Evaluating the Role of the warehouse in postponement Strategies

Introduction

The rapid changes occurring in customer-supplier relationship has resulted in shortening the product life cycle along with the product variations, which could meet the complex customer satisfaction demands. As the customer requirements changes rapidly, it increases the complexity of planning and demand forecasting to suit the changing demands. Hence, postponement strategies are able to help in solving such complex issues. The strategy involves delay in the production process to the maximum possible time, while delaying the point of product differentiation. As the whole strategy is related to the value of information, it can be maximized with delay in production decision time, giving more time to receive and analyze the customer requirement and demand. Hence, the postponement strategies help in improving the quality of decision, while also optimizing the quality of product planning and demand forecast. The relevant strategy also allows for the flexibility in the production scheduling, where the actual demand, in real terms, can play an effective role in the complete supply chain network.

While Alderson introduced the concept of postponement strategy in marketing, for the first time in 1950, the postponement applications have been extended to areas like manufacturing and distribution, as well as, process re-design. Later on, the delayed product differentiation enabled the postponing the product design and manufacturing process, to improve the relevant product quality. Similarly, the concepts involved would include the point of differentiation and the level of postponement, which would refer to the warehousing facilities needed at different locations for storing the products.

However, the motivation for implementing postponement policy in manufacturing process confined mainly to the provision of incentives for reducing cost and improving the level of service, while increasing product variety to suit the changing demands of the customers.(Zhang & Tan, 2001)

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Role of Warehouse

The role of warehouse for any manufacturing or trading organization relates to the policies concerning their logistic postponement, as its main aim should be to maintain the full anticipatory of inventory at a single or multiple warehouses located at different places. Accordingly, the process involves postponement of changing the inventory location to the maximum possible time, while using the risk pooling concept for stocking the chosen differentiated products at certain centrally located warehouses. The process would require total coordination between the retailers and wholesalers. This strategy would also involve manufacturing operations being performed before the logistical operations, which in turn are purely customer-order initiated.

With the re-organization of warehouses on the above lines, there would be lesser lead times, while resulting in increased on-time deliveries. With centralized warehouses, the inventory costs would reduce as it would reduce the need for frequent stocking of products which are in more demand at the local warehouses. However, the strategy could result in an increment of shipment costs as smaller packets may need to be shipped at faster speed from the central locations. In any case, this strategy requires clear definition on the role of distributors and retailers in regards on storing of products in warehouses. While distributors would be responsible for making decisions on product assortment and stock localization, they should be able to own and manage the central and connected warehouses. In addition, they must be able to evaluate the response time for the retail markets while the distributors should be focusing on the total logistics which includes transportation, warehousing and customer servicing.

The retailers’ responsibilities include owning and managing local warehouses will be linking directly with the consumers and evaluating the response time for the consumer demand on variety of products.(Battezzati & Coletta, 2008)

However, warehouses can play an important role for large organizations by storing generic parts and subassemblies and components so that they can be readily assembled as per the customer’s demand. This would include performing all finishing work at the warehouse facility which include kitting, assembly and packaging among other operations. (McCrea, 2005)

Types of postponement Strategy

While there are many definite patterns of postponement policies for manufacturing and inventory processing, the four main postponement strategies concerning the production processes are manufacturing, assembly, packaging and labeling.

Manufacturing postponement

This strategy involves shipping of basic materials and components to warehouses whereby the products is being assembled at the appropriate time. The manufacturing is completed as per the customer’s requirements. This will saves the unnecessary transportation costs. Several soft drink companies, particularly in Brazil will ship the basic syrups to the warehouse of bottling companies whereby other ingredients like sugar and water are added and mixed at the local warehouse to obtain the end product. However, this could increase the delivery time of the end product. On the other hand, there will be saving on the cost for transporting the material, like sugar etc. for the above mentioned soft drink products.

Assembly postponement

This means delay in the assembly of the final product until the customer order is received. This type of postponement strategy is suitable for the products that have number of differentiations. The basic components remain same but however, the final configuration would change according to the customer requirements. Marketing of computers is an ideal example, where assembly is postponed till the last stage, when the final product is assembled as per the customer specifications. As computers would have different hardware and software combinations, the assembly is delayed until the customer specifies the type of hard disk, Ram drive and other hardware required to make the final product. Similarly, the software applications loaded on the assembled computer would vary as per the customer order. This strategy allows the computer being manufacture offering the maximum choices to consumers while reducing the cost of inventory at their end for the finished goods.

The concept of assembly postponement strategy was first introduced by Caterpillar, Inc, as the firm innovated offshore manufacturing by creating the necessary production and distribution system at different places. By doing so, the company could beat the global competition by creating customer service capabilities as tools to beat the competition. In addition, the central warehouse plays an important role in this type of strategy. The base product is required to be delivered to the warehouse whereby the additional attachments are being assembled to the base product as per the customer requirements.

However, the inventory costs and the cost of production may increase when using assembly postponement strategy. The assembly and production expenses are usually more at the warehouse level than at the manufacturing level. Nevertheless, it saves the organization on transportation costs which are huge for the finished goods as compared to the base products.(Zinn, 1990, page2)

Packaging postponement

This type of strategy is most suitable for the packaging of articles in different sizes. Shipping and other costs are saved by using this strategy. For example, packaging of wine and other liquor bottles can be postponed until the specified instructions are received from the customer end. Similarly, packaging calculators and or other electronic gadgets from US to Europe may be delayed as the instruction manual needs printing in different languages. This must be done at the localized warehouse points thus the final packaging can be delayed accordingly under such postponement strategy until the last point of delivery as the instruction manuals are printed in the required language, to be packed along with the gadgets received from the centralized warehousing location. The bulk shipment of the original equipment without the manuals can result in the huge savings in transportation costs. However, the packaging cost at the individual distribution centers may go up, while packaging in different sizes would consume more time as well. (Zinn, 1990, page 1-2)

Labeling postponement

This type of strategy is helpful for the companies which send out their products under more than one brand name hence different brand labels would be required to meet the customer requirements. Normally the central warehouse sends the goods without any labels to the local distribution centers and after the labels are put on the products according to the specific order specifications. For example, food products may be sold by multi-national companies under different brands at various locations, the base manufacturing unit or central warehousing facility might use the original brand meant for the consumers of parent country. The final labeling would be done at different warehouses or distribution centers to meet the customers’ specific demands. This also helps in promoting the popular brand in a particular region. By postponing the labeling operations, the cost of carrying the necessary inventory of labels would be reduced largely at the central warehousing facility. However the labeling cost may increase marginally if the same is done at the individual localized warehouses since labeling in smaller lots at such warehouses would be more expensive than adopting to the policy of large-scale labeling done at the manufacturing end. (Zinn, 1990, page 1)

Apart from the postponement classification as mentioned earlier, Lee and Billington stressed on the form and time postponement strategies with the purpose of reducing the cost at different stages related to the manufacturing of goods while Bowersox and Closs focused on the types of manufacturing and logistic postponement that aimed to reduce the risk of anticipatory product or market commitment.

The following table describes the postponement strategy categories, while the same have positive affect on the working of supply chain network, for any organization: (Zhang & Tan, 2001, pages 4-7)

(Source: http://aisel.aisnet.org/cgi/viewcontent.cgi?article=1087&context=pacis2001, page 7 )

The time postponement strategy results in delaying the differentiation of product by many weeks thus saving the processing and transportation costs. The shipping of products from factory to individual distribution centers at various locations across the world can take many weeks. For example, marketing of HP desk-jet printers involved the strategy of “design for localization”, while postponing the localization step in the process from factory to the individual distribution warehouses. This has resulted in huge savings in time and cost for the company. Similarly, ‘form postponement’ type of strategy enables the organization to defer the point of differentiation in particularly when the standardization of components is required for better product integration.(Lee & Billington)

Warehouse role in supporting postponement strategies

The role of warehousing facilities has been traditionally limited to the stocking of inventory; the modern trends in warehousing policies have brought economic benefits to the organizations bringing customer service benefits as well. While customer service benefits would include full line and spot stocking, the value-added services are performed at the localized warehousing facilities. The economic benefits include seasonal sort-age as well as consolation of goods. As inventory handling and storage have been the basic functions of the warehouse, the handling functions are now extended to support the postponement strategies adopted by the companies periodically. These would include supporting the cross-docking, break-bulk and consolidating functions while postponement strategies are effectively supported with extended storage facilities that balance the supply and demand while keeping the track of market expectations. (Bowersox, “Supply Chain Logistics Management”)

In addition, the role of warehousing facilities has been described above with specific application for supporting the particular type of postponement strategy. It’s every organization’s goal to achieve reduction on the inventory levels in the maximum possible while postponing the operations at individual warehouses until the time and definite instructions from customer end are received. However warehouses have to realize that customer satisfaction should be the goal of all strategies, while achieving the same is an integrated process, involving all stages of supply chain management, from product manufacture to delivery.

Conclusion

While discharging the traditional function of inventory stocking and providing good customer service to the customers, warehouses have gone beyond these basic responsibilities as they are now recognized as the nerve centers for the companies that help the organization in meeting the customer requirement as well as speculating the same correctly. This is in particularly true for multinational companies which operate at global level as the regional warehouses support their postponement strategies for meeting the regional demands. However the type of postponement strategy should match with the warehouse function to produce the best coordinated results. Therefore it is essential that warehouse staff has the necessary training to upgrade their skill for meeting the aim of postponement strategies, in terms of economic and service benefits.