Make-to-order, make-to-stock, or delay product differentiation? A common framework for modeling and analysis

Abstract

Widespread increase in product variety and the simultaneous emphasis on shorter order-delivery times, and lower costs, is forcing manufacturing firms to consider alternatives to both make-to-stock and make-to-order modes of production. One such alternative is delayed product differentiation. It is a hybrid strategy that reconciles the needs of high variety and quick response. A common product platform is built to stock and then differentiated into different products once demand is known. In this paper, we examine the costs and benefits of delayed differentiation in environments where capacity is finite, and order lead-times are stochastic and load-dependent. We show that the advantage of delayed differentiation is affected by factors such as capacity utilization, product variety, and order delay requirement. In particular, the desirability of delayed differentiation is found to be sensitive to the utilization of the production system; its benefits diminishing with increasing utilization. In situations where order-delay requirements are tight, we show that delaying differentiation can be more expensive than producing in a make-to-stock fashion. However, when utilization is in the mid-range, the benefits of delayed differentiation can be significant. As intuition suggests, the benefits of delayed differentiation are also significant when product variety is high. In fact, the marginal benefit from delayed differentiation is, by and large, increasing in the number of products. If the point of differentiation can be affected, we find that, where feasible, differentiating early by postponing more work content until demand is realized is desirable, leading ultimately to a make-to-order system. If the cheaper early differentiation is not possible due to tight delivery requirements, we show that we should assign proportionally more capacity to the make-to-order stage