Postponement strategy is a concept in supply chain management where the manufacturer produces a generic product, which can be modified at the later stages before the final transport to the customer. Take for example an umbrella manufacturer who does not know what the demand will be for different coloured umbrellas. The manufacturer will manufacture all white umbrellas and dye them later when umbrellas are in season and it is easier to predict demand of each colour of umbrella. This way the manufacturer can stock up on white umbrellas early with minimal labour costs, and be sure of the demand before they dedicate time and money into predicting the demand so far in the future.
Postponement strategy is a business strategy which maximizes possible benefit and minimizes risk by delaying further investment into a product or service until the last possible moment. Within supply chain management (SCM), postponement is a deliberate action to delay final manufacturing or distribution of a product until receipt of a customer order. This reduces the incidence of wrong manufacturing or incorrect inventory deployment. Postponement strategies and practices serve to reduce the anticipatory risk in a supply chain.
Decoupling point is defined as the point in the value chain for a product, where the product is linked to a specific customer order. The point at which demand changes from independent to dependent. It is the point at which the firm becomes responsible for determining the timing and quantity of material to be purchased made or finished. It’s the last point at which inventory is held before finally going out to the customer. It divides operations stages for forecast driven and Customer order driven.
An example of this strategy is Dell Computers build-to-order online store. Dell has mastered the art of postponement for their custom-designed machines for individual consumers. When Dell started, this was not necessarily the case in the industry, however, Dell invented a new business model and leveraged postponement as a business model not as a supply chain strategy though, and it then designed their supply chain to support this business model.
The speculation strategy is really based on savings created through economies of scale, by creating and delivering the finished goods in bulk. The speculation strategy reduces the cost of logistics by maximizing the usage of resources like warehouses and trucks, and reduces the cost of manufacturing by running large production batches that improve throughput by reducing the cost of set-up changes and by reducing the raw material costs by buying in bulk. This strategy leverages the large lot-sizes to produce the economies of scale in manufacturing and distribution, but it is prone to having higher inventory costs due to higher inventory levels and obsolescence. As speculation strategy is based on creating economies of scale through mass production and distribution, the supply chain processes based on this strategy generally create stable plans without much volatility. The low volatility in plans does not require highly responsive supply chain design, especially when compared to the supply chains that cater to a postponement strategy.
One of the reference to the concept was in a paper by Zinn and Bowersox in the Journal of Business Logistics. They highlighted five types: Labelling, Packaging, Assembly, Manufacturing and Time Postponement strategy.
A successful example of Postponement strategy is the use of vanilla boxes. Semi-finished computers are stored in advance of seeing the actual demand for the finished products. Upon seeing the demand, thus with no residual uncertainty these vanilla boxes are finished by adding or removing components.
The three key interrelated decisions are: (a) how many different types of vanilla boxes to stock, (b) in what quantities, and (c) how to finish to meet the order most effectively
Development of Postponement strategy Concept in Supply Chain Management
Zinn and Bowersox in 1988 split up Postponement strategy into five different types to improve the distribution systems: four form Postponement strategy (labelling, packaging, assembly, and manufacturing) and time Postponement strategy. These strategies were created with the aim to save costs, and therefore Zinn and Bowersox (1988) created a useful cost-model to see how Postponement strategy affects each strategy with regards to cost.
In the first challenge, he criticised Bucklin’s and Zinn’s Postponement strategy theories as they lacked Postponement strategy application throughout the whole supply chain, since they only linked their theories to one of its levels (upstream – sourcing ; components, midstream – manufacturing, downstream – distribution).
The second challenge states that to cover the entire supply chain in conceptualization of Postponement strategy, a researcher would need to engage related concepts, e.g. just-in-time manufacturing and supply, efficient consumer response.
Globalization in Postponement strategy comes as the third challenge. He states that there are differences in language, culture across the world and that Postponement strategy is widely present in Western countries rather than emerging countries in Asia.
The fourth challenge discusses lack of typology in Postponement strategy. Researches should not only pay attention to manufacturing and logistics related Postponement strategy but also to service Postponement strategy, since the concept takes its place in services too.
Finally, the fifth challenge tells that in order to conduct a solid research plan on Postponement strategy one should consider the triangulation model with first step how Postponement strategy is implemented in a global supply chain, second step where, to what extent and how Postponement strategy is applied, third step benefits of Postponement strategy in the customized supply chain.
In Janus D. Pagh and Martha C. Cooper’s “Supply Chain Postponement Strategies: How to Choose the Right Strategy” the authors look closely at postponement primarily in terms of two processes, manufacturing and logistics. Here is the basic diagram the authors present. This diagram also importantly considers when the most effective time is to use these strategies.
Partial Postponement Strategy
Full Speculation Strategy Logistics Postponement
Speculation Low production costs Low production costs
High inventory costs Low/Mid inventory costs
Manufacturing Low distribution costs High distribution costs
High customer service Low/Mid customer service
Partial Postponement Full Postponement Strategy
Strategy Manufacturing Mid/High production costs
Postponement Postponement Mid/High production Low inventory costs
costs High distribution costs
Mid/High inventory costs Low customer service
Low distribution costs Mid/High customer service 3951605-247523000
The speculation strategy presented above is one that follows the traditional model of supply chains. It is a make-to-stock process that follows the common process of supplying the manufacturer, product assembly, finished goods packaging, and transportation to the customer. One benefit to a full speculation strategy is the gains from economies of scale, as supplies can be ordered in larger quantities to fulfill high volume production. The reason many companies have moved to a partial or full postponement strategy are due to the risks of speculation.
We will look more closely now at some of these strategies. What are companies doing to move early supply chain processes to the end, and how can these changes impact the overall effectiveness and efficiency of the supply chain. The two areas where we will consider are:-
Looking at Costs Across the Supply Chain
Moving from a Warehouse to a Distribution Center
Looking at Costs Across the Supply Chain
The Dell Computer Corporation is a strong example of manufacturing postponement. In the personal computer (PC) market historically products were made-to-stock. PC’s were assembled as a finished product, shipped to the store, and kept in inventory. What Michael Dell saw as an opportunity became a new model for the entire industry. Instead of assembling a complete PC, Dell created a supply chain where the company would hold inventory of component parts in a few centralized locations, and as customer’s placed their orders, a Dell computer would be assembled exactly to the customer’s requirements. Distribution and shipping is direct to the customer.
This system allowed Dell to become more flexible in their supply chain and created efficiencies that other companies in the industry were slow to enjoy. One such efficiency was reduced lead times. As many pre-assembled PC’s were manufactured overseas, the lead time for shipping to the customer was 4-6 weeks. With the Dell model, a PC could be fully assembled in one to two days, and the customer would receive their order by the end of the week. This process alone significantly reduces the holding costs incurred during shipping as well as improving customer satisfaction.
With this strategy of postponement, Dell commonly holds inventory for less than 4 days. By using a postponement assembly strategy, Dell is able to minimize their inventory, generate cash much faster and reinvest this cash into improving their supply chain model.
Moving from a Warehouse to a Distribution Center
The cost savings of postponement are in the reduced inventory holding costs a warehouse incurs, improved demand fulfilment across the supply chain, and shipping cost reductions. This is a bit of a unique way to view postponement, however it considers customer demand as the driver in the supply chain to pull from the manufacturer made-to-order, as opposed to a push system for products that are made-to-stock.