Optimization of postponement process for a two stage modular manufacturer

Purpose: Firms have increasingly been using postponement as one of the supply chain strategies to respond to rapid changes in customers’ demands. The purpose of this study is to identify the optimum level of postponement in the context of two-stage modular manufacturing setting, given the information about trade-off between level of postponement and associated cost is known. Design/methodology/approach: A critical ratio for the manufacturer to determine whether postponement process is to be continued or not is identified. An algebraic formula for the critical ratio is obtained using which managers can identify the optimal level of postponement using differential calculus. Findings: The authors have analytically arrived at the solution which gives the manager the optimum level of postponement. Here, they identify the optimum level of postponement in the context of manufacturing, given the trade-off between level of postponement and associated cost. They calculate the expected total profit with different demand scenarios. The parametric analysis in this study shows that if price of the product decreases, then optimal amount of postponement also decreases. Research limitations/implications: It is important for a manager to identify the optimum level of postponement. In practice, managers usually take this decision on the basis of their judgment and trivial analysis of trade-off between costs and benefits of postponement. Originality/value: In this study, the authors find an optimum amount of postponement for a firm to find an optimal balance between the cost and the benefit garnered by the postponement process.