This document summarizes a research study on using options-based planning to solve the trade-off between customization and responsiveness in production systems. The study examines using real options, where certain product features can be enabled or not, to increase flexibility and improve upon traditional build-to-forecast models. An optimization model and simulation are developed to determine which product features to make optional for different production runs. The results show that allowing options to be called throughout the sales order matching period, rather than just at the start, increases customization while maintaining responsiveness compared to traditional build-to-forecast approaches.

1. Mass-Customization: Solving the Customization-
Responsiveness Squeeze using Options-Based Planning
Fred Ahrens, PhD, PE
Department of Information, Operations and Technology Management
The University of Toledo
Toledo, OH 43606
October 21, 2016

2. Overview
• Background
• Motivation
• Research questions
• Production strategy overview
• Original Build-to-forecast model
• A new options-based planning model
• Simulation and results
• Future directions

3. The Customization-Responsiveness Environment

4. Customization and Responsiveness
What if the market demands both customization
(like MTO) AND responsiveness?
Answer: Build to Forecast
Production is initiated prior to an actual sales
order

5. 5
The Original BTF Model
• Developed in the mid ’90’s for the
machine tool industry
Raturi, A.S., J.R Meredith, D. McCutcheon, D.M, “The Customization Responsiveness Squeeze”, Sloan
Management Review 35:2, Winter 1994
Meredith, J., Akinc, U., “Characterizing and structuring a New Make-to-Forecast production
strategy”, Journal of Operations Management 25 (2007 623-642)
Akinc, U., Meredith, J., “Modeling the Managers Match or Wait Dilemma in a Make-to-Forecast
Situation”, Omega 37 (2009)

6. 6
Business Metric, BTF Models
Minimize orphans- Unmatched WIP at the end of the build cycle (finished product)
• Business liability, ‘sunk cost’
• No remaining customizing potential
Maximize flexibility
1. Original BTF select WIP nearest completion
2. New BTF- delay option calls

7. 7
The Original BTF Model, cont
• WIP (work in process) is initiated
• The WIP moves along a line and accumulates components based on a forecast
• When the remaining build time is less then the customer allowable time then matches
are attempted
End of build cyclew1
w2
w3
s1
s2
s3
t0 t1
t3
tend
tnow
More design flexibility, fewer committed
design features
w1
w2
w3
w1
w2
w3
All design features committed
Customer order appears to + I after
build start
BTF

9. Real Options Defined
 The right, but not obligation, to a future course of
action
 Have a cost, either upfront or when exercised
– Less then the opportunity cost associated with not having
had the option
– Valid for a period of time, ‘call time’

10. Example of a Real Option
Fascia
Option for
Fog Light?
SKU # FL_101 SKU # FL_102 SKU # FL_103
Option Called
N
Y
N Y
Option is sent for fog light
Option not exercised

11. Responsiveness
(Build time/Customer Accepted Lead-time)
Customization
(#ofFeatures)
0.00 .33
A B
D C
F
GH
I
.36
.550.00
0.00
0.00 .55
.49
.24
1.0
.64
0 1
1
0
1
0
ADHI
Make-to-order (MTO). Product is
matched to a specific order prior
to build start.
BCGF
MTS-like. High responsiveness
like Make-to-stock (MTS) but can
call options; a ‘convertible unit’
where product is usable in current
form or can be converted from
stock.
Make-to-stock (MTS). Maximum
responsiveness; ‘on demand’
MTS-like
MTS
* All numbers are standardized {0,1} where 0 is min. and 1 max. Xstd = (xi – xmin)/(xmax – xmin)
Make-to-stock. No option availability
L1
L2
Production Planning Space

12. 12
An Options-Based Planning Model
End of build cycle
w1
w2
w3
s1
s2
s3
t0 t1
t3
tendti
More design flexibility, fewer committed
design features
w1
w2
w3
w1
w2
w3
All design features committed
Remaining build-time within customer wait
time
Top
Option call time
ta
Customer allowed lead time: match period
w1
w2
w3
Options expired
Not available. Options set

13. Options-Based Planning: An Example
Build-time= 10
Customer accepted lead-time = 5
0
1
0
1
1
0
1
0
1
0
1
0
1
0
1
1
Time
Planned Design Parameter
Built Design Parameter
1
0
1
0
Sales Order
Candidate match 1 Candidate match 2
Decreasing flexibility
* In the original model the work in process (WIP) is moving sequentially down an assembly line accumulating parts as time progresses
WIP1 WIP2 WIP3 WIP4
End of build
t=10
Build starts
t=0
Remaining build time is within the customer lead-time

14. 14
Data:
)t*SN(
FR
b
0
tbt
SN
1
ij 

j
iF i=1,2…nopt
nopt = number of definable functional requirements (FR) per sales order
t = time period in simulation
tb = total build time for WIP
SN = number of arriving sales orders per time period, t
WN = number of WIP released per build cycle
FR = Functional requirement
Fi = Grand average of proportion of FRi for all sales order over for t[-tb, 0], the previous
time period
Decision Variables:
Oij = 1 if option i for WIP j is enabled at t=0 (WIP release) j=1,2…WN
IP Model to Set Options
Simulation Model

15. 15
Decision Variables:
Oij = 1 if option i for WIP j is enabled at t=0 (WIP release) j=1,2…WN
Note: a design parameter (DP) can only be called during match time if its option was set
Minimize |POi – Fi| (1)
s.t
WN
1
ji,

wn
j
i
O
PO i=1,2…nopt (2)
Constraint:
O= binary
This can made a mixed binary linear program as follows.
IP Model to Set Options, cont
Simulation Model

16. 16
Constraint:
O= binary
This can made a mixed binary linear program as follows.
New Decision Variables:
Ui = positive difference for FR (or DP) I i=1,2…nopt
Di = positive difference for FR (or DP) I i=1,2…nopt
Recall, that each WIP and SO vector has nopt elements (fig. 6)
Minimize 

nopt
i 1
Di)(Ui (3)
s.t.
WN
1
ji,

wn
j
i
O
PO i=1,2…nopt (4)
POi – Fi = Ui - Di i=1,2…nopt (5)
Ui , Di ≥ 0 i=1,2…nopt (6)
IP Model to Set Options, cont
Simulation Model

17. 17
Simulation Logic

18. Results
Responsiveness
(Build time/Customer Accepted Lead-time)
Customization
(#ofFeatures)
0.00 .33
A B
D C
F
GH
I
.36
.550.00
0.00
0.00 .55
.49
.24
1.0
.64
0 1
1
0
1
0
ADHI
Make-to-order (MTO). Product is
matched to a specific order prior
to build start.
BCGF
MTS-like. High responsiveness
like Make-to-stock (MTS) but can
call options; a ‘convertible unit’
where product is usable in current
form or can be converted from
stock.
Make-to-stock (MTS). Maximum
responsiveness; ‘on demand’
MTS-like
MTS
* All numbers are standardized {0,1} where 0 is min. and 1 max. Xstd = (xi – xmin)/(xmax – xmin)
Make-to-stock. No option availability
L1
L2

19. Results
-0.1
0.1
0.3
0.5
0.7
0.9
1.1
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
Simulation Time/Build -Time
PrpUnmatched
ta9xopt0
ta9xopt1
ta5xopt0
ta5xopt1
Customer lead time is 90% of build time
Options can be called at any time
Customer lead time is 90% of build time
Options are called before match time 'classic BTF'
Customer lead time is 50% of build time
Options are called before match time 'classic BTF'
Customer lead time is 50% of build time
Options available whole match time
Customer allowed lead-time
is 90% of build-time
Customer allowed lead-time
is 50% of build-time

20. 20
Thank You!