Analysis of Pull Postponement by EOQ-based Models

A number of quantitative models for analyzing postponement based upon cost and time evaluation have been discussed in the literature. Most of them assumed that the product demand is uncertain. However, if the demand is deterministic, e.g., because there is a long-term supply contract between the manufacturer and the retailers, the benefits due to economies of scope and risk pooling do not exit. Thus, evaluation of postponement structures under scenarios with deterministic demand is also an important issue. It is natural that the economic order quantity (EOQ) model can be used to derive a total cost function for analyzing postponement. In this chapter we develop an EOQ-based model to examine the cost impact of the pull postponement strategy adopted by a supply chain that orders and keeps n end-products. We formulate a total average cost function for ordering and keeping the n end-products in a supply chain, in which their demands are known and deterministic. Using standard optimization techniques, we show that postponed customization of end-products will result in a lower total average cost and a lower EOQ. Furthermore, we develop an EOQ-based model with perishable items to evaluate the impact of item deterioration rate on inventory replenishment policies. Our theoretical analysis and computational results show that a postponement strategy for perishable items can yield a lower total average cost under certain circumstances. This chapter is organized as follows. In Section 2.1 postponement strategy for ordinary (imperishable) items are discussed. In Section 2.2 postponement strategy for perishable items are addressed. We conclude the chapter in Section 2.3.