Manufacturing postponement strategies come of age (page 1 of 7)

To manage inventory effectively, companies not only must anticipate demand, but also when it will taper off. Not having sufficient inventory early in the product cycle can cost market share. Products at the end of life cycle lose value quickly and risk obsolescence, which can lead to large inventory write-offs. Moreover, with customer demand increasing for product specification, companies must produce several versions of each model.

Many manufacturers and retailers today are turning to postponement or delayed differentiation strategy to strike the right balance. By holding inventory in a less finished state - that is, postponing final product assembly until actual customer demand is known - companies can more quickly respond to market opportunities and offer greater customization options. However, postponement can require the fundamental redesign of a company's decade-old manufacturing processes. It also calls for a high degree of collaboration and visibility across the supply chain.

In 2003, Oracle Corporation and Cap Gemini Ernst & Young U.S. LLC jointly sponsored the first in-depth study of emerging trends in postponement. The executive study, which surveyed more than 350 supply chain professionals at mid-sized and large companies across industries, was conducted in conjunction with APICS - The Educational Society for Resource Management. The study findings, published last October, found that postponement is an underutilized, but increasingly viable and effective strategy within the supply chain.

In this article, we will examine the growing, industry-wide need for "adaptive supply chains," and the economic and market forces that are causing conditions that are ripe for postponement. We also will offer recommendations on how to get started in developing a postponement strategy.

'To Postpone or Not To Postpone'
Postponement is a systematic approach to designing and developing standard, configurable products that can be differentiated, quickly and inexpensively, once actual customer demand is known. This model allows organizations to transition from a "push"-oriented supply chain to a "pull" or a demand-driven supply chain.
Postponement is not a new concept.

For more than a decade, a small but influential group of sector leaders in the consumer electronic and semiconductor industries, such as Dell, HP and Xilinx, and major retailers like Wal-Mart and Home Depot, have implemented delayed differentiation strategies to reduce manufacturing, shipping and inventory costs, while improving order fill rates.

The Oracle/Cap Gemini Ernst & Young survey found overall reductions in inventory costs by as much as 30 percent to 40 percent in successful postponement implementations. Still the norm, across industries, is to hold anywhere from 80% to 90% of inventory in a finished state. Why?

Market Inhibitors
The reluctance to leave inventory in a less finished state -- and therefore, further from the customer -- is understandable. Postponement, as a concept, is counter-intuitive (like leaning away from the mountain when learning to ski). Instead of warehouses full of ready-to-ship product, inventory requires customization, light assembly and packaging before an order can be filled.

The Oracle/Cap Gemini Ernst & Young study determined that nearly half of responding companies had not implemented postponement strategies to date. This was attributed to "little knowledge of postponement benefits and associated costs, perceived technology limitations and ineffective organization alignment."

Implementing a postponement strategy involves fundamental changes to a company's manufacturing processes and internal operations.