Postponement in Manufacturing and Supply Chain

In general production process, many of the end products shares some common process and some of them in the initial stages. At some specific point in the process, specialized processes or components are used to customize the work-in-process, which was a common (generic) product up to that point in the process, into the different end-products. This point is referred as point of product differentiation. Postponement refers to redesigning the process to delay the point of differentiation. The point of differentiation may occur in two stages of supply chain, first it may occur in early stage which is referred as early level of postponement and in the other case it may occur in the late in the supply chain which is referred as late level of postponement. This concept had actually been mostly used in the logistics business (Shapiro and Haskett, 1985). Even consumer products industries started using this type of concepts in their process to improve their service for customer’s orders.

In every scenario we need to follow a special strategy for effective results. In Manufacturing and distribution of products, we need to use the following structure, which describes the process in which product variety is proliferated. Let’s go through the five important steps of a product in its supply chain:

Manufacturing (2) Integration (3) Customization (4) Localization (5) Packaging

Here these sequence of steps matches to most of the process flow in the industries.

Manufacturing: This is the initial step where the core of the product is made. Usually small numbers of products or a single generic product are made at this stage.

Integration: This is the step where all the main core products are assembled with the sub assemblies. For example in the case of computers, the body will be made in the manufacturing stage and it will be assembled with the Mother board and circuits in this integration stage.

Customization: This stage refers to the further assembly of the product with different accessories to form distinct product choices. For example in the case of computers, this is the stage where they insert all the necessary I/O cards, install all necessary software’s and accessory boards constitute different end product options.

Localization: Here all the products are localized to suit the local requirements of different regions or countries. For example different countries may have different power supply requirements and different languages for their manuals. We can imagine that each of the product options gets raised into more different end products for different places.

Packaging: This step sounds meaningful only for the few products, those requires some special kind of packing. For example in the case of Computers, monitors need to be packed properly so that they don’t damage when they are in transit.

Here the below figure shows the product variety proliferation tree that branches out at various stages:

Diag from pg 6

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In this context of product variety structure, postponement as a strategy to defer, it can be of two types: Time Postponement and Form Postponement.

Time Postponement: This refers to delaying the various product differentiation tasks as late as possible. It is something like switching from Build-to-Stock to a Build-to- order mode (Zinn 1990).One more great advantage of this time postponement implementation is related to the geographical location in which the differentiating tasks are performed. Usually these tasks will be performed at manufacturing factory, Distribution centers or distribution channels and customer sites. Here the earliest level of postponement refers to the case, when all the tasks are performed at the manufacturing factory. And the latest level of postponement refers to those, where the tasks are performed at the customer sites.

This strategy is usually helpful in the case where delivery or distribution of a product is delayed until customer demand is known. This allows inventory to be reduced as it reduces the necessity to maintain inventories or stocks at distribution centers. Let’s go through some case, which can give a clear idea of this strategy being used. Whirlpool, washing machine manufacturer has implemented this strategy very effectively in their US operations (Waller, et al, 2000).By one of their market research, they have found that most of the consumers don’t expect their order to be delivered immediately, as most of them will be ordering for their new houses, into which they cannot move immediately. So they redesigned their supply chain in such a way that the inventories in the department stores are kept to minimum and this delayed delivery until the orders have been received. This reduces the need for cross docking to a great extent and reduces inventory and transportation costs dramatically. In overall it improves customer service and decreases stock outs.

Form Postponement: This strategy delays certain stages in manufacturing process of a product until a customers order has been received (Zinn and Bowersox, 1988). This mainly aims at standardizing the upstream stages to the maximum extent.

Here they follow a different kind of manufacturing strategy. At first, parts or components that are common to more than a model are used to build a generic platform. Now these semi finished items will be shipped to separate markets and specific countries or items are added when a customer order is received.

Most of the computer manufacturers use this strategy in their operations. Most of the components of a computer are relatively generic and common to many markets (e.g. casing, mouse, board), while other components restricted to certain markets (e.g. power supply, differs from one country to the other) (Aviv and Federgruen, 1999).Usually demand in few places may be stable, demand in specific places may be difficult to predict. Thus using Form postponement strategy, all the basic components of a computer are assembled at a central location. As these components have longer life cycle, compared to other components, the inventory risk is reduced at this stage. Then modules are sent to different markets and country specific or high value components are inserted, once the customer orders are received.

Markets leader Dell is a classic example of this. By taking up a build to order (BTO) approach, the company started maintaining very low levels of inventory (Radstaak, 1998). This strategy allowed the company to improve their customer service, as their products can be customized on demand.

Place Postponement:

This strategy is used to redesign the location of process, in order to postpone the product differentiation. HP had used this strategy in their operations; in this case they put off their final assembling activities and made the final product at the distribution centre. This reduces the Inventory costs and response time to the customer. This strategy can be implemented in seven different ways. The first one focuses on delaying the differentiation tasks to downstream in the final processing and manufacturing.Zinn and Bowserox 1988(manufacturing, labeling, assembly, packaging) postponement, Lee and Billingtons(1994) time postponement, Lee and Tangs (1997) operations postponement, Lees (1998) Logistics postponement and van hoeks (1999) Place postponement all deals with the same strategy. Here are some places, where these strategies are implemented successfully.

European computer manufacturer implemented this strategy; they started assembling all their personal computers in their local distribution centre to the response of customer’s order, instead of completing in the factory. Then their focus turned in delaying the downstream movement of goods which is discussed by time and place postponement.

Logistics postponement discusses about the movement of goods, which is a delay in deployment of inventory. Rover – car manufacturer had implemented this strategy, which centralized the inventory from all his dealers, so that he can respond to customers quickly.

If a company does not start manufacturing or assembly before customers order is received then it is existed the highest possible level of postponement. On the other hand if company is able to meet customer requirement as close as end user then it is the lowest possible level of postponement where maximum flexibility is existed.

Decoupling Point

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Applications of Postponement

Inventory reduction

Better forecast accuracy

Logistics Cost reduction

Improved Customer service levels

Inventory Cost reduction

More Variety

Risk minimization

Procurement cost reduction

Transportation cost reduction

Manufacturing and procurement cost reduction

Challenges in Postponement

Product Modularity

Ability to quantify benefits

Misperception with risks, costs, benefits and general lack of understanding

Competing Interest

Visibility into Supply Chain

Change Management

Which signifies Top-down support

Ability to recognize Postponement Opportunity

Fundamental changes to manufacturing and logistics processes

Too costly to implement

Complex to implement

Consumes too much of management time

Too difficult to align organizationally

Critical Success Factors

Business process reengineering

Product design standardization

Enabling supply chain technology

Collaboration with Customers / Suppliers

Organizational design and accountability

Enabling collaborative internet technology

Internal cross-functional collaboration

Issues relating to Postponement

Conclusion

Case study:

When we think of postponement and their advantages, Auto industry is the one which strikes the mind first for many reasons. Firstly a car can be described as a modular system of components. This shows that there is an opportunity for commonality by producing a platform and adding modular subassemblies customized according to the customers demand. Then secondly, individually customized vehicles have higher forecast variability. Since this case shows that there are too many varieties to be forecasted accurately of each combination, there is typically disagreement on the forecast within the different divisions of a company. Finally is high inventory holding costs. It is much riskier to hold a finished vehicle in the showroom floor than to hold a partly finished one waiting for final customization because of high forecast variability for end products and high obsolescence.

General Motors (GM) offers over 600 million combinations, when different combinations are considered. Because of these many options, forecasting becomes very difficult. Excess inventory on the field is evidence of this. So they started to search for a way to create variety and mass customize beyond the idea of the platforms, GM looked at software configuration as a different way to use postponement. From software view, each of the systems in a vehicle can be considered as central processing unit (CPU) made up of several electronic control units (ECUs).At present they are using 30-35 ECUs per vehicle because software is becoming essential in automobiles for many reasons. Before postponement, GM faced many problems regarding product variety proliferation and higher inventory costs of storing ECUs for individual models. Usually these ECUs come to GM in finished form with all the software’s pre-loaded. And each of this is assigned to a specific vehicle but they all looked same from outside. Suppliers charged GM for custom software installation which not only raised the price but also resulted in problems with repair and maintenance. Then GM decided to assume the responsibility for software configurations and postpone the installations till the latest possible point in the assembly process. Foe this to be executed, GM had to redesign both assembly process and the ECU hardware. Then in mid 1990s they achieved to install the custom software’s for individual orders at the end of the assembly process. Now the ECUs come from suppliers to GM in a generic form. After realizing that even software can be postponed, they started looking for other systems that could be delayed until purchase. Now GM offers 99 % guarantee to deliver the vehicle within one day of the projected delivery day to a dealer closer to the customer. In a study done by GM to measure the benefits of postponement, they have projected inventory cost savings to be 10-15 percent and even maintenance cost savings.

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Here GM has taken benefits of both outsourcing and postponement. All the subassemblies are outsourced to suppliers with the comparative advantage of expertise and quality. As auto industries go with predominately build-to-order manufacturing system, their suppliers need to commit to the increase demand for customized features instead of aggregate orders.