Industries in which products are highly customized tend to operate primarily
according to a Make-To-Order (MTO) policy. However, it is frequently the case
that some proportion of the production is planned according to a forecast of
orders to reduce customer order lead times. Order lead times are quoted based on
the estimated cycle time; the time between receiving order requests and the
earliest time they can be delivered. This approach is common, but it carries the
risk that forecast orders may not materialize. Strategies based on delayed
differentiation and component commonality attempt to mitigate the risk by
facilitating pooling of demand. These strategies significantly reduce inventory
holding costs by positioning inventory upstream in the supply chain, where it
can be applied to many different customer orders; for example, see Brown et al.
(2000) for an application in the manufacture of semi-conductor devices, and
Burman et al. (1998) for a similar application in printer assembly. In process
industries, the degree of customization of finished products tends to be very
high and there is a large (often continuous) range of possible semi-finished
product designs that can be carried in stock. Therefore, the problem of
positioning inventory for the purpose of reducing customer order lead times also
includes the additional complexity of choosing which semi-finished designs to
stock.
We describe next an instance of the problem of choosing semi-finished product
designs and target inventory levels in the steel industry that has motivated our
interest in this class of problems. Integrated Steel Manufacturers (ISMs)
perform all of the steps necessary to convert iron ore into finished products.
Their operations are characterized by high capital expenditures and long cycle
times. Lately, they have started to face stiff competition from much less
capital-intensive mini-mills. Mini-mills process scrap steel and enjoy a cost
advantage in plain carbon-steel markets as well as significantly shorter cycle
times. Realizing that their competitive strength lies in being able to make a
large variety of high-quality products, many ISMs have positioned themselves in
markets for more specialized/customized finished products where they enjoy
greater pricing power. However, customers for such products often require
reliable deliveries that are synchronized with their own production schedules.
Therefore, these ISMs have observed an increase in product variety, and a
simultaneous pressure to significantly reduce delivery lead time for a subset of
their customers. |
|
