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Abstract
The rapid pace of new product introduction and global sourcing of raw materials and manufacturing facilities have created a complex and fragmented supply chain. Retailers in many consumer product industries are relying on third-party supply-chain managers (SCMs) to manage the global supply chain cost-effectively with short production lead times. To meet delivery requirements, the SCM must start the production process before receiving a firm order from retailers. We assume a two-stage production process where, in stage 1, a base product is produced. In stage 2, the base product is customised. The SCM absorbs the penalties associated with over- or underestimating retailers’ demand. Hence, the SCM has to decide on (a) the optimal production quantity of the base products and (b) the number of base products to be customised without delay. We develop a profit maximisation model for this strategy using a nonlinear objective function with two decision variables and one constraint. Applying Kuhn–Tucker conditions, closed-form solutions are obtained for the two decision variables. Also, formulations are given for two additional strategies: postpone customisation of all products and produce customised products only. An example illustrates the use of our model. We also examine the impact of demand variability on the effectiveness of the three strategies. Results show that postponement may not always be the best strategy for an SCM.
Acknowledgements
The authors express their sincere gratitude to the two anonymous reviewers for their comments on the earlier version of the manuscript. Snehamay Banerjee was supported by summer research grant from Rutgers University, School of Business at Camden. The authors also acknowledge the help from Ms Wenjia Wu, a graduate assistant in the Management Department at Western Michigan University, in writing a source code for the computations in R, and from Mr David Selden-Treiman, an undergraduate research student in the department, for plotting the figure using Maple.