Over the past few decades, logistics activities have gained increasing strategic importance for almost every company all over the world. Fixed costs of production have increased, consumer demands have become more complex and are harder to predict, both in time and place. Technology is rapidly changing around the world every new day there is a new and advance technology and product life cycles have shortened while product range has increased.
Now more than ever, companies are faced with the challenge of producing an increasingly large variety of products in a responsive manner while keeping materials and inventory to a minimum to fulfill the customer demand and satisfy him by reducing the fixed cost. Not only does demand vary from country to country, but products need to be altered for different markets in consideration of differences in language, culture and local standards. Consider the problems a manufacturer might face when expanding into new overseas markets.
Forecasting is difficult now days because the market trend will change after sometime and so the customer demand will also change with the new trend and so the company faces the challenge of satisfying different types of demand while minimizing the risk and also minimizing the fixed cost. Increasingly, companies are using a strategy known as postponement or mass customization to improve customer service and minimize the risks associated with making different products in different countries. This paper presents a framework for understanding postponement and how it can be implemented.
First it defines postponement and provides an overview on postponement and its implementation. Then it will discuss different postponement strategies and finally discussed that when postponement is appropriate and when not.
What is Postponement? Postponement is essentially a type of network configuration that aims to reduce risk. On one hand postponement has the potential to increase a companies’ flexibility to respond to changes in demand from different markets, and to fulfill changing demand of the customer, improve responsiveness to orders and reduce investment in inventory.
At the same time, the strategy can make a product more expensive to produce since economies of scale may be sacrificed for a more fragmented system of production. Transport costs can also rise since products may be shipped on demand and in smaller quantities. Postponement strategy delays some activities in supply chain or in manufacturing process until the customer will not tell what he actually want.
Postponement provides two economic benefits to the company, first risk is minimized because the company manufactures the end product as what the customer actually wants, and second the total inventory can be reduced by using inventory of the base product to support multiple customer, the combination of both reduce risk and lower inventory will reduce the total cost. The company’s main focus is to reduce the total cost and satisfying the customer need so by using the postponement strategy the company can fulfill these both things.
The main goal of manufacturing postponement is to maintain the products in an incomplete foam until the customer final demand will not receive for example the color of product, the size of the shoe, the design of the product etc. In manufacturing postponement the first example was mixing the paint color at retail stores to accommodate individual customer request.
In other industries the manufactures store the product in bulk, postponing the final packaging of the product until they will get the order from the customer. In some cases the company postpone the labeling of the product until the specific customer order will received. In automobile companies they will install the common accessories in all of the automobiles and postpone the installation of rim size, tire made size, stereo system, color, bumper lights, matching bumpers etc. They will install later on when they will get the customer order that what he actually wants to satisfy the customer demand.
These examples have the common thing in that they have reduce the inventory holding cost, and they have the potential to many different customers and serve according to them. Time Postponement:- Time postponement refers to the situation where distribution or actual delivery of a product is delayed until customer demand is known. This can allow inventory to be reduced significantly since it reduces the need to maintain large stocks at distribution centers. Washing machine manufacturer Whirlpool has employed this strategy very effectively in its US operations.
Through market research, the company found that most consumers did not expect to their order to be delivered immediately, since many customers buy for houses that cannot be moved into immediately. The company reconfigured its supply chain so that inventories at department stores were kept to a minimum and it delayed delivery until orders had been received. This reduced the need for cross docking and dramatically reduced inventory and transport costs while decreasing stock outs and improving customer service.
In this type the products will be in semi-finished forms and can be customized quickly in production facilities close to customers. It is also called geographic postponement. Its basic function is that the inventory will be in stock in bulk in one or two strategic locations. Final shape of the product will postpone until the customer exact order will be received. Once the logistical process is initiated, every effort is made to accelerate the economic movement of products direct to customer.
The strategy of full speculation represents a complete reliance on forecasting, where all differentiating manufacturing operations are performed prior to the product being moved to different markets (‘push’ based system). Logistics postponement represents time postponement while manufacturing postponement represents form based postponement.
The strategy of full postponement represents the highest level of delay in the supply chain (‘pull’ based system). As shown by figure, the decision about which strategy to use is essentially a tradeoff between different levels of customer service and inventory, production and distribution costs. When is Postponement Appropriate? To some extent, many global companies are currently practicing postponement. Shipping goods in bulk and undertaking simple packaging activities in another country represents a form of postponement. The important question is when the strategy is appropriate and when it is not? Where should a company position itself on the P/S matrix?
There are many variables which can determine the most appropriate level of postponement that should be practiced. Factors identified in the literature include: demand stability, product range, product price, manufacturing costs, transport costs, inventory costs, service goals, lifecycle, product design and lead time for components. There are 4 factors which are generally considered while analyzing that the postponement strategy is appropriate or not: length of product lifecycle, degree of modularization (product related), level of uncertainty in demand (market related) and the cost of the postponement system (manufacturing/distribution system related). Length of Product Life cycle:-
This is a high degree of consensus about the importance of lifecycle in the postponement. Products with short lifecycles generally create more challenges in production compared with products that have longer lifecycles. In the garment industry, lifecycles for the majority of products are very short and there is little opportunity to wait for sales figures before start production. Clothing manufacturer Benetton has responded to this problem by adopting form postponement. In its sweater manufacturing operations, products would typically be made using pre-dyed yarn and the company would then need to predict the level of demand for each separate color.
By reorganizing its manufacturing process, the company produced its sweaters using uncolored fabric and performed dying operations only after a customer order was received. Since the overall demand for the sweaters was easier to predict than demand for specific colors, the company saved millions in dollars in inventory, although production costs increased since new dying equipment would required color to complete garments instead of only yarn.
It suggests that the ability to standardize components of different product models has an important bearing on the type of postponement strategy used. At the very minimum, there needs to be some degree of standardization in the product design and the manufacturing process before the form postponement can be adopted.
In system involving modularization, the compositions of end products are separated into sub-assemblies that may or may not be common to different products. For example, DeskJet printers produced by Hewlett Packard (HP), have the same casing, circuit boards and print head components irrespective of the market they are destined to be sold in while power supplies, manuals and packaging vary from country to country. Thus, form postponement might involve standard components being producing in one stage and customized features being added at a point further down the channel. HP has taken this approach in its manufacturing DeskJet printers manufacturing for European and Asian markets.
This has reduced inventory levels and allowed the company to be more flexible modules can be transferred to any country in response to short term changes in demand and has also lowered transport costs since modules are much lighter and heavier components are added in local markets.
As is the case with product lifecycle, there is general agreement in the literature that the benefits of postponement increase as uncertainty in demand rises. For these products, the potential savings that result from lowering forecast error outweigh the costs of developing the system itself. It should be noted that market characteristics also interrelate with product characteristics. There are 2 types of products – those which are mainly functional and those that are mainly innovative.
Functional products tend to have low levels of demand uncertainty while move innovative products have high demand uncertainty and therefore have greater risks associated with inventory. Given these interrelationships, it is not surprising that technology based companies are currently practicing higher levels of postponement than in other industries.
Postponement may increase company costs both directly and indirectly. Direct cost increases can be caused by product or process redesign. For instance, HP printers for dual volt networks mentioned above had higher unit cost than printers that were designed for one network only. Indirect cost increases can be caused by the changes in the production and distribution processes with the consequent impact on the infrastructure and resources (including labor). This impact is sometimes not limited to the company implementing postponement, but affects the other players in the supply chain.
As we will describe in the chemical company example, postponing the process of dying the plastic by letting the selected customers do it resulted in lower utilization of the company’s dying equipment and non-recovery of a portion of the fixed cost. The actual cost of developing and implementing postponement plays a critical role in the determining the appropriateness of the strategy.
This is seems an obvious point but one often neglected in the literature, particularly in practitioner journals which focus heavily on the success stories, but pay less attention to actual costs. As is the case with market demand, costs interrelate with other factors. By running simulations with different levels of forecast error, product derivatives, fill rates and costs derived from data from HP, showed that the real benefit of postponement can be determined by comparing the ‘postponement premium’ (the cost of enabling postponement) to the value of the product. Specifically, they found that the ‘breakeven’ postponement point was where the benefits in terms of increased fill rate equaled to the costs associated with developing the postponement system.
They also found a number of important interrelationships between postponement premiums and other important variables. For instance it was found that when the number of product derivatives on a single platform increased, so too did the investment required to establish a postponement system.
Reference
- Zinn, W. and Bowersox, D. J. (1988), ‘Planning physical distribution with the principle of postponement’, Journal of Business Logistics, Vol. 9, No. 2 pp. 117-136.
- Pagh, J. D. and Cooper, M. C. (1998), ‘Supply chain postponement and speculation strategies: How to choose the right strategy’, Journal of Business Logistics, Vol. 19, Iss. 2; pp. 13- 32
- Fisher, M. L. 1997) ‘What is the right supply chain for your product’, Harvard Business Review, March – April, pp. 105-116.
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