Waiting just that little longer…

By Susheel Aswani, Marketing I, SIBM

In this day and age, the customer is demanding more variety and the manufacturer is realizing that in order to gain a crucial edge he needs to deliver goods at lower costs. The need of the hour is a supply chain which can respond quickly to changing customer needs. This article aims to study the concept of postponement in the supply chain, and explores its applicability in the business context…

The term postponement refers to the process of delaying a decision about a product. Today with the need to provide the customer with as many varieties as possible suited to his/her personal need it is imperative that adequate inventory be maintained. If there could be a mechanism whereby a mismatch between the demand/orders and the inventory on hand could be avoided it could result in great benefits to the manufacturer. Postponement aims to do precisely this. By delaying crucial decisions which could commit to product characteristics postponement enables best possible utilization of resources and creates vital economies.

This concept encompasses building of platforms or modules which are common across product categories, and modifying these to meet the demands effectively. By reducing the period for which predictions are made, demand can be forecasted more accurately. Another strategy is keeping your inventory as “Raw as possible” ie in an unprocessed form. By not processing the material we can reduce the quantity of finished goods inventory and the fact that we haven’t committed to processing the raw material for a specified purpose enables us to customize its usage as per the needs of the customers. The concept of postponement can occur at various stages of the manufacturing cycle. The point of postponement can vary from the design phase and can occur even as late as the packaging, assembly stages.

One of the most common applications of postponement in operations is postponement related to manufacturing and assembly. This takes shape in the form of creation of a platform or a vanilla product which is common across a family of products, on which customization can be implemented to satisfy customer needs. The platform strategy has now become closely associated with the automobile and apparel industry.

Lessons from DELL

Many manufacturers around the world concentrate on their best selling models. As a result the stock piles of these keep increasing. This practice of “channel stuffing” is dangerous. As and when the customer demands for variations or when there are changes in technology resulting in product obsolescence the company finds it difficult to cater to the needs of the customer. Dell through its ‘Built to Order’ model does not have finished goods inventory devaluing on a daily basis. They align their suppliers to deliver components as required and hence minimize raw material inventory. Dell maintains an inventory of 6 days as compared to a competitor who needs to maintain 25 days of inventory on hand coupled with another 30 days of inventory locked up in their distribution channels. This difference of a good 49 days results in cost saving of 6 % of the material cost. To add to this the fact that Dell allows its customer to customize their models and yet offer prices below the competition explains the reason for the success of the company. Let us understand this better with the help of an example. Dell offers over 100 million different combinations of its popular desktop model Dimension 4600C.

Dell is able to forecast the demand for popular combinations based on perfection of its built to order model. By offering discount on popular component combinations for which the components are easily available it can actually shape demand to its advantage. Their systems are configured in such a manner so as to allow for a greater variety of low-cost parts and a limited variety of expensive parts. In this manner they are able to manage components and Inventory velocity to ensure unparalleled success.

The concept of platform manufacturing started off with the automobile sector. Volkswagen builds over 30 automobiles from its 4 platforms. Through its strategy it is able to churn out a flashy Audi TT and a Volkswagen Beetle built on the same chassis. The Indigo, Indica V2 and the Indigo Marina are built by Tata Motors on the same indigenously developed platform. The platform strategy was used ingeniously by Honda to design its cars for their varied markets. The company was initially facing problems with the design of its Accord model. Initially the US customers complained that the car was too small and the Japanese customers complained that the car lacked stylistic features. The company launched the new Accord which was longer and designed for the preferences of the US market. The sales of the company grew rapidly in the US and Honda enjoyed a dominant position but the design failed in the Japanese Market. The company had to produce differently designed cars for its 2 major markets. Honda engineer Yozi Kami realized that the crux of the situation lay in the design of the chassis. He was instrumental in designing the first flexible platform where in the length width and height of the car can be tailored to suit market preferences. The fuel tank was moved to the rear end of the car and the wheels were connected to brackets that could be moved closer or farther apart from each other.

In the apparel market postponement is quite popular especially with regard to team jerseys. The sales of a particular team or a player depend on the performance of the player/team during the course of the season. Thus companies like Reebok keep a ready stock of the basic black/white jerseys. These are then screen printed with the name of the player’s based on the demand for jersey’s which is linked with the player’s appeal.

As mentioned earlier the Raw as possible strategy of keeping the raw material unprocessed for as long as possible is another embodiment of postponement. This is adopted by companies like Subway and Burger King in the fast food business. Unlike McDonald’s which has readily packaged burgers which are meant for immediate consumption a company like Subway offers its customers with the opportunity to customize their sandwiches by choosing the combination of items such as cheese, meat, pickles etc. The platform for each of these products would be the bun and lettuce and these would be readied on the basis of the forecast for each sandwich. This strategy helps the company to reduces wastage of inventory, as it is possible to use the platform across a category of products and meet the changes in demand.

Logistical Postponement takes into account postponement at other levels of the supply chain namely labeling packaging and distribution. If we take the case of a bottler, instead of buying the bottles with the labeling done he could consider the possibility of doing it in-house. This would permit the usage of the same sized bottles for a number of different products. This would enable meeting the difference in demand for cola and lemon flavored drinks based on seasonal demand. Postponement in packaging has been used by companies like Gillette which has made a decision to outsource its packaging so as to concentrate on manufacturing. Bulk quantities of razors are sent to the packaging company and as and when the orders are received different packaging configurations are assembled and sent across to the manufacturer. In the long run the benefits resulting from this decision are a 15 % reduction in the inventory and packaging costs and an improvement in the ability to meet orders on time.


Postponement in distribution has been effective in reduction of lead times. Whirlpool realized that it is expensive to stock heavy refrigerators at local stores as they occupy a lot of space. Thus they ship across the refrigerators and washing machines to a centralized warehouse from where they are shipped across to the customer’s home directly. A little closer to home companies like Aravind Mills and Madura garments maintain central warehouses to cater to their stores across the country. As againt this ITC’s Lifestyle retail business division has suppliers across the country. It has thus set up regional distribution warehouses. These stocking points can cater to the demand of stores across the country within 24 hours. Also flexibility in manufacturing ensures production can be ramped up in accordance with the demand. The company is able to cater to the needs of customers and ensure that the shelves are never empty


Using the above mentioned concepts pf postponement at various stages of the supply chain HP effectively solved the problem pertaining to its deskjet printers. To cater to its different markets ie North America, Europe, and Asia Pacific HP had to manufacture printers with different power supply models, power chords and manuals for operations. HP designed a common platform for the various models of printers. Earlier the printers had to be shipped across to the 3 international markets as per their demand with variations in their power chords and manuals. HP set up local distribution centers (DC’s) to assemble the country wise requirements and perform the final packaging. This resulted in tremendous cost saving for the company.


The Benefits:

Postponement can provide the following benefits to a firm:

More variety: As seen from the example of Dell the manufacturer is able to provide an entire bouquet of products to choose from using postponement.
Inventory Reduction: the quantum of inventory can be reduced by ensuring holding more work in process and postponement of customization. This counters the original notion that variety increases of quantum of inventory to be maintained.
Better quality of forecasts: delaying the customization until more information is available helps to improve the quality of forecasts. With time the forecasts improve and become more stable and hence the standard deviation in the demand for a product reduces. This reduction in variation helps to give a specific time frame to the manufacturer to customize the product.
Reduced logistical cost: shipping products in bulk and then packaging them, reduces bulky transportation problem and ensures reduced distribution cosst.

The above benefits ensure in providing the goods of the choice of the customer, and enhance service levels. But postponement has 2 major costs attached with it. The cost of increased product development and increased manufacturing cost. Creation of a modular design, or a platform strategy would require tremendous investment and may restrict the flexibility for further product development. Also the company needs to tailor its supply chain to fit in customization and these costs need to be weighed in relation to the benefits.

A case in question

Let us examine a case of a manufacturer of liquid hand wash. Let us assume that the product comes in 7 variants. Let us for the moment assume that the demand for the variants in a particular year is as follows:

By running a statistical test such as the Chi square test it can be demonstrated that the sales are not independent of the variant, which simply means that the variant impacts the sale of the product and the sale of all the products is not uniform. Keeping this in mind the company can have 3 options:

a) Stock different quantities of the soaps giving preference to the lemon and peach variant.
b) Advertise the variants which are selling well, and offer the slow moving variants as special combination packs
c) Go in for a postponement strategy such that the color and essence may be added in the final stage of assembly so as to play by ear with market trends.

The company while evaluating the options available may adopt either of the above mentioned strategies. If it goes in for the first strategy then it would have to be wary of market fluctuations. It would moreover to ensure that sufficient base stock levels of the different categories have to be maintained at all times. In considering the second strategy it would push its best selling models and thus try and direct demand towards these variants. It could perhaps manufacturer limited quantities of the other variants and make them available in combination packs realizing that they by themselves do not sell sufficiently. In this case again a few of the customers would be left disappointed as they would find a variant of their choice unavailable in an SKU of their choice. lastly the postponement strategy may be given the preference if the company sees sufficient potential sales of all variants in such a manner that the additional investment in changing the mode of the manufacture would be recovered in a reasonable period.

Conclusion

Postponement is slowly but surely spreading across industries. Companies like McGraw Hill have got into custom publishing where the reader is able to choose the text book extracts and cases he would want in a text of his choice. Even in the airline industry Embraer postpones high value feature additions to its aircrafts till the time the confirmation of sale has been made. Almost any industry where a certain degree of customization would be required ranging from residential real estate, to music retail presents an opportunity for the implementation of postponement strategy and save those precious millions for the company.

References:

Fast Track Supply Chain guide by Safexperss
Research Paper: “Platform strategies in International New product development” by Moreno Muffatto, University of Padua
Research Paper: Regional Strategies for Global Leadership by Pankaj Ghemmawat
http://www.wikipedia.org/
Direct From Dell by Michael Dell
Complete Business Statistics by Amir Aczel, Jayavel Sounderpandian
Frost and Sullivan Research services
http://www.tata.com/
Research Paper: Case studies of postponement in supply chain: Massachusetts Institute of TechnologyHP Transshipment case study

Radio Industry in India

By: Amit Puri, MBA Mktg I, SIBM.

Radio: Is it a pie big enough for everyone to party on?

Radio in India is segmented into MW (Medium wave), SW (Short Wave) and FM (Frequency Module) based upon the frequency of the radio station. It covers 99% of the country’s population and is also the most cost effective mass medium of one way communication. The strength of radio lies in its coverage and cost effectiveness.

The penetration of FM radio is estimated to grow from the current 30% to 60% by 2010. The importance of radio has not been neglected even by the policy makers. The tenth five year plan targets to get FM to 60% of the Indian populace.

FM has gained popularity in India only in the recent past and but much earlier around the globe before that, because:

1. It is a means for low coverage broadcasting, thus best suited for delivering localized
content
2. It can be used to broadcast stereoquality music which is not possible using AM or MW thus
making it a preferred low cost medium to broadcast good quality music and content.

Research suggests that in the “ad-avoidance world” that we live in, radio can be a friend. The radio audience is consistent and loyal, and thus radio works better to build brands. It offers efficient targeting by reaching the right audience at the right time and in the right place! Radio creates strong emotions which when linked with local people provides strong communities. Thus while people avoid watching ads on television (by changing channels, or doing something else) they don’t mind listening to advertisements on radio in one form or the other. Even on the internet, people tend to close advertisement windows as soon as they pop up which is less likely in case of a radio.

With mature mass mediums such as television and print available, why is a rush to get a share of the radio pie observed? Especially when knowing that returns are not as lucrative (the portion of the advertisement spends on radio is a meager 2% of the entire advertisement spend amount across media).

The answer seems to be simple. To reach to the masses and also generate value for the advertiser, radio is an ideal medium. Let us give it a closer look - the potential of the opportunity, the players vying for it, expansion options and what keeps the hopes high after the first phase of radio reforms have left a majority of the players in the red.

At present FM radio is present in 12 cities, and would go up to 87 cities, with 245 new stations being added to the existing 21 stations, and with ad spends to go up to 5% by 2010 in comparison to the current 2%. This in effect creates a Rs.13 Billion opportunity in a short span of 4-5 years.

The opportunity is definitely good enough for several players to try their hands in this field!

Phase I: A learning curve or a lesson in through failure?

Phase-I of radio reforms left most of the players entering in the FM market in the red and several players even had to close down shop. The reason was an extremely high entry limit. In phase-II the entry limit is effectively the OTEF (One Time Entry Fee) which is linked to the revenues that the company would generate. This would ensure that any company entering the market has to pay a lower amount to get in; but just in case it does make it big, it would have to share the revenue.

Annual License Fee = 4% of the revenue generated or 10% of reserve OTEF whichever is
higher

Existing players have been given an option to migrate to the new regime by paying OTEF as the average of the successful bids in that city for the radio frequency/license. Clearly then, it is a step in the direction to increase participation in accordance with the primary goal of increasing the presence of radio as a mass medium.

Although the entry barrier has been reduced to lure a larger number of players, is the strategy sound enough to sustain numbers? The number of players entering the arena in this phase is 43. Considering the size of the opportunity (Rs13bn), each player is left with an average of just above Rs 0.3bn.

The experience in foreign countries shows that radio developed as a medium for the masses before the others including TV and internet, while in India’s case TV and internet are mature mediums already; this could hinder growth of radio as an industry to a certain degree.

The risks:

􀂙 No consolidation possible within the current structure. As one company cannot run multiple station in a single city, smaller players who find it difficult to sustain operations, would have no option at a later stage but to close shop, as there would be few takers for such operations.

􀂙 With generalized targeting and minimal content differentiation, the strength of radio might be lost. Globally, radio’s potential lies in being able to deliver niche content for specific audiences. With one channel percity and high entry barriers, generalized content is the only option that most companies would be left with to generate “hearer-ship”.

􀂙 Rs 5Million per station is paid towards music royalties which would make it an unviable business proposition for the smaller players that too in smaller cities where revenue generation opportunities are limited.

􀂙 News and current affairs content is not permitted on private channels thus further restricting the options available for differentiated content.

At Rs 2116 Cr and 32 stations (13 in A & A+ Cities) ENIL - Radio Mirchi and 1599Cr and 45 stations (8 in A & A+ cities) Big Radio (Reliance ADAG) are the biggest players.

Breakeven analysis:

To check whether it is a viable business proposition for new players to set shop, let’s analyze the costs and revenue generated for one player on a very simplistic basis.

Assumptions and considerations:

1. Each station is treated as a different entity. Thus the performance of one station for a company would not affect the performance of the company’s other stations.

2. The revenue earned per radio channel is taken as Rs. 12244897 which would not be the case for all channels and would differ from one city to the other. But this would be offset by the entry barrier difference between different tier cities.

3. A radio broadcasting setup would require:
i. On Air Studio
ii. Voice Over Booth(Discussion Studio)
Production Studio
iii. Transmission Equipment

Depending on the combination of setup option that a company goes in for the cost would vary between 9 to 29 lack, for the current breakeven analysis the setup cost has been taken as 30 lack. The setups have been recommended by BECIL(Broadcast Engineering Consultants India Limited).

With an estimated earning before tax and depreciation over 1.5 lakhs per station, each station should ideally break-even in the first year of operation itself, but following are the problems with the present policy that could hinder the growth:

1. The earning per station would vary and the stations which earn less than the average revenue as estimated are not left with other revenue generating options.

2. One option for stations is to reduce their expenditure by saving on the music royalty by catering to specific audiences thus reducing the range of music for which they would have to pay royalty. This option would reduce the target audience and thus the revenue as well, inducing a vicious cycle.

Thus, phase-II of the radio policy is a step in the right direction to enable a lot of players to take it up as an opportunity. There are a lot of loopholes that are yet to be plugged for the sustained growth of the industry, including:

􀂃 Option to operate multiple channels
􀂃 Lower entry limit for niche content channels
􀂃 Differentiation of radio station on basis of content rather than just geography
􀂃 Option for companies to collaborate

The size of the radio pie as of now is too small for 43 players to co-exist and grow. The policy needs new thrust either to increase the size of the opportunity (by allowing to operate in the restricted areas) or to collaborate (so that a few can grow to an optimum size by consolidating)

Recommendations:

To plug these possible problems that the radio industry could face, the following recommendations can be considered:

a. Let a company operate multiple radio stations in the same region
b. Distinguish channels based on the content that they propose to broadcast.

If the companies are allowed to operate multiple channels they would be able to cater to different audiences by niche channels, the overall operating cost for the company to operate multiple channels would go down as royalty towards music used by the channel would come down and the company can use the same common infrastructure, e.g. the production studio.

Infrastructure and technology for operating radio is not a constraint as it is a full blown industry in other parts of the world. The regulating policy is the only major roadblock in the growth of the radio industry in India. Limiting the growth potential or even slowing down the growth curve doesn’t make sense. The sooner radio claims its due share of the market the better. After all, marketers and customers alike wouldn’t want to see radio as a lost opportunity!