How Warehouses Play A Role In Postponement

The aim of this essay is to explain how the warehouse can play a role in postponement strategies. It begins with a brief description on the functions of the warehouse. It then explains the concept of postponement strategy, the different types of postponement and the purpose of postponement. This essay will provide some case studies on the role of the warehouse in postponement. The essay concludes on the increasing influence and role of the warehouse where it undertakes more value-added-processing tasks. The function of the warehouse is getting more focused from storage dominance to transaction dominance. It has evolved from a minor aspect in the logistics system to performing two critical utilities of time and place that is crucial to the success of the supply chain.

Warehouse

Warehousing is a key component of the overall business supply chain. A warehouse is a facility where the supply chain holds or stores goods, until they are needed by the customers. It is typically viewed as a place to store, stock and maintain inventory. The functions of the warehouse are to:

Receive the goods from a source

Store the goods until they are required

Pick the goods from the storage area when they are required

Ship the goods to the appropriate user

Warehousing allows product accumulation, consolidation and customization where key activities are executed including packaging, labelling, marking, pricing and returns processing (Frazelle 2002). The warehouse acts as a link between the producer and customer and is an integral part of the logistics system. It affects the customer service stock-out rates and the company’s sales and marketing success. Moreover inventories help to buffer the uncertainties and inefficiencies in the system. Inventory has become a crucial part of supply chain management. Sople (2007) observed that in many logistical system designs, the role of the warehouse is viewed as a switching facility rather than as a storage facility. There is an increasing trend for the warehouse to assume more value-added processing tasks which is additional work beyond that of building and shipping customer orders (Frazelle 2002).

Postponement

The concept of postponement first appeared from a marketing perspective to manage risks and uncertainty. Over time, the scope of postponement has expanded from marketing to logistics, manufacturing, purchasing, distribution and promotion processes. Alderson (1950) defined postponement as a strategy that changes the differentiation of goods (form, identity and inventory location) to as late a time as possible. Researchers view postponement differently (Yeung et al. 2007). To some, postponement simply means performing at least one differentiating step later than it used to be performed. To others, postponement means adding variety after receiving a customer order rather than in anticipation of orders.

The principle of postponement proposes that the time of shipment and the location of final product processing in the distribution of a product be delayed until a customer order is received (Bucklin 1965; Zinn & Bowersox 1988). By holding inventory in a ‘less-finished’ state and postponing the final product assembly until actual customer demand is known; companies can respond more quickly to the market and offer greater customization options. Yang, Burns & Backhouse (2004a) accordingly defines postponement as a strategy that intentionally delays the execution of a task, instead of starting it with incomplete or unreliable information input. Yeung et al. (2007) have identified the different types of postponement and they are summarized in Table I.

From Table I the four major postponement strategies are: purchasing, form, logistics and time postponement. Where purchasing postponement is the practice of postponing the purchase of incoming components or raw material until demand is known (Yang, Burns & Backhouse 2004b). Form postponement keeps undifferentiated semi-finished products to initiate production in anticipation of orders, such as changing the sequence of activities to delay changes in form or identity (Zinn & Bowersox 1988). Logistics postponement maintains a full-line of anticipatory inventory at one or a few strategic locations (Pagh & Cooper 1996). Time postponement refers to the delaying of the forward movement of inventories until customer orders have been received (Zinn & Bowersox 1988).

The 4 Major Postponement Strategies

Purchasing postponement

Delay purchase of expensive and fragile materials/components

Form postponement

Products in semi-finished forms and can be customized quickly in production facilities

Logistics postponement

Maintain a full-line of anticipatory inventory at one or a few strategic locations. Products can be customized quickly in production facilities close to customers

Time postponement

Finished products are kept in central location and are distributed quickly to customers

To illustrate the above postponement strategies, an example would be on the Sony PSP (PlayStation Portable) supply chain. The PSP has a highly modular and standardized product design that is favourable to customization. It consists of a base pack that contains the console, battery and AC adapter. The PSP supply chain is for the products sold in Japan, Taiwan, China and Hong Kong where the total number of units is aggregated. However the actual quantity required in each country is unknown. The products sold in each country have some distinct differences in terms of manual and packaging for the different languages (Japanese, traditional or simplified Chinese) and the different types of sockets in each country (2 or 3 pin plugs).

Standard PSP Console

Different sockets: 2 &3 pin plugs manual and packing

Option 1: Purchasing Postponement.

Process flow: purchase+ make+ assembly+ delivery.

Delay purchase of expensive components until order is received

The make process includes the console system and type of plug

Assemble according to the type of manual and packaging for actual country

Deliver to the country per customer’s order

Option 2: Form Postponement.

Process flow: make+ assembly+ delivery.

The make process includes the console system and type of plug

Assemble according to the type of manual and packaging for each country

Deliver to the country per customer’s order

Option 3: Logistics Postponement.

(Postponement in place utility)

Centralization of inventories improves on-time delivery and high stock availability.

Deliver products to the country per customer’s order

Option 4: Time Postponement.

Finished goods are stored in a central location and distributed quickly to customer.

Process flow: assembly+ delivery.

Assemble and package according to the requirements for each country

Deliver to the country per customer’s order

Having identified the four major postponement strategies, this essay will briefly explain the reasons companies use postponement. Aside from managing risks and uncertainty, postponement helps the organization to reduce inventory cost by delaying purchase of expensive components or in holding semi-finished goods. Postponement reduces transportation cost through consolidation of inventory. Postponement reduces the risk of obsolescence as raw materials are less prone to deterioration and have a longer shelf life compared to finished goods. Postponement reduces demand variability as manufacturing and distribution of products are acted upon receiving customer order. This further help to improve competitiveness by offering customized products quickly. This essay will provide some case studies to examine further on the benefits of postponement.

Case Study

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 fulfil customer orders by postponing the location of inventory to their suppliers in the upstream supply chain until the arrival of customer orders (Bailey & Rabinovich 2006). With warehouses and fulfilment centres 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 (Yang et al. 2007). 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 (Gunasekaran & Ngai 2005). 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 (Mikkola & Skjøtt-Larsen 2004).

The large amount of integration between members of the supply chain due to postponement makes all members of the chain responsible for product development (Mikkola & Skjøtt-Larsen 2004). 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 (Gunasekaran & Ngai 2005). 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 (Feitzinger and Lee 1997). 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 centres in early 1995. In this way, the company save on transportation and duty costs and greatly increase its return on assets.

Conclusion

Postponement is a widely used manufacturing strategy. Dell’s success in the practice of supply chain management has generated a great deal of interest for companies to emulate its ‘Best Practice’ excellence. Before embarking on postponement, companies need to identify and fully understand the market requirements. The degree of uncertainty is significant for selecting an appropriate postponement strategy. Although it is difficult or impossible to obtain accurate information about the future, postponement is a typical response to external uncertainty. The warehouse is an integral part of the supply chain infrastructure becomes crucial in supporting and ensuring the success of the supply chain. From its traditional role as a storage facility, the warehouse has become a link between the producer and customer. The warehouse has to play an active role to ensure service excellence and service levels are not affected arising from uncertainties and inefficiencies in the system.

With companies implementing postponement strategy, the role of the warehouse has expanded as it undertakes more value added processes which include packaging, labelling, marking, pricing and returns processing. In the case study above, the warehouse is both directly and indirectly involved in supporting postponement. As demonstrated by the Amazon.com model the warehouse ensures product is available upon the receipt of customer order by consolidating and packaging the order for shipment. In executing form postponement it is important to have semi-finished goods available in the warehouse. This then allows customization to be done quickly. The warehouse is actively involved in the postponement strategies performing time and place utility by having goods available at the right time and place.