Postponement of Inventory Differentiation

8/13/2019 Postponement of Inventory Differentiation

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Product Proliferation

Variety of products has increased dramatically

Customer preferences

Competition

Globalization

Improved manufacturing techniques


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Resulting problems

Complexity

Greater variety of products

Different products for different markets

Difficulties in forecasting demand

More complex manufacturing facilities

Marketing, warehousing and distribution


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Increased costs

Forecasting

Production planning

Inventory holding costs

Production of unwanted items

Rework

Scrap


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Excess inventory

Safety stocks for each variation

Other problems

Increased delivery time

Delivery of wrong items

Stockout costs

Compliance with local content laws


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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


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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


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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


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Manufacturing Assembly Packaging Labeling

High uncertainty of

demand X X X X

Product is sold indifferent versions

X

Product is sold under

different brand names X

Product is sold in

different package

sizes

X

Product is sold in

several foreign

marketsX X X

Product has a high

unit value X X

Assembly increasesthe volume of the

productX

Product contains a

high proportion of

ubiquitous materialsX 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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Manufacturing and assembly postponement

Manufacturing and assembly costs

May increase

Smaller batch sizes

Duplicate facilities

Use of more expensive labor at decentralizedlocations

Or decrease

Use of less expensive labor at decentralized locations

Less production of unwanted goods, scrap, rework


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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 areperformed at decentralized locations

Importing components, not finished products


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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 nearcustomer


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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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Less finished goods inventories

May be stored in bulk form

Transportation costs should decrease

May be shipped in bulk form


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Labeling

Labeling costs

May increase

Smaller batch sizes

Duplicate facilities if labeling is decentralized

Or decrease

Less incorrectly labeled inventory to rework


Less finished goods inventories


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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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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 decentralizedlocations


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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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Faster response to customers

Product only has to be completed, notmanufactured from the beginning

Partially finished goods can be placed close tocustomers

Easier upgrades, service at customer location

Lower shipping costs

Bulk shipping, shipping of components, etc.


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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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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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Must evaluate performance of the entiresupply chain

Avoid local optimization

Economies of scale may not be the most efficientmethod overall

Organizational barriers

Dislocation of jobs

May create additional jobs

Blurred line between manufacturing and warehousing

Documents

Postponement of Inventory Differentiation