UNIVERSITY OF PETROLEUM & ENERGY STUDIES

DEHRADUN

Harnessing Energy through Knowledge

SYNOPSIS

ON

POSTPONEMENT STRATEGY- A CASE STUDY

APPROACH OF LIBERTY SHOES Ltd.

Under Supervision of:

Dr. Rameshwar DubeyAssociate Professor

CMES, UPES

Submitted By:

Neha SukhijaR300208034

MBA (LSCM) 3rd SEM2008-10

1. INTRODUCTION

In global competitive scenario, customers are becoming more and more demanding in terms of

product preferences, meanwhile companies are competing to offer greater product variety and

customize to consumer’s needs (The Economist 2001, Time 2002, and Business Week 2002). This

trend combined with an increased pace of technological change and shortening of product life cycles

are leading to an increased proliferation of product varieties. However, companies with expanding

product varieties often face the challenge of accurate demand forecasts, dealing with the complexity

in supply chain and manufacturing processes, managing inventory proliferation, and providing high-

quality service to customers.

Postponement or delayed product differentiation has been adopted by several companies as a

strategic mechanism to manage the risks associated with product variety and uncertain sales, and

as a powerful way to enable cost-effective mass customization. The concept of postponement is

to re-design the product or production process so that the point of differentiation can be delayed

as much as possible. In other words, postponement is to delay the commitment to a product’s

characteristics until more information is available, so the decisions about the product can be

made more accurately. Postponement itself is an operational concept; however the motivations

for adopting this practice are often at the strategic level, where critical business issues could be

addressed by innovative applications of the postponement concept. On the other hand, these

strategic issues are often the opportunities for implementing a postponement strategy.

1.1 Postponement Strategy

Postponement in literal sense means delaying the time during which some action is awaited or it

is simply putting off any action to a future time.

Postponement means building partial products up to a “decoupling point”, or “push-pull

boundary”, and wait until actual order signals are received to complete the products.

Postponement is a business strategy which aims at maximizing possible benefits and minimizing

risk by delaying any further investment on product or any activity until the last moment.

The concept of postponement was first suggested by Alderson in 1950. He recommended that

producers should add options or make differentiating changes to the product close to the time of

purchase by the end use customer. (Walker et al. 2000). The advantage of this approach is easy

to see. Consider the entire supply chain of a product and try to locate the point at which the

product has been manufactured or has assumed the final form. How remote is it from the

consumer in physical terms or in terms of time? If we give the final form or configure the

product close to the consumer, will it really give us any advantage?

The answer to the question is intrinsically related with the product type; and, following Fisher's

cue, there are reasons to believe that some benefit can be achieved by postponement. This can be

achieved by better control of demand information as the final configuration of the product can be

manipulated based on more up to date demand information.

As per APICS Dictionary, 11th edition ,

Decoupling point is the location in produced structure or distribution network where

inventory is placed so as to create independence between processes.

Decoupling Point is an important and a strategic decision which determine the lead time of

customers and how much investment is required to be made in inventory.

Order Penetration Point- In logistics this point plays a key role as it is the point where

the product becomes distinct for any customer. Downstream from this point is driven by

customers and upstream processes are driven by forecasts and plans. (PRINCIPLE OF

POSTPONEMENT)

Today customer expectation has risen to a marked level and if this is not fulfilled then, a

company cannot sustain in this global competitive environment and with increasing customer

expectations, companies are now less willing to hold finished goods inventory, and thus it is a

kind of challenge faced by all the companies. One innovative response to this challenge is

postponement which is also known as “delayed differentiation.” Postponement is an adaptive

supply chain strategy that enables companies to dramatically reduce inventory while improving

customer service.

Source: www.supplychainonline.com/

Source: www.marcbowles.com/.../module10/m10two3.htm

A postponement strategy aims at delaying some supply chain activities until customer demand is

revealed in order to maintain both low system wide cost and fast response.

Taking the example of Italy based clothing company Benetton. During the 1980s and early

1990s, Benetton was the world leader in the casual apparel market with stores spread across the

world. The company was well known for its postponement strategy, wherein the dyeing of the

garment was postponed till the colors in vogue for the season were identified.

Every year Benetton came out with two collections, one for each season (spring/summer and

fall/winter). The collection primarily comprised of a base collection , which included the classic

items, and garments according to the prevailing trends. For collections that were to reach the

stores in January every year, the final designs were decided in March of the previous year. The

store owners could place orders for the new designs till July. In July, Benetton began producing

the clothes, considering the first 10% of the orders. Benetton's innovative postponement strategy

allows product customization to be economically maximized. In the clothing industry,

traditionally the yarn is first dyed and then knitted into garments, which is a lengthy process;

Benetton first knits garments using bleached yarn and postpones dyeing until a latter step of

production.17 Before postponement was used, there were always too many garments in colors

customers did not want, whereas colors in demand were always sold out. The new strategy

allows Benetton to be extremely responsive to rapid changes in customer demand for different

colors in clothing. It also permits higher customer service levels.

Postponement strategy requires fast and accurate information.

5 Activities in Supply Chain

1. Purchase

2. Manufacturer

3. Assemble

4. Distributor

5. Seller

Put the symbol Ω in place of customer order decouple point.

1. Selling from local stock to purchase manufacturer

Purchase Manufacture Assemble Distributor Ω Seller

2. MTS- Make to Stock

Purchase Manufacture Assemble Ω Distributor Seller

3. ATO- Assemble to Order

Purchase Manufacture Ω Assemble Distributor Seller

4. MTO- Make to Order

Purchase Ω Manufacture Assemble Distributor Seller

5. Project

Ω Purchase Manufacture Assemble Distributor Seller

The locations in the product structure or distribution network where inventory is placed to create

independence between processes or entities. Selection of decoupling points is a strategic

decision that determines customer lead times and inventory investment.

Postponement : A product design strategy that shifts product differentiation closer to the

consumer by postponing identity changes, such as assembly or packaging, to the last possible

supply chain location.

1.2 Types of Postponement Strategy

Purchasing Postponement

In this the purchasing of some fragile and expensive materials is postponed for some

time. It would be a demand driven information system. As and when the demand is

placed or the order is received, purchasing of that expensive raw material is made.

Manufacturing Postponement

In this purchasing of raw material is made but goods are not produced, they are in semi

finished state and can be customized quickly in production facilities.

Today many manufacturers and retailers are turning towards postponement strategy to

strike the right balance between customer demand and inventory. By holding inventory in

a less finished state will be a better way as according to the customer need, final or

finished product would be produced and demanded, thus it will offer greater

customization options. It involves redesigning of old manufacturing process. The

manufacturing postponement strategy can be successfully applied when it is vital to have

inventories close to customers, and to the extent that no specialized manufacturing

capabilities (e.g. technological or knowledge based) or highly restrictive economies of

scale, requires that the operations are performed centrally

Logistics Postponement

Products in semi-finished forms and can be customized quickly in production facilities

close to customer. Products to be produced are forecasted and then manufacturing is also

done, but it is finally customized in production facilities close to customer. By employing

this strategy, the anticipatory nature of logistics is reduced or completely eliminated,

since products are distributed directly to retailers/customers.

Time Postponement

Time-based postponement refers to the intentional delay of activities to a later time and it

can be implemented without changing the sequence of activities.

Time-based postponement refers to the intentional delay of activities to a later time and it

can be implemented without changing the sequence of activities. Time-based

postponement focuses on finding the best location to position the decoupling points and

should include all decisions that increase the cash-value of the product such as

manufacturing (changes in form or identity) and logistics (changes in place).

Other Postponement Strategies

_ Product development postponement

Delay critical product development decision

_ Price postponement

Delay the pricing decision until customer demand is known

_ Postponement of passage of title

Delay the transfer of product ownership from seller to buyer

_ Demand postponement

Split demand due to capacity constraint

Postponement by Changing the Sequence of Activities

Postponement by changing the sequence of activities is implemented by changing the design of

the products, the manufacturing processes, or the supply chain network structure. The objective

is to move the actual transformation in terms of form or identity of the product as close to the

end customer as possible by moving the point of product differentiation closer to the market

(Mason Jones and Towill 1999). The point of product differentiation is where common raw

materials, parts or sub-components become multiple product derivatives.

In the case of the HP DeskJet-Plus printer, the activities required to manufacture and package a

printer were: manufacture and test subassemblies (logic boards and printer head boards), and

then put subassemblies together including motors, cables, key pads, chassis, gears, and printed

circuit boards to produce working printers.

1.3 Benefits of Postponement Strategy

1. Improvement in customer satisfaction

By applying postponement strategy to the product or activity wide range of new

customized and innovative products are available that leads to customer satisfaction.

Moreover by applying postponement strategy, another benefit that could be achieved by

applying postponement strategy is reduction of lead time as only customized products are

produced so it leads to improvement in customer satisfaction. For Example, on the basis

of demand information Benetton applied postponement strategy and hence improving the

customer satisfaction.

2. Reduction in inventory cost

Inventory costs shifts upstream to less expensive generic products, which also reduces

inventory obsolescence costs that enables better planning and allocation of resources by

reducing the forecasting horizon, and even successful implementation of postponement

strategy can reduce the cost by 30 to 40%..For instance, the main motivation for General

Motors to adopt software postponement was to reduce physical costs. With hundreds and

thousands of software defined variety of Electronic Control Units (ECUs), GM found it

could not handle the proliferation of the physical ECUs on the assembly plants and

started postponing the software customization of ECUs from its suppliers to assembly

plants and dealerships. In GM’s postponement application, evidences have been found

that postponement generates value through lowering work-in-process inventory and

reducing costs caused by complexity.

3. Improvement in order fill rates

Since finished goods are produced on the basis of customer demand, it is made from

generic components so companies are able to deliver finished goods on time.

4. Other Benefits

i) Inventory Flexibility

ii) Freight Efficiency

iii) Cost Reduction through bulk shipping

iv) Speed

v) Legal(Tax & Duties)

1.4 Challenges of Implementing Postponement Strategy

Since postponement often involves a fundamental redesign of decade-old manufacturing

processes, its implementation can be challenging, as the same old process is reviewed again and

the activity which could add some more value to the product or the activity which cause increase

in lead time is reduced, hence improving supply chain performance, but still it is difficult to

implement as the employees are against accepting the new changes as they do not want to follow

new trend, moreover there is risk as well. However, this can be accomplished through an

incremental implementation strategy.

Ensuring proper alignment across the organization, as well as with suppliers and customers, is

one of the most significant challenges companies face when implementing postponement.

1.5 Enablers of Postponement

A number of market leaders have begun to view effective supply chain management as a top

priority and are more willing to take calculated risks.

• Advances in information technology allow companies to streamline their business processes

and to gain a degree of visibility into the supply chain that was previously unavailable.

• Advanced inventory optimization technology from companies like Oracle now allows for

decision support regarding where to postpone, when to postpone, how to postpone.

2. LITERATURE REVIEW

Author, Year Context Conclusion & Finding

WU, Lei-Yu (2002) Adoption of Postponement Strategy in a global logistics system

Case of Taiwanese IT firms was studied and studied postponement benefitted it, different types of postponement was studied

Yang,B & Burns,N ( 2001) A Conceptual framework of postponed manufacturing and its impact on global competitive performance.

Postponement Strategy practiced by Benetton was studied, increase in sales and reduction in inventory because of postponement.

Aviv, Y. and Federgruen, A. (1999)

The benefits of design for postponement

Benefits of Postponement

Frank Y. Chen, Candace A. Yano (2009)

Improving Supply Chain Performance and Managing RiskUnder Weather-Related Demand Uncertainty

Supply Chain Co-ordination, Price Postponement

Johnny WAN,(2006)

PostponementStrategy in Supply Chain Management

Different types of postponement strategy

M. Eric Johnson,(2000)

Postponement Strategies for channel derivatives

The value of postponing product differentiation until final distribution formanufacturers who market a family of product derivatives through multiple channelsis examined.

This Postponement concept was traced back many years ago approximately 50 years ago but

logistics researchers were not able to define or understand this concept. It was around 10 years

ago that logistics researchers began to understand, define and study this concept. In the past five

years many companies have started understanding this concept and applied it into their product

flow, process flow and derived benefits out of it. They have applied postponement as their

supply chain strategy to have a winning edge over its competitors.

Postponement as is discussed earlier is postponing a supply chain activity for a certain period of

time to eliminate the risk of loss because of demand uncertainty. Postponement could be applied

in various activities like in labeling, packaging, manufacturing, and by using simulation model it

would be made clear that which postponement strategy would be useful in which condition. Over

the past two decades logistics activities have gained importance for most of the companies as

consumer demand today has become more and more complex and difficult to predict.

Technology has also changed, it is rapidly changing, product life cycle is shortening and product

variants are increasing. So, now the companies are facing a most important challenge of being

responsive towards the customer’s ever changing and increasing demand, that too with minimum

cost, minimum inventory level. Thus, it has emerged as a greater challenge for the upcoming

companies or industries. Forecasting has become one of the most important issue in this new

market so the companies face the challenge of predicting the market demand with minimizing

risk of holding inventory.

So, now companies are using postponement or in more generic terms mass customization to

improve customer service and minimizing risk. Postponement has the potential to increase or

enhance the company’s flexibility to respond to customer’s demand, change in demand from

different markets and reducing investment in inventory. This strategy can even make a product

expensive because of fragmented system of production, moreover it could even lead to increase

in transportation costs because products may be shipped on demand and in smaller qualities.

2.1 Postponement Literature: An Overview

Development of Postponement Strategy

The principle of postponement was traced back in the year 1920s and empirical research dates

back to the 1960s. But strong response towards postponement was developed after research

undertaken by Zinn and Bowersox in 1988.

In their paper Zinn and Bowersox defined and analyzed five different types of postponement that

is, labeling, packaging, assembly, manufacturing and time. They used simulation model to define

which strategy would be useful in which condition. Although this concept was first proposed in

early 1950s (Alderson 1950, Buklin 1965) but interest in this concept by Zinn and Bowersox in

1988. They examined the benefits of postponement over traditional forecasting strategy of

business. They found that products marketed under different brand names are benefitted from

labeling postponement and products sold in various configurations are benefitted from assembly

postponement. Taylor, in 1996 noted that postponement strategy is basically useful and

important for an international enterprise as international enterprises are encountered by greater

degree of risks because of diverse markets and extensive supply chains thus encounter greater

degree of risk resulting from inventory management.

As per the study conducted by Lei-Yu, they studied Taiwanese- information technology firms for

understanding postponement strategy. The IT sector was selected as it was characterized by high

product values, short product life cycle and high demand for customization, and IT industry

provides a rich data set on postponement behaviors, and the conclusion drawn from this data is

useful for managers. Taiwanese IT industry was small as compare to U.S and Japanese

production technologies but it is the largest OEM for personal computing products. For example,

in 1998 IBM, HP, Dell and Compaq purchased over 11.5 billion $ USD in OEM personal

computing from Taiwan. Taiwanese IT firms had rather spend a substantial portion of their USD

to improve logistics and manufacturing efficiency and this logistics research in combination with

trial and error resulted in implementation of form postponement strategies by these IT firms.

A firm is said to practice labeling postponement if it satisfies following four criteria:

i. If it markets/produces products under different brand names.

ii. The final product is not labeled before receipt of purchase order.

iii. When orders are received, the corresponding warehouse units then label the products

with appropriate brand name logos and include the corresponding instruction document

manuals and warranty documents.

iv. Labeling activities are conducted at overseas units.

Labeling postponement reduces depreciation of inventory of products. Eg. Compal use labeling

postponement, it labels the notebook PCs at its local facility.

A firm is said to practice packaging postponement if it satisfies following four criteria:

i. It markets/produces products in different bundles or sizes.

ii. The final product is not packed before the purchase order is received.

iii. After receiving orders, proper bundles are packed and shipped.

iv. Packaging activities are conducted at its overseas unit.

Packaging postponement reduces inventory depreciation for products. Eg. D.Link package

Ethernet cards after receiving the orders.

But, realistically seeing packaging postponing also cause delay in labeling.

A firm is said to practice assembly postponement if it satisfies following four criteria:

i. It markets/produces products which are configured/customized from a base product using

a number of common parts.

ii. The assembly of final product from base product is not made until purchase order is

received.

iii. After receiving the order, final product is assembled/customized from the base product to

meet the configuration requirements.

iv. Assembly activities are conducted at its overseas unit.

Assembly postponement reduces cost of depreciation on the value of intermediate products.

A firm is said to practice manufacturing postponement if it satisfies following criteria:

i. It delays fully or partially manufacturing of process until it receives the order.

ii. Manufacturing activities are conducted at overseas unit.

Realistically, manufacturing postponement can also cause assembly, packaging and

labeling postponement to be delayed.

2.2 Implementation of Postponement Strategy in various industries

Hewlett- Packard reported one of the early application of postponement (labeling, packaging,

manufacturing, assembly & time) in computer industry.

HP manufactures printers in U.S and distribute it globally through its three distribution centers in

Europe, U.S and Far East. Earlier all the requirement of making printers were fulfilled in U.S

factory and the finished products was shipped to three distribution centers. Transit time to

distribution centers was quite long which resulted in holding of large safety stock by distribution

centers. But later HP redesigned it process, it produced generic printer at factory and shipped it

to the distribution center for final customization. The result from localization of distribution

centers proved to be positive. It caused reduction in inventory costs and customer service was

improved. Pipeline inventory also lowered. Moreover, it resulted in their product being more

marketable.

Dell also used bulky differentiated products, eg. Desktops and drivers, thus it adopted the

strategy of Build To Order (BTO). Dell has its core competency in least assembly time. They

have fastest assembly time and have shorter value chain. They do not keep inventory in hand,

and make the product as and when they receive orders from customers and then they finally

deliver it. Thus, they are using Build To Order (BTO) strategy.

BMW also had a vision that every customer should get his/her individual car at a confirmed date-

ideally at his/her desired date. They had their customer oriented sales and a build to order

process. Their methodology is that they have online ordering process at dealers, and on

information on the basis of order status deliver the car to the customer. Thus, by using BTO

strategy company is able to achieve the objective of reduction in lead time.

Benetton also used postponement strategy. They used manufacturing postponement so that better

management of forecasts could be made. This is a very suitable approach for innovative products

and products which have shorter life cycle and high risk of obsolescence. Benetton also used an

innovative manufacturing based on postponement. Benetton does not die yarn rather it makes the

sweater by knitting the plain wool and dye it when it receives order from customers. But, in this

case plain sweaters made by Benetton are required in sufficient quantity in inventory to enable

quick dyeing and distribution. Thus, it enabled Benetton to react more efficiently to demand.

Thus, in order to understand the point where postponement strategy could be applied, it is

necessary to understand the concept of point of differentiation and customer order point. Point of

Differentiation is the point where the product’s unique characteristics differs and customer order

point is the point at which customer places order.

Customer Order Point

Point of Differentiation

TIME

COST

2.3 Factors Affecting Postponement Strategy

There are four main drivers of postponement strategy, these are :-

Demand for customization

Modularity in construction

Product value

Product Life Cycle

Modularity is expected to induce assembly postponement because to perform assembly

postponement a product should be comprised of independent modules. But modularity cannot be

applied to every product thus it is necessary to first understand the product characteristic that

could be benefitted from modular designs.

2.4 Benefits of Postponement

Sending customer demand and correspondingly responding to that demand are two different

things and in today scenario it is of utmost importance to quickly respond to the customer’s

demand, tastes and needs. As there are so many products and options available to customers, so

it becomes all the more important to respond to customer’s demand and taste. With product

proliferation, a company’s product design and supply chain strategy becomes critical to

profitability. Designing products for postponement and performing last stage production as close

to demand is vital for profitability. Thus, companies need to put the right products into right

hands at right time for the right cost.

Few benefits of this model are:-

Minimize wrong inventory

Use of low-cost country manufacturing of components become more effective

Customers are provided with more options available to them.

Inventory flexibility

Apart from the above mentioned general benefits, companies that are outsourcing the product

completion function also find following benefits to be true

Faster access to global market with fewer assets and capital

Richer customer insights are gained for new products

Ability to focus on innovation and product design for supply

There is time to concentrate on high intellectual property items and not mundane

execution tactics.

Strong trust based relationship between OEM & service provider

Respond to demand more profitably

Here literature review indicates that how various industries have adopted postponement

strategy successfully is given in tabulated form:

3. RESEARCH METHODOLGY

This case study will be based on qualitative research methods where the perception of

individuals will be the focus of the study, in naturally occurring situations. Case study research

method as an empirical inquiry investigates a contemporary phenomenon within its real-life

context, particularly when the boundaries between phenomenon and context are not clearly

evident and when multiple sources of evidence are used (Yin, 1984). Here in the real time case

will be studied as the production process of Liberty Shoes Ltd. will be studied and then point of

differentiation would be studied where postponement would be applied.

4. RESERCH PROBLEM/HYPOTHESIS

The research statement is:

(1) How postponement strategy will help Liberty Shoes Ltd. to improve their sales

revenue by reducing inventory level of obsolete items. The measures that will be

adopted to study include financial and non- financial measures.

(2) The adoption of postponement strategy helps Liberty Shoes Ltd. to improve ROI.

5. ANALYSIS OR RESOURCES NEEDED TO CARRY OUT RESEARCH

Review Papers

Online Journals

6. EXPECTED FINDINGS & CONCLUSIONS

decrease in cost

increase in profit

flexibility in organizations

increase in customer satisfaction

7. LIMITATIONS & FURTHER SCOPE OF STUDY

Application of postponement strategy in the production process of Liberty Shoes

Ltd.

Benefits of postponement.

8. REFERRENCES

AME Info (2004) Manufacturing Postponement Strategies come of age

Bruce Hildenbrand CPIM, Mid-Hudson APICS, (2008) ‘Where is your decoupling point’

APICS, Oracle, Caps Gemini Ernst & Young, ‘The Adaptive Supply Chain: Postponement for Profitability’

Philip J. Bullock, (2002) ‘Knowing when to use Postponement’

Zinn, W. and Bowersox, D. J. (1988), ‘Planning physical distribution with the principle ofpostponement’, Journal of Business Logistics, Vol. 9, No. 2 pp.117-136.

Pagh, J. D. and Cooper, M. C.(1998), ‘Supply chain postponement and speculation strategies:How to choose the right strategy’, Journal of Business Logistics, Vol. 19, Iss. 2; pp. 13- 32

Hoek, R. I. (1999), ‘Postponement and the reconfiguration challenge for food supply chains’,Supply Chain Management, Vol. 4, Iss. 1; pg. 18

Feitzinger, E. and Lee, H. L. (1997), ‘Mass customization at Hewlett-Packard: The power ofpostponement’, Harvard Business Review, Jan-Feb 1997, pp. 117-116.

Frank Y. Chen, Candace A. Yano (2009), ‘Improving Supply Chain Performance and Managing Risk Under Weather-Related Demand Uncertainty’, Department of System Engineering and Engineering Management, Department of Industrial Engineering and Operations Research

Johny Wan (2006), ‘Postponement Strategy in Supply Chain Management’, Institute for Manufacturing and University of Cambridge

M. Eric Johnson, Emily Anderson (2000), ‘Postponement Strategies for channel derivatives’, J/A Article, November 2001, Vol. 11; no.1

Christopher S. Tang (2006), ‘Robust strategies for mitigating supply chain disruptions’, International Journal of Logistics: Research and Applications, Vol. 9, No. 1, March 2006, 33–45

Akif Asil Bulgak, Ashish Pawar, (2006), ‘Analysis of Postponement Strategies in Supply Chain’, _stanbul Ticaret Üniversitesi Fen Bilimleri Dergisi