Postponement how it may help the firm in controlling total cost
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Over the past 10 years, there has been a growing consciousness in industry towards the importance of effective Supply Chain Management (SCM). The term supply chain has become a standard part of the business vocabulary. There are as many definitions for the term as articles or books on the topic, but the general idea is integration. Excellent performance can be achieved by taking an integrated view of all the activities required to convert raw materials into finished goods. To archive that kind of performance, companies are now focusing on the logistics activities. Logistics activities have gained increasing strategic importance for most companies. Fixed costs of production have increased, consumer demands have become more complex and are harder to predict, both in time and place (Hoek, 1998a). Technology is rapidly changing and product life cycles have shortened while product range has increased (Gattorna and Walters 1996).
Companies are now faced with the challenge of producing an increasingly large variety of products in a responsive manner while keeping materials and inventory to a minimum. Inventories are required to buffer the uncertainties and inefficiencies. Therefore, inventory has become a crucial part of supply chain management. The manufacturing world is facing the challenge of delivering what the customers want, when they want, while meeting the financial need to keep inventory levels down. In order to stay survive in the market, business strategies must be consider and fully implement. The most effectiveness strategy in today era will be using postponement strategy.
Why choose Postponement
Postponement refer to the extent that parts of manufacturing and logistics operations can be delayed until customer commitments are known and the uncertainty associated with operations can be reduced or eliminated’ (Pagh and Cooper, 1998). Postponement is essentially a type of network configuration that aims to reduce risk by making Trade-offs between flexibility and costs. On one hand postponement has the potential to increase a companies’ flexibility to respond to changes in demand from different markets, improve responsiveness to orders and reduce investment in inventory (Lee et al, 1993). At the same time, the strategy can make a product more expensive to produce since economies of scale may be sacrificed for a more fragmented system of production (Waller et al, 2000). Transport costs can also rise since products may be shipped on demand and in smaller quantities.
Postponement is also known as delayed differentiation, is an “adaptive supply chain strategy that enables companies to dramatically reduce inventory while improving customer service” (Muzumdar et al., 2003). The concept is to delay the point of commitment of work-in-process inventory into a final product and, thereby, gain control of efficient asset utilization in a uncertain environment.
Nowadays, consumers are demanding higher levels of customization, yet are not willing to pay extra or wait longer. Product modification is a common challenge for firms for providing customized products. Postponement can be used to cope with this challenge as component commonality is one of the most popular supply chain strategies to tackle the challenges such as difficulties in estimating demand, controlling inventory, and providing high service levels for customers. Postponement can be achieved by postponing the configuration of generic components into a wide variety of end products. In postponement a product is processed till it remains generic and the customization is delayed until demand is realized. A generic product offers more flexibility when demand is uncertain since it can be transformed into any final product. Instead of keeping high finished goods inventory or suffer stock outs which can result in lost sales or interrupt plant production schedules, the customization of the product can be delayed until customer orders arrive.
Postponement concept of delaying the point of product differentiation has been found to be an effective strategy in product variety. Postponement delays product differentiation at a point closer to the customer. This involves designing and developing generic products that can be customized once the actual demand is known. It also involves the implementation of precise inventory approach to position inventory farther away from the customer while satisfying the service levels and reducing the inventory costs. Postponement lessens the forecasting horizon and thereby solves the uncertainty of end product demand (Whang and Lee, 1998). Also better inventory performance can be achieved by redesigning a product or its supply chain.
How to Implemented Postponement Strategy
Implementing a postponement strategy involves
Companies are now faced with the challenge of producing an increasingly large variety of products in a responsive manner while keeping materials and inventory to a minimum. Inventories are required to buffer the uncertainties and inefficiencies. Therefore, inventory has become a crucial part of supply chain management. The manufacturing world is facing the challenge of delivering what the customers want, when they want, while meeting the financial need to keep inventory levels down. In order to stay survive in the market, business strategies must be consider and fully implement. The most effectiveness strategy in today era will be using postponement strategy.
Why choose Postponement
Postponement refer to the extent that parts of manufacturing and logistics operations can be delayed until customer commitments are known and the uncertainty associated with operations can be reduced or eliminated’ (Pagh and Cooper, 1998). Postponement is essentially a type of network configuration that aims to reduce risk by making Trade-offs between flexibility and costs. On one hand postponement has the potential to increase a companies’ flexibility to respond to changes in demand from different markets, improve responsiveness to orders and reduce investment in inventory (Lee et al, 1993). At the same time, the strategy can make a product more expensive to produce since economies of scale may be sacrificed for a more fragmented system of production (Waller et al, 2000). Transport costs can also rise since products may be shipped on demand and in smaller quantities.
Postponement is also known as delayed differentiation, is an “adaptive supply chain strategy that enables companies to dramatically reduce inventory while improving customer service” (Muzumdar et al., 2003). The concept is to delay the point of commitment of work-in-process inventory into a final product and, thereby, gain control of efficient asset utilization in a uncertain environment.
Nowadays, consumers are demanding higher levels of customization, yet are not willing to pay extra or wait longer. Product modification is a common challenge for firms for providing customized products. Postponement can be used to cope with this challenge as component commonality is one of the most popular supply chain strategies to tackle the challenges such as difficulties in estimating demand, controlling inventory, and providing high service levels for customers. Postponement can be achieved by postponing the configuration of generic components into a wide variety of end products. In postponement a product is processed till it remains generic and the customization is delayed until demand is realized. A generic product offers more flexibility when demand is uncertain since it can be transformed into any final product. Instead of keeping high finished goods inventory or suffer stock outs which can result in lost sales or interrupt plant production schedules, the customization of the product can be delayed until customer orders arrive.
Postponement concept of delaying the point of product differentiation has been found to be an effective strategy in product variety. Postponement delays product differentiation at a point closer to the customer. This involves designing and developing generic products that can be customized once the actual demand is known. It also involves the implementation of precise inventory approach to position inventory farther away from the customer while satisfying the service levels and reducing the inventory costs. Postponement lessens the forecasting horizon and thereby solves the uncertainty of end product demand (Whang and Lee, 1998). Also better inventory performance can be achieved by redesigning a product or its supply chain.
How to Implemented Postponement Strategy
Implementing a postponement strategy involves
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