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