Time is Money: the Cost of Delayed differentiation
Introduction
”Procrastination is the waste of time” and ”time is money”.
Mathematically combining the above quotes we may conclude that procrastination is indeed the waste of money, but in supply chain intelligent and thoughtful procrastination in postponement can create wonders.
(Hoek 2001:161) Describes delayed differentiation or postponement as a concept in supply chain wherein some of the activities are not performed until the customers places the order. (Lee 1998) Explains postponement as the process which delays timings of the crucial processes in which the final products acquire specific functional features and identities.
The basic properties are kept the same but the customization takes place after acquiring the current knowledge of the market, requirements. This is done for the purpose of reducing the risk and uncertainties. There is a distortion and irregularities in the information flow which cannot be speculated. Postponement aims to keep this distortion minimum and thus helps to avoid stock out cost and obsolescence.
Other Advantages of Postponement
- Reduce inventory cost.
- Reduce transportation cost.
- Reduce risk of obsolescence.
- Reduce demand variability.
- Improve competitiveness by offering customized products quickly.
Types of Postponement
- Full speculation strategy
- manufacturing postponement
- logistics postponement
- time postponement
- full postponement
Other Types of Strategies
- Product development postponement -Delay critical product development decision
- Price postponement-known Delay the pricing decision until customer demand is
- Postponement of passage of title -to buyer Delay the transfer of product ownership from seller
- Demand postponement -Split demand due to capacity constrain
Other Types of Postponement
- Postponement of commitment.
- Postponement of passage of title.
- Postponement of branding.
- Postponement of consumer packing.
- Postponement of final assembly.
- Postponement of mixture or blending.
- Full speculation strategy
This strategy in general followed by most of the companies as (Pagh 1998)states it. in this type of postponement, a full speculation and forecast of the manufacturing and logistics is carried out. The final consumer is places at the lowest level of the supply chain. All the manufacturing, designing operations are performed. The finished product is kept at a warehouse close to the customer and delivered as and when required. A decentralized distribution system is used for this purpose.
The author further gives an example of this strategy by using Xerox Company. Xerox Company has become a generic term in photo copying departments. Xerox used this type of strategy for standardized products (plug-and play products like small workstations, small copiers, and telecopy’s). What they did was to manufacture, assemble and stored at a spot near the delivery needed. Further the author explains, this is because, the short delivery time is the ‘order winning’ criteria in this field.
Advantages
- Large scale production possible.
- Distribution can be carried out in large lots.
Disadvantages
- Inventory investment very high. (Amongst all strategies).
- Due to large stockings, obsolescence and return shipments may occur.
The consequences of employing the full speculation strategy are difficult to generalize. Some points are, however, rather obvious. Full manufacturing and logistics economies of scale can be achieved, since products can be both manufactured and distributed in large lot-sizes.20 As a result of the decentralized inventories, the inventory investment will be high, the highest of all four of the P/S-strategies. Further, obsolete products and transhipments may occur.
Manufacturing Postponement Strategy
Manufacturing postponement is explained as a type of postponement in which the final processing( manufacturing is not carried out until the final customer order is received. the components which are required to be in the production of the final component are kept ready to an semi completed state. As and when the customer orders products, the product is manufactured (assembled) in the desired way, packing etc. It could be done at as low as at a distribution point. The use of this strategy facilitates the manufacturer to combine the spares in a very flexible way so as to increase the variety he offers and satisfy the demand of individual customers.
This is a strategy which requires a lot of research and pre development strategy. The firm using manufacturing postponement also requires facing a good engineering and management so as to design the parts which can be assembled and modified as needed. Famous example of manufacturing postponement (Pagh 1998). The extract gives an excellent example of the manufacturing postponement strategy followed by Hewlett Packard. They were the pioneers in application of this strategy. Hewlett Packard’s is a leading name in printers. Instead of holding a large number and variety of premixed colours, what they did was, they started stocking neutral colours in sufficient amount. When a customer order was given they customized the neutral colour according to the need. The result was that the Stock keeping units of them were drastically reduced. After the success of this strategy they employed. This time they postponed the assembly of their printers for the European and Asian markets. All the spares were produces and stored at local distribution centres. The final assembly is done as per the customer demands. The author says that the result of application of this was positive and that, though the manufacturing cost increased a bit the overall cost (manufacturing, inventory and shipping) were reduced by 25%.
Advantages
- Reduction in inventory (finished goods), hence lower inventory costs.
- Extending product variety.
- Individual demand fulfilment.
- Achieving new markets.
Disadvantages
- Possibilities of late deliveries.
- Greater delivery costs.
- Possibilities of stock outs.
- Loss in control over production.
- Logistics postponement
In this type of postponement the manufacturing is based on forecasts. The finished products are transported and stored at a distribution centre or a regional warehouse. The place for warehouse is chosen as to be at an optimum distance from the place where it is required at a particular time.
This type of postponement strategy depends on totally speculation of market condition. Strategy, this is done by first transferring of finished products to regional distribution centres or warehouses. Then the final product is distributed to the customer as and when needed. (Pagh 1998) States that using this postponement strategy, through anticipatory nature of logistics can be reduced or eliminated. He further explains that this is because the products are delivered directly to the customers.
Advantages
- reduction of inventory at the manufacturing plant( though larger warehouses required)
- more product variety
Disadvantages
High delivery costs, if regional distribution centres are not placed at proper distances from the places where they are required.
(Tage Skejtee-larsen 2007)Gives the proof of success of this strategy by stating the example of FORDs European distribution centre near Cologne. He states that it delivers the spares parts required to all the dealers and garages across Europe within a time limit of 24-48 hours. (Pagh 1998) Further this is advocated by Pagh as the use of this strategy is increased in last few years. He gives an example of a study conducted by Abrahamson for three Swedish international companies (Atlas Coco Tools, Sandwich Cormorant and ABB Motors). These three companies have changed their postponement strategy from full speculation strategy to logistics postponement. Application of this strategy has created marvellous results. Prominent being them being increased on time deliveries, shorter and reliable lead times, reduce inventory costs and faster introduction of new products
Full Postponement
This type of strategy is a combination of the logistics and manufacturing postponement. Full postponement is the highest level of this strategy. The customization of the product is delayed until the final customer is ordered. (Tage Skejtee-larsen 2007)states that the delay must be in a way that a partial assembly of products as per customer order. The final customization is carried out after the customer orders for the required stuff. The author points out the major difference in the strategy being that the production is carried out at a central suitable location while the delivery is directly done where required.
A perfect example of this would b the Danish audio-video manufacturer Bang and Olusfen. (Abrahammsons (1993)) .It is a company manufacturing, distributing and selling high end televisions and stereo systems. As they sell high end items they lay a stress on design and quality. They customize each and every item as per individual customers need (quantity, model, colour etc). They get this information with the help of retailers. The final assembly then is carried put at the manufacturing plant. The author describes that earlier that the company used the full speculation strategy. The drawback of the strategy being high inventory levels and slower response deliveries.
Advantages;
- Low manufacturing inventory costs.
- Reduction of inventories in distribution system.
- Extremely high flexibility.
Disadvantages
- higher production costs
- longer delivery times
- Postponement of Commitment;
This type of postponement aims at avoiding potential waste of committing wrong product to wrong market or incorrect distribution centre and later having to carry or return the shipments sent. It avoids the imbalance of inventory. Kenneth B. Ackerman (Ackermann)gives an example of air freight, wherein some manufacturers try to eliminate field inventories by keeping entire stock near inventory. He further explains this as if the air freight is well speedy to allow keeping all the inventory at factory, the manufacturer may reduce the air transportation costs by elimination inventory losses arising from obsolescence or miscommitment.Product is moved to the market in synchronisation with of field distribution centres.
This postponement is very useful in reducing the cost of handling, storing and carrying cost of heavy and bulky appliances.
Postponement of Title Passage
This is type of postponement in which the manufacturer pays the warehousing charges and the passage of title is postponed until the product is release from the warehouse. The warehousing system, generally being third party one, the manufacturer still has some control over it. But the power of releasing it stays with the retailer. (Ackermann) further states that using this strategy enable the buyer to reduce the carrying cost of inventory. Also situation the warehouse in a proper location balances all other costs.
Postponement of Branding
This strategy aims at last minute labelling. An example for this would be of a canned pea’s vendor (Ackermann)who produces peas for his own brand as well as for some private brand. For satisfying the needs what h does is that he keeps all the unlabelled cans together. Whenever the order of private brands comes accordingly the product is branded. . By this the possibility of incorrect product labelling and wastage is eliminated.
Also fresh and bright branding can improve the aesthetics and looks of the product, hence can improve the sale.
Postponement of Consumer Packing
In this type of strategy the postponement occurs in packaging of the material. The example given by Kenneth in his book (Ackermann) is that of Soft drink manufacturer Coca Cola and that of Whiskey. Coke determined its manufacturing strategy as to make the concentrated syrup and then to transport it to soda fountains, regional bottles to make it attractive for consumers. What the manufacturers of Whiskey did was to transport in bulk the product and then to bottle it in the country of sale. This will eliminate the risk of damaging the bottles and also saving the customs duty.
Postponement of Final Assembly
This is a very interesting type of strategy. This type of strategy is visible in day to day life. In this type of postponement the assembly of final product is postponed until final order is received. For egg, an office furniture manufacturer can postpone the assembly of finished parts he has until he receives the final order for delivery. This enables him to reduce chances of obsolescence. Also there is great flexibility in terms of production.
Postponement of Blending
This type of postponement implies delay in mixing, combining or blending. Kenneth (Ackermann) gives an example of a gasoline pump developed by Sun Oil Co. The speciality of this pump being it has capacity to blend the ingredients in such a way so as to allow offering 5 types of fuels, low octane to high octane.
Bibliography
- ABRAHAMMSONS, Mats ((1993)). Time based distribution. The international jounal of logistics management, 4:2, 75-83.
- ACKERMANN, Kenneth B. Practical handbook of warehousing. fourth edition ed., Chapmann and hall, 174-175.
- HOEK, Van (2001:161). The rediscovery of postponement. 19(2), 161-184.
- [online]. at: HYPERLINK “http://www.ifm.eng.cam.ac.uk/mtms/events/documents/Johnny_Wan.pdf,” http://www.ifm.eng.cam.ac.uk/mtms/events/documents/Johnny_Wan.pdf,
- LEE (1998). Postponement for mass customization:satisfying customer for tailor made products. In:.GATTORNA, J.D (ed.). Best practices for supply chain management. chapter 5 :7-91 ed., Gower publications.
- PAGH, Janus D, Cooper,Martha C (1998). Supply chain postponement and speculation strategies:how to choose the right strategy. Journal of businss logistics,.
- TAGE SKEJTEE-LARSEN, Philip B Schary (2007). Managing the Global supply chain. third ed., Cpoenhagen Business school.
