Postponement of Inventory Differentiation

Reduce Costs by Delaying ComplexityAdding Activities

Product Proliferation

Variety of products has increased dramatically

Customer preferences
Competition

Globalization
Improved manufacturing techniques

Product Proliferation

Resulting problems

Complexity

Greater variety of products Different products for different markets Difficulties in forecasting demand More complex manufacturing facilities

Marketing, warehousing and distribution

Product Proliferation

Increased costs

Forecasting
Production planning Inventory holding costs Production of unwanted items Rework Scrap

Product Proliferation

Excess inventory

Safety stocks for each variation

Other problems

Increased delivery time Delivery of wrong items Stockout costs

Compliance with local content laws

Postponement of Differentiation

Delay the point of differentiation as much as possible

Keep products as standard as possible until absolutely necessary

Ideally until an order is received

Types of Postponement

Time postponement

Delay differentiation tasks as long as possible

Early differentiation

Differentiation occurs early (upstream) in the production process

Late differentiation

Differentiation occurs later (downstream) in the production process

Types of Postponement

Form postponement

Upstream operations are standardized as much as possible

Common components Common production lines

Differentiation may occur at different stages of the process

Manufacturing

Assembly
Packaging Labeling
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Opportunities for Postponement

The amount, timing and operations postponed depends on the nature of the product and process How long should the differentiation be postponed?

Generally, the longer the better

More accurate match of production to demand Lower investment in inventory

Manufacturing High uncertainty of demand Product is sold in different versions Product is sold under different brand names Product is sold in different package sizes Product is sold in several foreign markets Product has a high unit value Assembly increases the volume of the product Product contains a high proportion of ubiquitous materials

Assembly

Packaging

Labeling

X X

X X X X X X X X X X

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Cost Impact of Postponement

Implementation results in a number of tradeoffs

Differentiation activities must still be done

When and where differentiation occurs determines the costs that will be incurred Economies of scale are replaced by diseconomies of scope

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Cost Impact of Postponement

Manufacturing and assembly postponement

Manufacturing and assembly costs

May increase

Smaller batch sizes Duplicate facilities Use of more expensive labor at decentralized locations

Or decrease

Use of less expensive labor at decentralized locations

Less production of unwanted goods, scrap, rework
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Cost Impact of Postponement

Inventory carrying cost should decrease

Less work in process and finished goods inventories

Transportation costs should decrease if the activities are performed at decentralized locations

Distance to customer is decreased

Some components may be acquired locally Tariffs, import duties may decrease if activities are performed at decentralized locations Importing components, not finished products
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Cost Impact of Postponement

Stock out costs

May increase

Lost sales because product is not immediately available

Or decrease

May only need to do final assembly of the items instead of the complete manufacturing process Faster response if decentralized facility is near customer

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Cost Impact of Postponement

Packaging

Packaging costs

May increase

Smaller batch sizes Duplicate facilities if packaging is decentralized

Or decrease

Less incorrectly packaged inventory to rework

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Cost Impact of Postponement

Inventory carrying cost should decrease

Less finished goods inventories

May be stored in bulk form

Transportation costs should decrease

May be shipped in bulk form

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Cost Impact of Postponement

Labeling

Labeling costs

May increase

Smaller batch sizes

Duplicate facilities if labeling is decentralized

Or decrease

Less incorrectly labeled inventory to rework

Inventory carrying cost should decrease

Less finished goods inventories

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Cost Impact of Postponement

Implementation costs

Product redesign

Common components Modular construction Ease of adding components later in the process

Shipping container redesign

Bulk packaging
Allow for easy access to contents
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Cost Impact of Postponement

Process redesign

More standardized operations

Shift from centralized to decentralized facilities for manufacturing, assembly, packaging, labeling

Increased fixed costs as operations and facilities must be duplicated

Training costs

More workers assume processing functions Expanded job responsibilities at decentralized locations
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Cost Impact of Postponement

Material cost

May increase if materials added at decentralized facilities are purchased locally

Loss of quantity discounts

May decrease if material cost is lower at those locations

Quality costs

May increase as processes are decentralized

More opportunities for problems to occur More locations to fix

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Potential Benefits of Postponement

Lower inventory carrying costs

Lower risk of unsold items

Less complexity at centralized locations

Fewer part numbers

Fewer operations

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Potential Benefits of Postponement

Faster response to customers

Product only has to be completed, not manufactured from the beginning

Partially finished goods can be placed close to customers

Easier upgrades, service at customer location Lower shipping costs

Bulk shipping, shipping of components, etc.

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Potential Benefits of Postponement

Lower customs and tariffs

Components and subassemblies may incur lower tariffs than completed goods

Compliance with local content laws

Value is added at decentralized locations

Addition of manufacturing to local economies

Potential to use less expensive labor

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Implementation Issues

Cross functional team is necessary

Marketing

How much differentiation is required by customers?

Research and development

Redesign products and processes so differentiation can occur at the most beneficial points in the process

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Implementation Issues

Manufacturing and distribution

Locate processing facilities at most beneficial locations

Coordinate operations, supply of materials, etc.

Finance and accounting

Provide cost information and analysis of the costs and benefits of alternative postponement plans

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Implementation Issues

Must evaluate performance of the entire supply chain

Avoid local optimization

Economies of scale may not be the most efficient method overall

Organizational barriers

Dislocation of jobs

May create additional jobs

Blurred line between manufacturing and warehousing

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