Postponement of Inventory Differentiation

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Postponement of Inventory Differentiation

• Reduce Costs by Delaying Complexity-Adding
  Activities

2
Product Proliferation

• Variety of products has increased dramatically
• Customer preferences
• Competition
• Globalization
• Improved manufacturing techniques

3
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

4
Product Proliferation

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

5
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

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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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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

13
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