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 pre-finished 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:
- Cost to realign manufacturing, warehousing, shipping, order taking and or purchasing
- Warehouse and or plant reconfiguration?
- Increased warehouse costs due to possibility of increasing warehouse space to serve as a consolidation area.
- Cost to install new manufacturing equipment
- Product design changes
- Increased shipping expedition costs
- Changes in skill levels and labor costs to reflect new employee responsibilities.
- 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:
- Are some of the company’s products seasonal?
- Is the firm operating on a short order lead time as compared to its production cycle?
- Is there a good deal of differentiation to satisfy customers
- Is there any one step in the production process that adds significant value to the end product
- 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:
- 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.
- Planning discussions held in regard to process changes in packaging, design or warehouse location
- Discussion and plans made for materials, labor, logistics, inventory and supplier locations
- 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.