Manufacturing postponement strategies come of age

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. Configure-to-order production demands a high degree of collaboration and visibility across the supply chain.

Traditional manufacturing practices - mass-producing finished products in predetermined, set quantities - are about as straightforward as it gets. In sharp contrast, stopping production at a generic product state, and offering a range of different configurations and options, requires a flexible, just-in-time production model. If poorly implemented across the supply chain, mass customization can result in cost overruns and longer lead times.

Outsourcing adds another layer of complexity. As more of the value chain moves outside of the organization, the company is increasingly reliant on outside suppliers and contract manufacturers. While outsourcing partnerships enable Original Equipment Manufacturers (OEMs) to improve their financial performance and focus on their core competencies, there is a downside in terms of inventory. Incorrect decisions increase procurement costs, and if product doesn't move, the costs are unrecoverable. Therefore, postponement strategies must manage variability in supply, as well as demand, and recognize that cost and risk characteristics will change over time.

A postponement strategy also is dictated by the product lifecycle: not having right inventory early in the lifecycle will mean missing customer service level targets and the opportunity to gain market share. Products at the end of life cycle lose value quickly and risk obsolescence, resulting in costly write-offs. Moreover, if old products are held in a generic state, their components and parts can be 'recycled' for next-generation products.

As the Oracle/Cap Gemini Ernst & Young survey found, a postponement implementation involves a fundamental changes to a company's manufacturing processes and internal operation. Product design and production must be restructured to support product standardization and design modularity. The company must convince its supplier and partner network to go along with pushing the point of product differentiation closer to the customer.

As any supply chain professional knows, deviating from standard business practices will have seismic ramifications up and down the supply chain. For comparison purposes, think of coordinating relay races where the final destination is not known until mid-way through each event - that is, from the point of standardization, forward. With a conventional production model, each business unit within the company and each supplier performs a discrete job (the equivalent of running a leg of the race) and than 'passes the baton' to the next group.

With postponement, teamwork is critical. When the order specifications are known, the supply chain partners must respond by pulling in the right people and gearing production accordingly. Postponement will only succeed if customized products are turned around within a reasonable timeframe.

Because so many parties are involved, these operational changes cannot be implemented in an ad hoc way. In fact, the Oracle/Cap Gemini Ernst & Young survey sites organization buy-in and support as the primary critical success factor. 'Most companies have not had sufficient levels of management support to effectively address this degree of change,' the survey concludes.

Other key inhibitors listed in the report are:

• Inability to recognize where postponement is most effective;


• Inability to quantify benefits;


• Belief that technology does not support implementation.

Market Drivers
Many product manufacturers today find themselves between a rock and a hard place. Interactive media and technologies have empowered consumers, giving them a greater say in product design and performance. Yet while demanding higher levels of customization, they often are unwilling to pay more or wait longer. 'As a result, organizations are facing increasing cost pressures and shortened product life cycles, often resulting in products becoming obsolete within a couple of months of their introduction,' states the Oracle/Cap Gemini Ernst & Young survey.

With an accelerated product cycle and global market volatility, traditional forecasting methods are proving unreliable. In fact, nearly three-quarters of respondents (73%) sited increased difficulty in forecasting as a primary driver for postponement.

Economics also play a decisive role. In boom times, inventory moves at a clip and postponement is less of an issue. But when the world economy slows and market demand is unpredictable, the financial consequence of stockpiling finished inventory, or wildly miscalculating market demand can be disastrous.

According to the survey findings, inventory costs, including inventory obsolescence, are rising as companies attempt to meet customer demand. Six out of 10 survey respondents cited demands for higher levels of customization as another primary driver.

In a recent conversation, Joe Pyne, a UPS Supply Chain Solutions senior executive, struck at the heart of postponement when succinctly noting, 'Inventory is cash.' Obsolescence issues aside, companies with warehouses full of ready-to-shift merchandise must ask themselves: Is this the best use of company assets? Might the money tied up in inventory-related costs be more wisely invested in R&D, plant upgrades or marketing and sales.

The stage at which inventory is held directly impacts a company's bottom-line. For example, within the semiconductor industry, it is twice as expensive to warehouse finished chips, as it is to hold them in an undifferentiated die batch state. And with as many as 20 different assemblies for a basic circuitry, maintaining inventory at the 'lowest common denominator' allows the chip manufacturer to forecast demand at a more granular level, based on quicksilver changes in market demand.

Global manufacturers also are recognizing that postponement strategies improve demand forecasting. Standard product offerings must be tailored for local consumption in accordance with a host of criteria: among them, language, currency, business and regulatory practices, user preferences and purchasing trends, and rates of technology adoption. Yet while customization often varies country by country, most U.S. product manufacturers still forecast demand several months out and ship finished product overseas.

Needless to say, once a product is customized, its market applicability and usage are fixed. If there is a glut of printers configured for the German market, and a shortfall for Japan, the imbalance cannot be corrected with existing stock. In this no-win situation, the manufacturer risks losing market share in Japan, while having to reduce prices in Germany to move excess product.

In the next section, we shall see how postponement strategies enable companies to lower inventory risks while actually expanding their market reach and opportunities.

Postponement Comes of Age
Postponement brings organizations closer to the Holy Grail of manufacturing: build on-demand. The Oracle/Caps Gemini Ernst & Young survey found 'improvements in top-line revenue often result from postponement, since companies can provide a large number of SKUs, with high order fill rates and shorter lead times, to a global customer base.'

Postponement adopters are finding innovative ways to support delayed differentiation, such as transforming warehouses into advanced fulfillment centers to perform customization of goods at a point closer to the consumer. Instead of pre-configuring product for different languages and countries, product is shipped in a generic state, in bulk, to these regional centers. The final customization, assembly and packaging are undertaken as orders come in.

From an operational and logistical standpoint, this is the preferable model for a multinational product vendor. Bulk shipments of 'raw' equipment are considerably less expensive to ship and store than 'shrink-wrapped' products. Moreover, with common inventory, companies can more effectively weather market fluctuations in world markets. Now if a shortage exists in one market, excess inventory from another can be sent to close the gap.

Postponement In Action
By pushing the point of product differentiation closer to the customer, postponement can improve service levels service levels and delivery performance, while reducing inventory investments and improving margins. A good case in point is Xilinx, a world leader in programmable logic devices (PLDs), one of the fastest growing segments of the semiconductor industry.

Despite the 2000-2001 downturn in the economy, Xilinx, a 'fabless' supplier, successfully pursued a market diversification strategy. In collaboration with its two main manufacturing suppliers, Xilinx improved its competitive position by making its product design more modular and delaying customization until customers orders are placed.

Chris Wire, Xilinx's senior director of Supply Chain Management, said postponement is having an impact at both the product and supply chain levels. In a break from traditional semiconductor methods where the logic circuits are fixed once the chip is manufactured, Xilinx devices are standard parts that are provided to customers ready to be programmed.

PLD solutions help minimize risks for manufacturers of electronic equipment by shortening the time required to develop and bring new products to market. Instead of waiting for a fixed prototype, customers can design and verify their unique circuits in Xilinx programmable devices. The same standard unit can be configured for a wide array of digital electronic applications, ranging from wireless base stations to DVD players.

To increase supply chain efficiencies and reduce inventory costs, Xilinx has its standard, programmable chips shipped in bulk to an intermediate point as a feeder for many markets. By keeping inventory 'raw,' Xilinx can service key customers around the world based on real demand or replenishment needs. Xilink's lead-time to configure a chip with a customer's software for a specific application averages only two to four weeks.

According to Chris Wire, the postponement strategy has achieved its two primary strategic objectives: to lower inventory costs and improve customer service levels. For example, on-time delivery performance has reached 98 percent. He contends that postponement is 'getting better and better,' and he credits availability of today's sophisticated software solutions as a key part of Xilinx's success.

Don't Postpone the Inevitable
A surge in supply chain management spending is having a rippling effect across numerous industries, including consumer packaged goods, healthcare, retail, technology, automotive, education, telecommunications and aerospace. Sector leaders have invested heavily to improve and automate business-critical SCM processes.

Facing increased pricing and service level pressures, their competitors now also must raise the bar, and spearhead greater efficiencies across their partner networks. Based on the benefits derived from postponement, the Oracle/Caps Gemini Ernst & Young survey indicates that it will become a business mainstay. 'The constantly changing business environment will force all of us to address some aspect of postponement in order to remain competitive.'

Postponement already is shaping customer expectations. Ninety-one percent of survey respondents implementing postponement strategies noted 'significant improvements in customer satisfaction and inventory costs.' A majority (83 percent) also reported that their customers were seeing 'significantly improved order fill rates with decreased lead times.'

For all of the aforementioned reasons, devising a postponement strategy is not an easy undertaking. There is a welter of complex technology, process and management issues. There are no hard and fast rules. The right postponement model will vary company, by product group, by market.

A decade ago, companies seized the SCM lead by hiring outside experts to institute best practices and manually figure out a postponement strategy. Today, postponement is supported by enterprise-strength application software solutions, with built-in analytical and business intelligence (BI) toolsets. The planning, inventory optimization and decision support systems help companies set the right postponement levels and targets, and make accurate service and delivery commitments.

Yet the job cannot be left to technology alone. Implementing a delayed differentiation strategy requires major business process alignment and greater organizational accountability. The manufacturer must secure the participation of suppliers and contractors, since the, too, must retool their operations to support postponement.

The survey identified the success factors that drive successful postponement strategies. Heading the list is an organization's ability to produce standardized products and to incorporate customization at the most advantageous point in the supply chain. Also termed essential is resolving competing interests within the company's own supply chain. This extended to changing reward and metrics structures to support collaboration. Another critical element is external collaboration with ones suppliers and customers.

However, none of the above can be accomplished without a commitment for the board suite. The study states: 'Without consistent top-down sponsorship and support, from design through implementation, a postponement implementation is destined for failure.'

In addition to organizational buy-in, the critical success factors identified by survey respondents were:


• Product design modularity (80%)


• Business process reengineering (75%)


• Collaboration among all internal functions of the supply chain (78%)


• Collaboration with suppliers and customers (72%)


• Proper metrics and incentives (66%)

Devising A Postponement Strategy
While it would be impossible to cover all the bases of a successful postponement policy in a single article, we can review key factors and issues.

The first step in even considering a postponement strategy is to enlist c-level management support. For postponement to work, management must be willing to take risks, implement sweeping changes and commit the resources to reform manufacturing practices and build a collaborative infrastructure. Practically speaking, unless it is the stated mission and policy of the company, it will be difficult, if not impossible, to win the support and participation of major suppliers and partners. Typically, the chief information officer or the chief financial officer, or both, will spearhead the project.

The next step is to determine how best to implement the strategy. Large organizations with supply chain professionals on staff might opt to handle the project in-house. Another alternative would be to work through channel partners. This would be a good solution for any organization that uses contract manufacturers and outside logistics support.

In lieu of reengineering its operation and manufacturing arm, some organizations may find it faster and more cost-effective to outsource all or part of the operation. The survey notes that outsourcing components of a company's supply chain is becoming popular, and vendors offer specialized efficiencies in the areas of production and assembly, distribution and fulfillment.

The survey found that successful companies implementing postponement create cross-functional teams and invest in information technology in order to redesign their business process. As aforementioned, it is necessary to eliminate internal 'turf' battles by setting group targets and remuneration goals.

Like a chessboard, the supply chain must be viewed as one sphere of operation. We recommend modeling multiple scenarios to arrive at the optimal balance. Determine how changes in one supply chain area will affect others, and map enabling information flows, such as funneling customer feedback back to R&D, and coordinating order fulfillment across the extended enterprise.

As touched on before, inventory strategies will vary across product groups. 'One-size-fits-all' products serving stable markets might be stocked as finished goods, while products sold in multiple configurations are left in a pre-customized state.

Service targets and delivery levels should reflect the relative profitability and importance of a class of products vis-à-vis revenues and future growth opportunities. Other important considerations are the customers and channels. Therefore, product strategies should map to a host of factors, and be cognizant of fluctuations in demand, supplier performance issues, time-to-market targets and product life cycles.

Technology
Early postponement adopters had few tools at their disposal a decade ago. Typically, they hired outside supply chain experts to study their operation and formulate strategies based on their own experience and computational methods. Basically, it was a seasoned judgment call.

Advancements in supply chain management (SCM) and information technology have minimized, and often eliminated, many of the risks traditionally associated with the implementation of postponement. Enterprise software solutions built around a unified data infrastructure provide the collaborative platform for coordinating activities internally, and with suppliers, partners and customers. Inventory optimization solutions enable decision making about where to postpone, when to postpone and how to postpone across product groups.

Ideally, a company will select standard, out-of-the-box software applications that can interface with its existing front and back office data systems. Data is the lifeblood of any supply chain system, and the ability to access, process and analyze vast amounts of information - ranging from product sales, market orders and forecasts, to inventory levels, manufacturing quotas and service levels - is critical to administering and continuously fine-tuning a postponement strategy.

Avoid software requiring extensive programming or complex modeling skills. When fed the right information, the business intelligence and analytical tools should do the work for you. Algorithms should incorporate constraint-based solving technology to assess the viability of the strategy, based on the cost of achieving targets, and whether they are feasible given sourcing and production constraints.

For instance, forecasting tools should enable SCM professionals to test different scenarios, such as the ramifications of changing the service levels or inventory investment. Finally, the system can monitor the success of the venture by tracking service levels versus targets, inventory turnover, total inventory capital, plan profit and cost breakdown analysis - and flag deviations.

Automation also will play a key role. A successful postponement implementation wills turnaround orders at acceptable market levels.

Therefore, it is imperative that the customization process gets underway as soon as possible. Automating and standardizing business processes across the enterprise is critical to meeting competitive service and delivery targets. Take something as simple as processing a customer order. An automated system will instantly process and route an incoming order, regardless of where it is placed around the world. With a manually processed invoice, the delay can take days, if not weeks for a foreign order.

Ideal Candidates
We believe the companies in the strongest position to employ successful postponement strategies will have strong support from senior management. They will be using integrated, Web-based enterprise business solutions that facilitate and support collaboration and visibility across the extended supply chain. They will have adopted standardized and automated business processes to support faster response times and real-time intelligence.

Postponement will be most effective when companies have implemented strategic sourcing and formal buying strategies, such as vendor-managed inventory (VMI) or consignment, to reduce financial risk, supply variability and lead times. At the heart of postponement is a company's ability to maintain competitive service and delivery performance levels.

The survey posits business conditions that make strong postponement candidates. 'Prominent among these are companies that produce a significant variety of products with short product life cycles and which have a supply chain able to support mass customization.'

Benefits
The most important benefits of a successful postponement implementation are improving customer satisfaction while minimizing inventory costs, according to 91% of survey respondents. Another chief benefit noted is increased flexibility that increases a company's ability to offer a wider range of customized goods. Customers reportedly are seeing improved fill rates (83% of respondents) and decreased lead times.

The company and its suppliers enjoy reductions in inventory costs through better resource planning and allocation. This is attributed both to shorter forecast cycles and shifting inventory upstream to a less expensive generic state.

'Overall, postponement's primary benefits are to reduce the effects of market uncertainty and to meet customer needs, while effectively managing supply chain costs,' the survey finds.

In summary, the time is right for postponement and the benefits of a well-implemented strategy will deliver new 'highs' and 'lows': lower overall supply chain costs, lower inventory obsolescence, lower procurement costs, lower infrastructure costs (i.e., people, process, technology, equipment) and lower manufacturing and shipping costs, as well as; higher order fulfillment accuracy and higher levels of customer satisfaction.