Even characteristics and the valuation of overstock

if decision makers know that short lead times drives responsiveness, Fisher et
al. (1997) demonstrates that companies struggle to quantify the impact of lead
time reduction and have constraints to reduce their lead times in practice. To
address the quantification of lead time reduction, Blackburn (2012) stated that
marginal value of time is low for products with low forecast variability, or
predictable demand, and it only considers inventory holding cost. In a broader
way, de Treville et al. (2014b) proposed a quantitative model
that demonstrated that marginal value is high and investments in lead time
reduction are meaningful for products whose forecast evolves over time and
demand volatility is high or stochastic; such as innovative products. However, de
Treville et al. (2014a) applied this same model to products that were difficult
to classify as functional or innovative, in three different industries, and
demonstrated that depending on demand characteristics and the valuation of
overstock costs, the mismatch cost may be higher even for products that appear
to be functional.

 The cost-differential frontier model proposed by de Treville
et al. (2014b), uses quantitative financial techniques to optimize sourcing
decision in face of demand risk. The frontier indicates the indifference of an
organization between a make-to-order policy and a long-lead time supplier. It
shows the cost differential required to compensate for an increase in demand
volatility exposure, from a make-to-order policy, by placing an order when
demand is known; to the longest lead time supplier, which in this case is
Flextronics lead time. If the long-lead-time producer offers a cost that is
cheaper than the make-to-order cost by a percentage that is greater than the
cost-differential frontier, then the long-lead-time producer covers for the
supply-demand mismatch cost generated with the long lead time. In the opposite,
if this percentage is lower than the one in the cost-differential frontier, the
supply-demand mismatch cost is greater than the cost savings offered by the
long-lead time supplier. The cost-differential frontier is based on the
newsvendor model as the order quantity covering the replenishment lead time is
the one which maximizes profit.

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For an organization that
quantifies the value of lead time reduction and discovers that the cost of
having long lead times outweigh the cost of flexibility, the organization is expected
to align in five dimensions: strategy, processes, structure, rewards system,
and people management (de Treville and Krishnamurthy, 2014c; Goldratt and Cox,
1984; Schonberger, 1982; Suri, 1998; Suzaki, 1987). These five dimensions are
mentioned in the model developed by Galbraith (1995) called Star Model, where
he stated that all five dimensions must be aligned to achieve its strategic
objective. For an organization that is willing to reduce lead times and
exploits the time-based strategy advantages, de Treville et al. (2012) created
a model that states a positive relationship between the time-based strategy and
process lead-time reduction, moderated by the organization’s structure, rewards
system and people management. 

Researchers show that when
an organization is willing to transform its business to pursue a time-based
strategy, as being responsible to customers provides a clear competitive
advantage that compensates for higher costs or production, the benefits can be
substantial (de Treville et al., 2014c). Suri (2010) demonstrates that
companies that have implemented QRM and cut their lead times by 80% or more,
they can deliver to customers exactly the products they need, faster than any
competitor in the market, at even a lower price and with incremental
improvements in quality.


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