous version of (3) w.r.t. t , we get:

The two service measures can then be written as:

+gr(t)

F(xlt) dx.

and

Prob{Y a R) = Prob{W

aR

- ( T - t)) = F(SIT - R).

Given a target E ( Y ) , we can then equate this target to

(I), from which S can be found. Alternatively, given a
target reliability (as a probability) of response time being
less than or equal to the target R , we can equate this
target reliability to (2), from which S can also be found.
As described earlier, one way to gain control and service is through delayed product differentiation. Suppose
that there is a way to make process changes so that the
point of product differentiation t can be delayed, which
means that the point at which intermediate inventory
stockpile is held can also be delayed. Letg(t) denote the
unit holding cost rate for intermediate inventory, given
that the intermediate inventory stockpile is held t time
units after initial production. Assuming that there would
be value added during production, g ( t ) should be a nondecreasing function in t. Let H ( t ) be the expected holding cost per unit time for such intermediate products,
given that the S value is determined by setting either (1)
or (2) to meet the respective target. In what follows, we
focus on (1) being the service measure used. The analysis
is similar if (2) was considered.
Note first that the total average work in process (prior
to and after product differentiation) would be the same
when t is delayed. We can therefore focus on the inventory level at the intermediate inventory stockpile. Since
the intermediate inventory stockpile is a standard periodic review order-up-to S system, the steady-state probability of the inventory level at the time of inventory
review being higher than x is F ( S - xit) (see Hadley and
Whitin 1963). Hence:

where S is the value that enables (1) to satisfy the service

target. For the sake of illustrating a qualitative property,
we replace the summation sign in (1) and (3) by an integral, i.e., to treat r as a continuous variable. This is a
common approach used in inventory theory. Differentiating (1) with respect to (w.r.t.) t and setting it to zero
yields:

From (4), we know that dS/dt a 0. Also, aF(xlt)/

dt a 0. However, g l ( t ) 2 0. Hence, it is not at all clear
if dH/dt is greater than or smaller than zero. Nevertheless, if g'(t) is small and close to zero, then the total inventory cost would decrease as the point of product
differentiation is delayed. To gain the benefits of inventory
savings from delayed product differentiation, the process
change would thus have to be such that gl(t) is small.
2.2. Application of the Build-to-Order Model

Consider the scenario faced by a disc-drive manufacturer. Disc-drive orders come from different computer
manufacturers (OEMs), each of which orders a unique
set of products. Disc-drive manufacturing has a long lead
time, because many time-consuming tests are involved.
Hence, it is necessary to have in-process inventory to
shorten the response time to customer orders. High forecast errors resulted from high demand uncertainty implies that high levels of in-process inventory are needed
to provide a high level of reliability for meeting the target
response time to orders.
The manufacturing process of disc drive can be divided into two parts. All disc drives for any OEMs have
to first go through a generic part of the process. In
the second part, the disc drive is then customized to the
specifications of the different OEMs. Intermediate discdrive inventory is held at the end of the first part of the
process. The first part of the manufacturing process,
however, is relatively short. The second part of the process begins with some time-consuming tests that require
customized printed circuit boards.
Since the second part of the manufacturing process is
relatively long, a high level of intermediate inventory
stockpile ;s required to support high reliability of order
lead time targets. Based on the model analysis shown in
the last section, it would be ideal to design the process so
that the point of product differentiation is postponed
without increasing the value of inventory at that later
point. This calls for reconfiguring the process so that
process steps in the second part with little value added
can be made generic and so can be performed before the
differentiation point. It turns out that the testing steps
just described can be carried out using a "coupon"
board (can be viewed as a generic board) without the use
of the customized board on a drive. After the series of
tests are completed, the coupon board is then removed
and the actual printed circuit board is then inserted at

this point. Hence, the point of product differentiation is

postponed from the beginning of the tests to after the
tests are completed. Since tests do not add significant
value to the product, the delayed product differentiation
strategy does not incur an increase in the value of inventory investment. Figure 2 illustrates such a process design change.
The biggest resistance for the use of the coupon boards
as a way to delay product differentiation came from manufacturing management personnel who were just-in-time
purists. The insertion and subsequent removal of a coupon board was viewed as a nonvalue-added activity, and
therefore should not be instituted. The model helped to
quantify the value of flexibility that resulted from delayed product differentiation, in the form of inventory
reduction, and was a key step to solidify management
support for eventual implementation of the process design change.
2.3. Another Application of the Build-to-Order Model

A workstation manufacturer begins its manufacturing

process with the processor board, which involves the
fabrication of ASICs (application-specific integrated circuits). The lead time of this first process is quite long.
The second stage involves building the sheet metal,
power supply, fan, and cables. The third stage includes
the integration of base memory, floppy drive, hard drive,
and the operating system. This is followed by the addition of application software, add-on memory, video
RAM card, LAN cards, and other option cards. The final
stage, which is often performed in distribution sites, includes the assembly of power cord, keyboard, mouse,
monitor, and documentation.
This workstation manufacturer builds partially completed workstations based on forecast, and stocks the
work in process. Different customers may need different
configurations of the system, e.g., different application
softwares, memory, hard versus floppy drive, and option
cards. Such customization steps are performed under the
build-to-order environment, i.e., a system is configured
upon demand. In the past, stages 1 and 2 were generic to
all customers, and thus the product is built and stocked
up to that point. The rest of the stages constitute the
customization steps.
Delayed production differentiation has been introduced as a key way to add flexibility to the manufacturing process. T o implement delayed differentiation, the
manufacturer considered standardizing the key subassemblies, such as base memory, floppylhard drives,
and the operating system. This way, the point of differentiation can be deferred until the third stage is completed. The number of units of the partially completed
product needed to support the response time target could
be reduced by such a change.
On the other hand, a workstation that has gone
through stages 1 to 3 of the process is worth significantly
more than one that has gone through only stages 1 and 2

PCB

Insertion

end-product

Work-In-Process
lnventory Stockpile

Coupon Board
Insertion

PCB

Insertion

end-product

Series of Tests
Work-In-Process
lnventory Stockpile

Figure 2. Disc drive manufacturing example illustrated.

of the process. Careful analysis of the change using a

simple inventory model such as the one described in subsection 2.1 revealed that reduction in physical units of
inventory held is more than offset by the increased value
of per-unit inventory. Consequently, although delayed
product differentiation is attractive in principle, there
could be a limit to which differentiation should be deferred. Inventory models are useful to help the assessment of the tradeoffs.
2.4. A Build-to-Stock Model

When immediate availability of products is critical, the

service measure is usually the conventional fill rate, i.e.,
the fraction of demands that are met from stock without
delay. In this case, inventory is stored in finished goods
form. Consider the following manufacturing process. For
a batch of items that could eventually be customized to
different end-products, it takes t time units to process the
items in one generic form, i.e., all end-products have to
go through these first t time units without any differentiation. Up to this point, all items are identical and can be
customized to any end-products. It takes T - t time
units to customize the generic items into different endproducts. Hence, the total manufacturing time is T time
units. Inventory is held only in finished goods form (see
Figure 3). All end-products have identical inventory and
backorder costs.
Suppose that each end-product finished goods stockpile is operated as a periodic review inventory system,
where the review period is a time unit. Demands for
end-product i in each time unit is normally distributed
with mean ki and standard deviation a,. Assume that
demands of items across time units are independent,
but demands for different end-products in a time unit can
be correlated. Let p, denote the covariance of demands
for end-product i and k in a time unit. We further make
the assumption that demands for all end-products have
an equal coefficient of variation, i.e., ailpi is constant for
all i . Define also that R, = a,/Cjaj. Demands not met
immediately are backordered. We ask a similar question

Point of Product

Differentiation

Generic Production
Process

Customization

Process

Figure 3. A build-to-stock model.

as before: How to characterize the operational performance of such a system as a function of t , T, the required fill rate, and the demand distribution of the endproducts. Based on that, we can then explore the costs
and benefits of delaying the point of product differentiation t .
At the beginning of each time unit, the inventory status
of all end-products is reviewed, based upon which two
actions will be initiated. First, an allocation decision is
made regarding how items that have just completed the
first t time units of processing should be allotted to be
customized for different end-products. Second, the
amount of new items to begin production is determined.
Readers familiar with the distribution literature would
recognize that this manufacturing system resembles the
single warehouse, multiretailer system studied by Eppen
and Schrage (1981), Federgruen and Zipkin (1984), and
Schwarz (1989). Hence, we will only state the key operating characteristics without detailed proofs here. We
then present the results of our analysis based on these
characteristics.
Eppen and Schrage have shown that, using linear inventory holding and backorder costs and under fairly
mild assumptions, the optimal inventory policy is to operate each end-product stockpile as an order-up-to S system. Let S, be the order-up-to level for end-product i.
Hence, at the beginning of each time unit, the number of
new items to begin production is the total demand of the
previous time unit. Furthermore, an equal fractile allocation rule is used to allocate the inventory that has just
completed t time units of production for the customization to different end-products. This rule stipulates that,
after allocation, the inventory position for each endproduct should be the sum of the mean demand for the
end-product over T - t time units, and a common
safety-stock factor multiplied by the standard deviation
of demand for the end-product over the T - t time units.
Given such results, the steady-state end-of-period inventory level, I,, has a mean and variance given by (see
Eppen and Schrage, or Schwarz, for details):

where A iis a function of Si and pj, but is independent of

t . Based on these two moments, service measures such
as the fill rate can be derived. The value of Si is then
determined to satisfy the target service level (see
Schwarz).
We can now consider the value of delayed product
differentiation by considering increasing the value of t
but keeping T constant. Note first that by keeping T
constant the average work-in-process inventory remains
unchanged when t changes. Next, note that E(Z,) is independent of the value of t. Thus, delayed product differentiation does not affect the expected value of Ii.
However, the variance of Iiis a function of t. Clearly, the
smaller the variance of Ii, the lower the Si to satisfy
the same level of service.
Differentiating (5) w.r.t. t yields:

xj$

Since, for all j and k, pjk < qu,, and therefore

+
Cj+,pjk S ( c ~ ~ Thus,
) ~ . aVar(Ii)/dt is always nonpositive. Delayed product differentiation in this case would
always result in less inventory held in finished goods
form. This result is true regardless of whether demands
for the end-products are positively or negatively correlated. However, if pjk is negative, then dVar(I,)ldt is
more negative. Hence, the benefit of delayed product
differentiation in the form of inventory reduction is
greater when demands for different end-products are negatively correlated.
In the special case of N independent and identical endproducts with common standard deviation of demand in
a time unit, a , we can simplify (5) to:

The value of delayed product differentiation is easy to

see in this simplified form. The first term inside the
bracket on the right-hand side has as a denominator
the number of products N, while the second term does
not. Clearly, the variance is reduced by increasing the
numerator in the first term and decreasing a corresponding amount in the second term. Also, the larger the number of end-products, the greater is the reduction in
variance from delayed product differentiation.
2.5. Application of the Build-to-Stock Model

The following application is abstracted from Lee,

Billington and Carter. A key computer manufacturer has
one of its printers manufactured centrally in the U.S.,
and distributed globally through the company's three distribution centers (DCs) for worldwide demands. The
three DCs are located in Europe, the U.S., and the Far
East. Theses printers need to be localized for the requirements of different countries, which involves packaging a printer with the appropriate power supply module,

with the correct voltage and power cord terminators

(plugs), and a manual with the appropriate language. In
the past, localization was performed at the U.S. factory,
a strategy known as "factory localization." Due to competitive pressures, the manufacturer has to provide high
levels of availability for the dealers by maintaining some
target finished goods inventory at the DCs.
Manufacturing at the U.S. factory operates in a pull
mode. Production plans are set to replenish the DCs
LL
just-in-time" to maintain the target safety stocks. Under "factory-localization," the different versions of the
printers, with different power supplies and manuals, are
shipped to the two non-U.S. DCs by sea, with a transit
time of approximately one month. The consequence of
such a long lead time is that the European and the Far
East DCs have to maintain high levels of safety stocks.
Localization at the DCs provides an attractive alternative to gain control of inventory and service. Hence, the
factory would be responsible for manufacturing a generic
printer without the power supply module and manual.
Generic products are shipped to the DCs, where the generic product is then localized to the different specific
country options as they are needed. Such a strategy is
termed "DC localization." To implement DC localization, some design changes had to be made to the product. For example, the product needs to be redesigned so
that the power supply module is the last component to be
added on and can be plugged-in easily at the DC. Some
investment is needed to equip the international DCs with
such a capability. In terms of inventory control with DC
localization, the international power supply modules and
manuals are kept at the remote DCs, instead of at the
factory. Semi-finished goods, i.e., unlocalized version of
the product, are stocked at the European and the Far
East DCs. When actual orders are received, a quick operation localizes the generic version into the specific
product required. Figure 4 shows the difference between
the two localization strategies.
The change from factory localization to DC localization is like moving the point of product differentiation
from the factory to the DC, i.e., a postponement of a
month for the non-U.S. markets. The build-to-stock

8/

customers

Point of Product

Differentiation

-J

4-1.
In addition to inventory, there are many other factors
that should be considered in a comprehensive evaluation
of the localization alternatives. First, a localized printer
contains localization materials, and so it has a higher
value than an unlocalized printer. Hence, the capital tied
up in pipeline inventory (inventory in transit) is also
lower when localization occurs at the end of the chain,
i.e., DC localization. Second, an unlocalized printer is
much less bulky than a localized one, as the localization
materials and many of the final packaging materials that
are needed for the customers do not have to be bundled
with the printer. One can thus ship the unlocalized printers in bulk pallets, and cut the cost of transportation
significantly. Third, increasing "local content" and local
"manufa~turing~~
presence can make a product more
marketable, which supports doing localization at the nonU.S. DCs (see Cohen and Lee 1989). There is also a need
to develop a local supply base of the localization materials for the DCs. Finally, since DC localization requires
the DCs to perform some operations that are traditionally
viewed as manufacturing activities, there may be cultural
and organizational barriers to overcome. After considering both the quantifiable and the nonquantifiable factors
mentioned before, the manufacturer has redesigned the
product, and is designing all future products to support
the DC-localization strategy.
2.6. Another Application of the Build-to-Stock Model

Factory-LocalizationStrategy

mfg

model was used to estimate the inventory savings that

resulted from such a product redesign. In this case, the
correlations among demands of different end-products,
i.e., printers for different countries, are not particularly
high. To illustrate the inventory savings through the
model of subsection 2.4, consider T as the sum of production time at the factory (1 week) and the transit time
from factory to the European DC (4 weeks), i.e., T = 5
weeks. Factory localization would mean that t = 1
week. DC localization would almost push t to be very
close to T. Let K, be the safety stock factor for endproduct i at the European DC. If the demands for the
different country versions of the printer in Europe are
independent, then the safety stock level for end-product
i is K ~ ~ ( R , ~ 40-3,
c ~ cwhereas
~
corresponding safety
stock level under DC localization is K ; R' ; ~ ( ~ Y ; . ; The
&).
reduction of safety stock is K,{~(R,~c~.;" 40-3 -

DC

customers

Point of Product

Differentiation

DC-Localization Strategy

Figure 4. Printer localization example illustrated.

A printer manufacturer was about to introduce a

new product, a color printer. Demands for the new color
product and the existing monoprinter are probably negatively correlated. To meet high levels of product availability, the manufacturer has to stock high levels of
finished products. With a high degree of demand uncertainties for the two products, it is easy to have inventory
building up for one product while shortages exist for the
other one.

The manufacturing processes for the two products are

basically very similar, except for the materials used.
There are two key stages: printed circuit board assembly
and test, and final assembly and test. There are two key
subassemblies that differentiate the color and monoprinters. At the printed circuit board assembly stage, two
distinct head driver boards are used, one for each product. At the final assembly stage, two distinct print mechanism interfaces are also used. Other differences in the
bill of materials for the two products exist, but these are
minor and can easily be standardized. Here, product differentiation in the manufacturing process begins when
the distinct head driver board is inserted into the product, i.e., at a relatively early stage of the process.
To address the problem of high forecast errors for the
two distinct end-products, we can again employ the strategy of delayed product differentiation. If a common head
driver board can be designed for both types of printers,
then the point of differentiation can be delayed to after
the printed circuit board assembly stage. Furthermore, if
a common print mechanism interface can also be designed,
then the point of differentiation can be further delayed to
the end of the final assembly stage. Figure 5 shows the
two alternatives of delayed product differentiation.
The operations research literature has addressed the
issue of inventory savings that resulted from commonality of parts (see, for example, Baker 1985, Baker,
Magazine and Nuttle 1986, Gerchak, Magazine and
Gamble 1988, Henig and Gerchak 1986, Gerchak and
Henig 1989, and others.) The focus of these works, however, is on the impact of the component inventory as a
result of commonality. In our application here, the values of the head driver board and the print mechanism
interface are relatively insignificant, compared with the
value of a finished printer. Hence, the major value of
commonality is not on part inventory reduction, but on
the resulting finished goods inventory reduction due to
delayed
product
differentiation
achieved
by
commonality.
Besides the technological challenge to standardize the
parts, commonality would result in higher part costs. A
color printer is a product with more functionality than a
monoprinter. Having a standardized part for both means
that the material cost for the monoprinter would probably go up, because a part with greater capability has been
used. To fully evaluate the effectiveness of commonality
in this case, one would thus have to assess the impact of

1.
2.
3.
4.

inventory savings for the parts;

material costs of parts;
investment cost for the engineering change; and
inventory savings for finished goods.

No Common
Key Parts

Common Head
Driver Board

Head
Driver Board,
Common Print
Mech Interface

, color printer

*
*

Common PCB
Assembly

PCB Assembly

color printer
mono printer

Common PCB
~

mono printer

Common
~

~i~ ~

~~ ~ l

color printer
~ mono
~
printer
b ~

Final Assembly

Figure 5. Printer commonality example illustrated.

3. CONCLUSIONS

Product and process design changes are powerful means

to enable a company to gain control of inventory and
service in the presence of product proliferation. In many
instances, they are more effective than investing in better
inventory planning and control systems, which assume
given product and process designs. The application examples in this paper on productlprocess design changes
to effect delayed product differentiation would perhaps
illustrate the importance of expanding the mind set of
inventory modelers from focusing on "optimal" inventory planning and control to exploring alternative productiprocess designs to improve inventory and service
performance.
We do see a parallel of our problem here to quality
management. Rather than focusing on quality control
in the form of inspection and process control, the trend in
quality management now is toward designing quality into
the product (see Taguchi and Clausing 1990). There is no
doubt that technical and creative challenges exist for designers to make changes such as the ones described in
this paper. An encouraging note should be mentioned
here. In the many examples cited in references that describe Taguchi's method of design for quality, it is often
stated that design changes do not always have to be expensive and difficult undertakings. There often exist simple design changes that can result in a significant
reduction in product quality variations.
Rapid technological changes and increased globalization of markets will continue to result in product proliferation as a major challenge to operations managers of
global companies. It is important for design engineers to
look beyond functionality, performance, and manufacturability of a product. Logistic issues such as inventory
and customer service are critical battlegrounds for competitiveness. To this end, inventory models have a lot to
offer.
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l ~

~ b

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