April 02, 2006
Postponement Calculations Part II: After Postponement
This post is the final part of the two part series on the effects of implementing postponement. If you have not read part 1, I highly suggest doing so.
Using Postponement
Altering the production process, the firm that manufactures the DD1 and DD2 has created a new process that allows for the production of the DD0. The DD0 is a product that is not sold on its own but can be turned into either the DD1 or the DD2. The DD0 has a production time of 19 days and takes 1 day to turn into a DD1 or a DD2.
This allows for the postponement of the DD product line. Now, there is need for three different types of inventories. Finished goods inventory is held for the DD1 and the DD2, but now with shorter lead times, and WIP inventory is held in the form of DD0.
In order to achieve the same service level, what are the optimal value for each product?
DD1 and DD2 still have the same standard deviation, but now have a day lead time instead of a 20 day lead time. This is because it only takes one day to turn a DD0 in either good. Using the new lead time, the equation looks like this:
DD1 Safety Stock= 2.05*180*SQRT(1)=369 Units
DD2 Safety Stock= 2.05*200*SQRT(1)=410 Units
DD0 inventory has a 19 day lead time. The z-value is still 2.05. The standard deviation is the only tricky part to find. Pooled standard deviation is not the sum of the individual standard deviations. Instead, it is the square root of the sum of the individual values squared. So, for this particular problem that means it is:
SQRT(180^2+200^2) = 269
Now that we have all the values we need, the final step is to plug them into the formula:
DD0 Safety Stock= 2.05*269*SQRT(19) = 2,408
The sum of all 3 inventories is 3,189, which is 300 less units than the old system and an 8% reduction in inventory. Additionally, the majority of that inventory is WIP which means that it does not hold the entire value that the FG do and therefore holds reasonable expectations that holding costs are lower.
This example is not only reasonable, but as I've discussed in previous articles, a technique that has saved many firms, such as the adhesive firm and firms in the paint industry, huge investments in their inventory.
For more information regarding postponement, please leave a comment with your email address.
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