Abstract:
Problem definition. Product proliferation occurs in supply chains to produce diverse product portfolios from a limited variety of raw materials. In such a setting, upstream operational decisions are often plagued with high demand uncertainty, whereas downstream decisions are exposed to high product variety. We compare two operational strategies (i.e., lead-time reduction and process redesign), both of which improve the flexibility of supply chains by delaying product proliferation. Academic/Practical Relevance. The well-known examples of Zara and Benetton illustrate the usefulness of these two operational strategies in managing product proliferation. We develop an integrated framework to evaluate the impact of changes in supply chain structure, cost and lead time of each echelon on profits. Utilizing this framework, we compare the relative value of the two strategies that have only been investigated in isolation in the literature. Methodology. We use the multiplicative martingale model of forecast evolution (m-MMFE) to characterize the demand updating process, and develop a dynamic optimization model to determine the optimal order quantities at different echelons. We compare alternative operational strategies analytically as well as numerically using Markovian sampling. Results. We show that reducing the lead time of a downstream operation is more beneficial to manufacturers than reducing the lead time of an upstream operation by the same amount, whereas reducing the costs of upstream operations is more favorable than reducing the costs of downstream operations. We also indicate that a complementary strategy of deferring high-cost operations to later stages and then focusing on reducing lead times of those scheduled after the proliferation substantially increases profits. Managerial Implications. We develop a decision typology that points out effective operational strategies depending on product/market characteristics and process flexibility.