Hold Safety Inventory Before,At, or After the Fan‐Out Point?

We consider a product sold in multiple variants, each with uncertain demand, produced in a multi‐stage process from a standard (i.e., generic) sub‐assembly. The fan‐out point is defined as the last process stage at which outputs are generic (outputs at every subsequent stage are variant‐specific). Insights gained from an analytical study of the system are used to develop heuristics that determine the stage(s) at which safety inventory should be held. We offer a relatively‐simple heuristic that approaches globally‐optimal results even though it uses only two relatively‐local parameters. We call this the VAPT, or value‐added/processing time heuristic, because it determines whether a (local) stage should hold inventory based only on the value added at that local stage relative to its downstream stage, along with the processing time at that local stage relative to its downstream stage. Another key insight is that, contrary to possible intuition, safety inventory should not always be held at the fan‐out point, although a fan‐out point does hold inventory under a wider range of conditions. We also explore when postponement is most valuable and illustrate that postponement may often be less beneficial than suggested by Lee and Tang (1997).