Postponement Strategy in Supply Chain Management

Postponement is first implemented in manufacturing processes to reduce cost of inventory and improve service level within the company while the product variety increases. The concept of postponement is to delay the change in form, identity and place to the latest possible point until customer commitments have been obtained. It is by exploiting the commonality between items and by designing the production and distribution process so as to delay the point of differentiation. Postponement is closely intertwined with modularization where products in a certain product family are designed where all of them consist of different standardized units. With modularization, combination of different standardized sub-components allows the producing of different end products. The form, function and place of the product are altered and is in contra with the push systems in which goods are manufactured entirely in anticipation of future customer orders and stored downstream without customer’s formulated specifications.

Postponement Strategy in Supply Chain Management

Postponement is a mass customization technique that is applicable for certain products that can have their variety postponed until just before shipping. Here’s a list of methods for achieving mass customization:

  • Create products and services that are customizable by customers (involving design function)
  • Modularize components to customize finished products and services (involving the manufacturing, distribution, marketing function and the product design).
  • Provide quick response throughout the value chain (involving the design, manufacturing, distribution and marketing function).
  • Customize services around standard products or services (involving the distribution and marketing function).
  • Provide point of delivery customization (involving the marketing function).

Need for Postponement

The application of postponement strategies is increasing in the practice of international business. Final processing or manufacturing activities are moving either upstream from national operations or downstream from global production plants. The biological products life cycle of product is the concern in respect to inventory risks and this is in contrast with electronics industries where short product life cycles in the market are a key driver of postponement. Postponement reduces the uncertainty and risks coupled with product variety. In additional, it saves costs and adds values to the supply chain by eliminating obsolete inventory and making the product to customer’s specification more easily. The accelerating need for simultaneous product differentiation, rapid delivery, regional product variation and competitive cost levels are also the factors that led to the usage of postponement strategy.

Types of Postponements

That there are three generic types of postponement: form, time and place postponement. Form postponement refers to the postponement of final manufacturing or processing activities; time postponement refers to the delaying of the forward movement of goods until customer orders have been received; place postponement refers to the positioning of inventories upstream in centralized manufacturing or distribution operations to postpone the forward or downstream movement of goods. With the combination of time and place postponement, it is referred to as logistics postponement. An example is whereby in centralized European distribution structures where goods are stored at a limited number of central locations and shipped to customers on the basis of actual orders.

Depending on the type of final manufacturing operation, the type of product and market, there are four possible final manufacturing structures in postponement: unicentric manufacturing, bundled manufacturing, deferred assembly, deferred packaging. In unicentric manufacturing, the final stage of manufacturing is delayed until the point of consumption. This type of postponement is used through integrated manufacturing in a global manufacturing plant, distribution to order, for global brands with standard formulation and peripherals for example CPUs. In bundled manufacturing, it is forecast-driven where final manufacturing in a continental plant, for products with a global brand, standard peripherals and different formulation, for example TVs. In deferred assembly, it is order-driven where final manufacturing or processing in the international distribution channel, for products with a global brand and different formulation and peripherals. Lastly on deferred packaging, it refers to packaging and configuring shipments in a local warehouse, for products with a global brand, standard formulation and different peripherals.

Postponement Activities

Five types of postponements are there: labeling postponement, packaging postponement, assembly postponement, manufacturing postponement and time postponement. Labelling and packaging postponement is related to the level of postponement in deferred packaging, both impacting the place and form of the finished product. For assembly and manufacturing postponement, it is in related to bundled manufacturing and deferred assembly where both impacting the form and place of the finished product and also its function. The distinction between assembly and manufacturing postponement is the use of various sourcing locations and the resulting converging stream of goods. Manufacturing postponement operation is obligated to have a complete job-shop layout in manufacturing postponement which contrasts to assembly postponement systems where products are sourced mainly from one source, only some peripherals or additives may be sourced locally. And lastly on time postponement, it is related to the level of postponement in unicentric manufacturing, in which the place of the finished goods in the supply chain is impacted.

Examples of Postponement Strategies

Some examples of different postponement strategies used by various companies are noted here.

Amazon.com

When Amazon.com began as on online bookstore in 1995 could offer more than the traditional brick and mortar bookstores that offers 200,000 titles. Applying logistics postponement (finished goods) it seeks postponement opportunities in the final movement of products, which have taken their final form in advance of customer orders, to the customer. With the emergence of e-commerce, virtual inventories are independent of the physical location of the inventories at the time orders are placed. Amazon.com thus manages the inventory to fulfill customer orders by postponing the location of inventory to their suppliers in the upstream supply chain until the arrival of customer orders. With warehouses and fulfillment centers located in cities often near to airport deliveries are directed to the customer. In practice, Amazon.com usually chooses to work closely with its vendors and the United States Postal Service to ensure that it can use such a postponement strategy (drop-ship) to handle the volume and delivery timing of a popular product. This case study demonstrates the warehouse’s role as a holding facility to store the goods until they are needed. It also allows the products to be customizes quickly before shipment to customer.

Dell Computers

Dell’s supply chain is a model of excellence, one to be emulated. Dell Computers created a unique model within the computer industry by pioneering the build to order computer. Dell uses an assortment of techniques; postponement, modularity, vendor managed inventory, supply chain partnerships, and demand management that support build to order operation. The use of supply chain partnerships allow for vendor managed inventory. The modularity of the computers and Dell’s use of demand management techniques combined with vendor managed inventory allow for a high degree of postponement. Moreover Dell’s closeness to customers allows it to avoid obsolete inventory, enabling it to bring new products to market faster than its competition.The large amount of integration between members of the supply chain due to postponement makes all members of the chain responsible for product development. Postponement and modular design allow the mass customization to be successful. A vendor managed inventory system serves Dell to maintain lean inventory levels while focusing its efforts on the assembly of the product rather than inventory management. As Dell engages in a build to order strategy; it does not begin to assemble the product until a customer order is received and the customer’s credit has cleared. Dell can keep its computer components uncommitted for as long as possible to enable the customization of products while maintaining economies of scale. By delaying the final configuration of the product for as long as possible it allows for last minute changes in the assembly of a product or it can allow for a shorter lead time of the products for the company. Therefore, Dell is able to practice purchasing and form postponement. Purchasing postponement offers the maximum benefits as less capital is committed until an order is received. To do this, Dell has its suppliers ship components from their factories to “revolvers”, which are small warehouses located near Dell assembly plants worldwide. Dell is also able to perform form postponement as a result of the modular design of the computer. The warehouse can support the final configuration to allow assembly of the computer base on individual requirements.

Hewlett-Packard (HP)

Hewlett-Packard Company’s key to mass customizing effectively is to postpone the task of differentiating a product for a specific customer until the latest possible point in the supply network. Conducting an analysis of its personal computer manufacturing, HP analysts discovered that the modular structure of the product and the production process would allow the company to postpone all steps of the personal computer’s final assembly (integrating the PC board, processor, chassis, power supply, storage devices, and software). Learning from Dell and adopting form and time postponement strategy HP distribution network then built the product in locations close to customers only in response to their orders. HP abandoned its previous practice of stocking finished goods or partially completed units, HP implemented a build-to-order approach at all its distribution centers in early 1995. In this way, the company save on transportation and duty costs and greatly increase its return on assets.

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