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2015

Can Your Company Benefit from a Postponement Strategy?


Whether it is make-to-stock or make-to-order fulfillment processes, either one can lead to overproduction or underproduction risks.   In an attempt to avoid one or both of these risks many manufacturers are taking fresh approach to procurement with….postponement strategy.


With the holding of production in a prefinished form and pushing the point product delineation closer to the point of the customer order, a sound postponement strategy can improve the forecasting capability. Customers, then, have a greater range of variety.  Companies have the lessened risk of lost sales and lower inventory costs and lessen chances of obsolescence.

However, is this answer for all companies?  It depends.


Postponement strategy in essence is a LEAN supply chain that involves the deferral of end of manufacturing activity such as packaging, labeling, assembly, etc,.  Upon enacting this strategy any particular step might be pushed toward the end of the process.  This is done with the goal of scheduling production as close to order fulfillment as possible.


Since the company is no longer speculating on demand and thereby possibly creating excess inventory the holding costs of inventory can be reduced by 30%. Additionally, stock out are minimized so customer satisfaction increases accordingly. 


A perfect example of this strategy is the paint store.  Instead of stocking hundreds of cans of paint in multiple colors, stores choose to stock tints and colorants. These are mixed on site per customer order. Customers end up happy as they get the infinite number of hues they demand.  The stores / vendor are happy as they reap the benefits of order fulfillment, lower inventories and customer satisfaction. 

There is one company that seems to have completely mastered the postponement strategy and that is Dell Computers.  Dell embraced this strategy beginning in 1993 and continuing to this day.  Computer components were held in generic form and custom assembled as it received customer orders.  Dell implemented this strategy while its competitors held onto inventory for months on end. 


Of course prior to any such implementation a company should review its costs and any organizational changes to determine and ensure any such changes do not exceed expected benefits.  I recommend eight such costs / benefit considerations:


  1.       Cost to realign manufacturing, warehousing, shipping, order taking and or purchasing
  2.       Warehouse and or plant reconfiguration?
  3.       Increased warehouse costs due to possibility of increasing warehouse space to serve as a consolidation area.
  4.       Cost to install new manufacturing equipment
  5.       Product design changes
  6.       Increased shipping expedition costs
  7.       Changes in skill levels and labor costs to reflect new employee responsibilities.
  8.       IT system changes and costs

 

As I stated that it depends on whether or not a company implements such a strategy. There are several clear markers which can assist in that decision.  They are as follows:


  1.       Are some of the company’s products seasonal?
  2.       Is the firm operating on a short order lead time as compared to its production cycle?
  3.       Is there a good deal of differentiation to satisfy customers
  4.       Is there any  one step in the production process that adds significant value to the end product
  5.       Do the product lines have customized end products

 

Implementing and executing a postponement strategy is the same as applying any other continuous improvement process.  It begins with the buy-in and collaboration of the major stakeholders mapping out a coordinated plan.  This process and mapping involves five steps:


  1.       Key stakeholders – executives and employees meet and map out current products and financial processes to establish a baseline. It is essential to include key engineering and manufacturing personnel at this stage.
  2.       Planning discussions held in regard to process changes in packaging, design or warehouse location
  3.       Discussion and plans made for materials, labor, logistics, inventory and supplier locations
  4.       A mutual understanding of the scope and timeline of project and how progress is established amongst stakeholders.

 

Finally, it is imperative that information is clearly communicated to all internal and external partners who may be affected in some manner by the postponement strategy implementation.

Per a survey by the National Association of Manufacturers small businesses are carrying an unbalanced portion of the $2.02 trillion which federal compliance regulations burden the economy.


What does this really mean for these small manufacturers and distributors?


The average U. S. Company pays almost $9,991 annually per employee in order to comply with those regulations. The average manufacturer practically pays double of that amount per employee for the year. For the small manufacturers, with less than 50 employees, the cost runs about $34,600 for each employee.


The claim for this cost disparity is based upon economics of scale.   A firm with only 20 employees incurs the same expense as a firm with 300 to 500 employees. The larger firms can readily withstand these costs due to spreading the costs over larger revenues and a large employee base.


However, if you are a small manufacturer, you are encountering a double whammy from the cost of compliance regulation. One can safely infer from this that many small manufacturers might invest more in their companies – capital and people – if the regulations were less stringent.


While some past administrations have either taken or recommended steps to alleviate this situation, the agencies themselves have taken an erratic view of the impact upon businesses.


A prime example is the EPA’s review of the ozone standards from the Clean Air Act.  The ozone standards are under review.  The EPA might recommend that the standard be reduced from 75 parts per billion down to 60 parts per billion.  If this takes place the result might not be what the U. S. economy is ready to embrace – a loss of almost 3 million jobs and an increase in gas and electricity costs. 


Perhaps this survey should be part of an ongoing discussion about the costs of regulations. We all want regulations that are administered fairly and protect employees and the public at large.


The question that needs to be asked is: How far do we need to go to enhance this protection?

Supply chain management fosters strategic alliances along with operational efficiencies to differentiate itself from other companies.   Raw material sourcing is one of these opportunities to minimize risks, reduce operating expenses and ensure continued operations in the face of a supply chain disruption.  Single suppliers present companies a chance to reduce procurement expenses through material cost reductions and volume discounts.  However, procurement with a single provider has attached to it significant risks such as higher costs and lower profits due to supplier disruptions.


To borrow from a 2005 study by Kevin Hendricks entitled ‘The Effect of Supply Chain Disruptions on Long-term Shareholder Value, profitability and Share Price Volatility’, Mr. Hendricks found that after a major supply chain disruption companies a 107 percent drop in operating income, a 7 percent decline in sales and an 11 percent increase in costs. These were the companies that sourced through a sole supplier.


The supply chain and supplier management relationship can make or break a company.  There is a long history of companies suffering huge losses, both financially and in customers, for not being proactive in being responsive to supplier needs.  Supplier relationship is more than merely a module in a program: it is actions to ensure suppliers are meeting service level agreements.


The lightening strike and fire that took place at the Royal Phillips Electronics chip plant in New Mexico provides an earnest lesson on the importance of proactively managing the supplier / customer relationship.


Two distinctly different responses by Phiilip customers earmarked the point of being proactive.  When Nokia did not receive a schedule notification form Phillips they verified chip inventory levels at each Nokia facility. Upon learning the Phillips situation was worse than anticipated Nokia seeked to locate and secure other supply lines to prevent their capacity from being threatened.


Ericsson’s spin on the situation was an entirely different story.  Ericsson believed that Phillips would be back on line within a week and did not take any alternative action to ensure their capacity. Thus, when Phillip’s production did not resume within the week it was too late for Ericsson.  Ericsson was unable to contract other manufacturing capacity and their mobile phone business has yet to recover.


This situation clearly points to the need for single source manufacturers to establish a cooperative and collaborative relationship with multiple suppliers prior to disruptions.  Companies that have multiple sources of supply are more likely to recover from a supply disruption than companies with a sole source of supply.


Nokia proved that sustaining a strong supplier management relationship allows for the immediate response to disruptions. Through this relationship Nokia had the knowledge of Phillip’s situation, made the effort to follow up when communications broke down; it was able to move ahead of Ericsson in the mobile phone market.


There are other sole supplier risks including the purchase of a sole supplier by a competitor, disruptions caused by weather, a supplier declaring bankruptcy and a disruption in a suppliers supply chain preventing them from souring materials.


To alleviate these risks and counteract the effects of a supply disruption a firm might carry a larger safety stock. But the carrying cost of the additional inventory must be weighed against the likelihood of such a disruption and the length of time material will be unavailable. It will be difficult to rationalize adding costs for an event that might well not occur. If the disruption does occur the added cost can be shared with the supplier by vendor managed inventory, reduced prices for tired purchases and payment allowances.


Organizations can provide to their sole suppliers order forecasts to support the stability of raw material supply, both short and long term. A supplier will be more likely to support a customer if there is a collaborative relationship. Under these circumstances a supplier will notify or give preferential treatment to a customer by notifying them sooner to a situation than other customers.  This collaborative relationship can pay off for the vendor as well – if events slow down the vendor’s production.


Single suppliers can assist companies to achieve large cost savings through the reduction of raw material costs. However, when companies do use a sole supplier, they should develop supply resource management best practices to control their exposure to the suppliers’ operations.  Timely communications and collaboration can prevent a major disruption in the supply chain and minimize negative financial effects. Utilizing collaboration and open communications, safety stock inventory and accurate forecasts will allow companies to curtail the risks of supply disruption and loss of shareholder value.