Postponement of Inventory Differentiation

1. 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

6. 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

7. 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

8. 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

9. 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

11. 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

12. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. Potential Benefits of Postponement • Lower inventory carrying costs • Lower risk of unsold items • Less complexity at centralized locations • Fewer part numbers • Fewer operations

22. 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.

23. 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

24. 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

25. 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

26. 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