“You don’t really understand something until you can explain it to your grandmother.” Albert Einstein 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 Sebastián Javier García-Dastugue ******* The Ohio State University 2003 Dissertation Committee: Approved by Professor Douglas M Lambert, Adviser Professor Keely L Croxton Professor Thomas J Goldsby Adviser Business Administration Copyright by Sebastián Javier García-Dastugue 2003 ABSTRACT 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 business Postponement, 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 the 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 Postponement 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 it represents a method for capturing a number of managerial objectives that change within a short time horizon Early in the life cycle of the ii product, speculation is the strategy of choice for positioning inventories across the supply chain Speculation is used to minimize the risk associated with running out of stock It 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 to delay activities and to maintain product in a non-committed 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 its geographic differentiation The objective for dynamic time-based postponement is to reduce safety stocks wherever it is 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 quantitative 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 distribution centers, and quick-service restaurants owned by a franchisor These four companies had suppliercustomer relationships, worked closely, but were independent from each other and did not share ownership Collected data included manufacturing runs, interplant transportation, shipments to next-tier customers, sales to end-customers, emergency transshipments, 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 model 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 iii The 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 phases 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, how 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 firm with a roadmap for assessment of the business opportunity and for its implementation In this research setting, dynamic time-based postponement could produce a cost saving of between $5.3 and $6.9 million 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 initiatives 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 iv Dynamic time-based postponement represents an approach to a true implementation of collaborative replenishment 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 aspects of this dissertation First, this dissertation is research in supply chain management; that is, 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 it is implemented without changing any aspect of the product, the manufacturing process or the supply network structure The third differentiating aspect is that, in this research, it is recognized that postponement can be implemented by changing only the time in which activities are performed, rather than by changing the sequence of activities v Este trabajo está dedicado a mis padres, Inés y Juan Carlos, quienes siempre se esforzaron por darme lo mejor de ellos (a) A la memoria de mi padre, Juan Carlos, a quién tendré presente por siempre (b) a) Dedicated to my parents, who always have provided me with their best b) To my father who will be in my memory forever vi ACKNOWLEDGMENTS Several people interacted with me during the writing of this dissertation To all of them I am extremely thankful for their support and their help A dissertation grants a doctorate to a person, but there is at least a bit of this enterprise that belongs to each of these individuals I would 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 To 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 prepared 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 the doctoral program; who taught me endlessly; who helped me grow professionally and personally by providing me with challenges in teaching, writing and presenting my research interests; and who let me know when I could 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 I needed it To Professors Keely L Croxton and Thomas J Goldsby, who, together with Professor Lambert, formed my dissertation committee Their guidance through the process of writing this dissertation was invaluable Both played a central role in vii helping me ride the emotional roller coaster of writing a dissertation Their openness and accessibility made this process tolerable I also want to express my gratitude to Professor Sean Willems from Boston University Professor Willems not only let me use the software used for the quantitative analysis for this research, but also dedicated his time to answering my questions and guiding me in the use of the optimization software I will never forget the time, when even though he was working late at night, he spent more than an hour on the phone with me working together to find a solution to a problem I also want to thank Professors Martha C Cooper and Walter Zinn, from the Marketing and Logistics Department at the Fisher College of Business They with the three members of my dissertation committee, provided the environment to learn an enormous amount inside the classroom, doing research, or during informal conversations on the corridors I 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 helped 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, I never would have pursued my doctoral degree This dissertation represents the end of a wonderful journey and the beginning of another one I decided to accompany Ignacio in his endeavor to build a world class logistics program in Argentina several years ago, because I believed 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, who passionately helped me improve my English, who patiently guided me through learning the academic viii Another assumption was made by modeling each phase of the LTO as a stationary problem This implies that each restaurant expects the same average daily demand for the seven days of the week Actual daily demand showed weekly seasonality; the highest demand is observed on Saturdays and the lowest on Tuesdays Due to the fact that the ratios of a case of each ingredient to the number of promotional meals were small (1/380 and 1/320 for the ingredients analyzed), and considering that the highest daily demand of this type of meal was approximately 170 meals a day, it was expected that weekly seasonality would have limited impact on the inventory levels prescribed by the optimization Despite these limitations, it was believed that none of the assumptions and simplifications affected the conclusions regarding the use of dynamic time-based postponement EXTENSIONS AND FUTURE RESEARCH OPPORTUNITIES This research represents the first assessment of dynamic time-based postponement The study should be replicated in different research settings such as the apparel industry, or seasonal products such as candies or sports equipment The apparel industry presents many of the same characteristics as a limited-time offer, but the number of orders that can be placed to manufacturers is limited and lead times could be as long as nine months Frequently, retailers can place only one order to a manufacturer for the whole season This kind of problem is known as the newsboy problem Dynamic time-based postponement could be used to complement the analysis of the newsboy problem to determine the impact to the whole supply chain of increasing the number of orders that can be placed to manufacturers For example, two scenarios could be modeled One would represent the actual practice in which only one order is placed for the whole season This scenario 232 should include the expectation of sales at regular price, clearance sales, sales through secondary channels and lost sales due to the inability to adapt decisions to follow demand more closely The other scenario would include the same factors, but it should incorporate the fact that decisions could be revised This means that the original order could be adjusted within certain limits This analysis would result in the size of the business opportunity to be shared among the members of the supply chain who made this new scenario possible Seasonal products such as candies and sport equipment are similar to fashion products, but candy prices are lower and replenishment cycle times are shorter than for the apparel industry The value of sport equipment products is higher than candies and apparel, and replenishment cycle times tend to be shorter than in the apparel industry In the sports equipment industry, orders can be placed more frequently than in the apparel industry, but not as frequently as in the candy business High product value and the ability to place more than one order might allow management to identify several lead time options which suggests that dynamic time-based postponement could have potential Testing dynamic time-based postponement in several business setting will provide a better understanding of the implementation issues An optimization model represents a goal for which management would strive In this research, this goal was potential cost savings to the supply chain It was a goal because the costs savings are based on the output of a model and in the model all activity are performed exactly as planned That is, there is no contingencies, no human errors, and no miscommunication or late communications between managers As a next step, a simulation-based model could be developed using the output of the optimization as the target inventory policies This analysis might provide insights in terms of the dynamics in the supply chain A simulation model can be designed to replicate the managers’ decision-making processes and would result in a closer representation of an actual LTO environment For 233 example, despite the inventory levels set by the optimization before the LTO starts, if managers observe that demand is lower (or higher) than expected, they might not strictly follow the plans Instead, they might adapt decisions to their new expectations A simulation model could be developed to capture this dynamic nature of decision-making The development of a case study of an actual implementation of dynamic time-based postponement would provide insights about the intercompany relationships and the management concerns that hinder the development of supply chain-wide initiatives The potential contributions of the development of a case study includes: the identification of specific management concerns; how these concerns are presented to the other members of the supply chain, how these concerns are received, addressed and solved; how risks and rewards are determined and shared among firms; and, the impact of the experience on the degree of closeness of the relationships between firms Another future research opportunity is to reassess past studies in postponement by changing the sequence of activities, and to identify each of the benefits of postponement presented in Figure 2.9 Figure 2.9 shows that postponement allows demand aggregation, reducing the forecasting horizon, and the learning effect These three sources of benefits from postponement ultimately provide cost savings The benefits of each might depend on environmental factors This research opportunity has potential to result in a prescriptive framework to assist management in the determination of the benefits from postponement If the majority of the benefits from postponement stem from the learning effect, then the priority should be to develop the capability of information sharing and the infrastructure to support information visibility If most of the benefits stem from reducing the forecasting horizon, then the focus should be on improving forecasting techniques If the benefits stem primarily from the demand aggregation effect, then efforts should be concentrated on commonality of parts and subcomponents 234 A COMMENTARY The implementation of dynamic time-based postponement has considerable potential in supply chain management Dynamic time-based postponement requires that activities (and decisions) across the supply chain are coordinated This coordination is required not only during the planning period, before the product is launched, but it is required for coordinating replenishment throughout the life of the product This coordination needs to be supported by the appropriate information sharing Information sharing is enabled by information technology and telecommunications The development of information technology received considerable attention from trade publications and scholarly research Much has been written about the development of seamless information sharing from the end-customer to the original supplier [9] Numerous initiatives, such as Transora in the consumer packaged goods industry, Covisint in the car manufacturing industry, and ChemConnect in the chemical industry, have based their businesses on offering the required connectivity to share information across supply chain members In 2002, a large number of Fortune 500 firms invested substantial amounts of money on the so-called Electronic Information Hubs, Electronic Marketplaces or Electronic Exchanges [10] However, by 2002, only a few of these firms were still interested in the electronic information hubs And those who were using them were just using basic features such as electronic auctions for purchasing standard non-key purchases, pooling resource (such as sharing transportation) or bartering By the end of 2001, many of these initiatives failed and the focus turned to be the implementation of supply-chainwide rather than industry-wide initiatives [11] These failures might be related to managers reluctancy to share data and the lack of a value proposition to them Information represents power in the supply chain It is important to recognize that managers can be reluctant to share data because they are concerned about giving away part of their information asymmetry Information asymmetry occurs 235 when information is available to some but not all members of the supply chain When there is information asymmetry, the one who has the information may use it to increase benefits at the expense of others [12] Generally, it is not technology, but the concern about losing power that limits information sharing If this is the case, management focus should be on how to guarantee that the information shared will be used for good rather than to benefit at someone else’s expense For example, in a buyer-seller relationship, the seller may be reluctant to share cost data The buyer may believe that if the seller learns the size of the profit margins the buyer is obtaining from the seller’s business, the buyer will think margins are too high and would try to negotiate better prices This might have been the reason why manufacturers did not provide actual variable manufacturing costs, as indicated in Table 4.2 This kind of concern should be addressed as part of building a long-term relationship It is unlikely that technology will replace management’s ability to build relationships on trust The other factor that limits information sharing is related to the quality of data Maintaining data quality receives less attention and managerial resources than it deserves Generally, this is particularly the case for non-IT managers One possible explanation is that it is difficult to find a relationship between the costs incurred due to data problems On the other hand, it is difficult to determine the benefits from maintaining and improving data quality However, problems related to data quality have been estimated to cost US businesses from $ 600 billion [13] to $ 800 billion a year [14] Poor data quality can cause any enterprise to fail For example, data quality issues such as accuracy, timeliness, completeness, consistency, reliability and accessibility, are critical factors in the successful implementation of enterprise-resource planning information systems [15] Data are used at many organizational levels for decision making Also data are used by most corporate functions For instance in logistics and production, most data come from the recording of transactions such as sales, handling of 236 product at a warehouse, inventory adjustments, and transportation The people responsible for entering the data that are used even at the highest organizational levels are usually at the lowest in the organizational hierarchy They might even be temporary workers For example, at a retail grocery store, the cashier at the checkout is responsible for scanning the bar codes of all products The cashier may know that two items, with different bar codes, are priced the same and decide to scan the same product twice These incorrect data are used for a variety of tasks such as forecasting, and planning manufacturing, transportation and marketing activities Once data are in an information system, it is unlikely that their quality will be improved Therefore, considerable effort should be placed on training the people who enter data This is supported by the fact that data entry by employees is the most frequently mentioned source of data quality problems 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