Executive Briefings

Variations on Postponement      

Postponement, the process that delays the final configuration of a product until more accurate demand information is available, is gaining in importance, yet its value proposition is often misunderstood. Research carried out by the Zaragoza Logistics Center (ZLC) in collaboration with Deutsche Post World Net and DHL-Exel, clarifies the value of postponement, particularly for companies that might opt to use third-party logistics providers (3PL) to provide the service. It also explores the potential for 3PLs to offer services to smaller companies through postponement campus solutions.

The research focused on supply chains where a product differentiation activity (PDA) is executed by a 3PL on behalf of its customer in the distribution channel, i.e., it is postponed to occur downstream from the manufacturing plant. A PDA is any transformation activity that adds product-specific features to a generic work-in-progress, thus creating different variants of the same product. Examples of a PDA include kitting a consumer printer model with country-specific cords and stickers, adding country-specific labels to medications, co-packing fast-moving consumer goods with promotion-specific gifts, or assembling the same car bumper with model-specific fog lamps.

The research, led by Fabrizio Salvador and Alessio Trentin at the ZLC, is based on 10 case studies conducted at DHL facilities that provide postponement services for customers in various industries including consumer electronics, health care, and automotive. Four types of 3PL-enabled postponement service were identified.

The first variation on the theme is called From Forecast to Order Driven PDA postponement. In this type of postponement service, the PDA performed initially by the manufacturer based on demand forecasts is postponed for execution in the distribution channel by the 3PL based on actual customer orders. This eliminates much of the inventory risk for the manufacturer since the product is configured according to real market demand.

A second option, dubbed Remaining Forecast-Driven, occurs when the PDA is based on revised forecasts rather than actual customer orders. Again, the manufacturer benefits because its speculation risk is reduced due to tighter forecast windows.

Thirdly, the so-called Remaining Order Driven postponement variant enables customers to place large, but partially unspecified, orders early and then provide final product configuration quantities later in the order fulfillment process. The benefits of such enhanced customer service are evident in project-driven environments such as telecommunications equipment.

A fourth type of postponement service involves the 3PL performing a PDA that the manufacturer is unable to carry out in-house, e.g. because it is cost-prohibitive to establish a network of postponement facilities. This PDA Enabling postponement service allows the manufacturer to create a new business by introducing product variants that previously were beyond its reach.

Each of the four versions of postponement outlined above has a slightly different value proposition, disparities that should be taken into account by 3PLs when pitching for this type of business. But perhaps more importantly, the research reveals that postponement can be much more than a way to lower cost by reducing speculation risk; it can also be a means to grow revenue through improved responsiveness or increased product variety.

This is an important finding for both parties. Enterprises often overlook the potential for capturing market advantage when deploying a postponement strategy. Postponing the final product until more accurate customer demand information is known makes it easier for manufacturers to introduce variants, particularly smaller enterprises that lack the scale to support a wider product range. These capabilities also allow enlightened 3PLs to sell their postponement expertise more effectively. For example, postponement operations that open up new product possibilities can be marketed to manufacturers' sales and marketing as well as the supply chain department.

In spite of the opportunities, many smaller companies cannot pursue a postponement strategy because they lack economies of scale. Researchers also evaluated one potential solution to this challenge--a 3PL "postponement campus" where synergies are achieved by serving different customers in the same location. Campus solutions appear particularly appealing for PDAs that are labor-intensive since they allow flexible allocation of skilled operators and offer potential to consolidate administrative staff. Additional resources such as production equipment or IT systems can also be shared. Benefits are especially high if a 3PL can serve customers with complementary demand patterns in the same campus.

Postponement campuses are in their infancy and further investigation, such as a longitudinal study of the implementation of the campus solution(s), is needed. For more information on ZLC's postponement research, contact Jarrod Goentzel.
http://ctl.mit.edu/index.pl?id=10784

Postponement, the process that delays the final configuration of a product until more accurate demand information is available, is gaining in importance, yet its value proposition is often misunderstood. Research carried out by the Zaragoza Logistics Center (ZLC) in collaboration with Deutsche Post World Net and DHL-Exel, clarifies the value of postponement, particularly for companies that might opt to use third-party logistics providers (3PL) to provide the service. It also explores the potential for 3PLs to offer services to smaller companies through postponement campus solutions.

The research focused on supply chains where a product differentiation activity (PDA) is executed by a 3PL on behalf of its customer in the distribution channel, i.e., it is postponed to occur downstream from the manufacturing plant. A PDA is any transformation activity that adds product-specific features to a generic work-in-progress, thus creating different variants of the same product. Examples of a PDA include kitting a consumer printer model with country-specific cords and stickers, adding country-specific labels to medications, co-packing fast-moving consumer goods with promotion-specific gifts, or assembling the same car bumper with model-specific fog lamps.

The research, led by Fabrizio Salvador and Alessio Trentin at the ZLC, is based on 10 case studies conducted at DHL facilities that provide postponement services for customers in various industries including consumer electronics, health care, and automotive. Four types of 3PL-enabled postponement service were identified.

The first variation on the theme is called From Forecast to Order Driven PDA postponement. In this type of postponement service, the PDA performed initially by the manufacturer based on demand forecasts is postponed for execution in the distribution channel by the 3PL based on actual customer orders. This eliminates much of the inventory risk for the manufacturer since the product is configured according to real market demand.

A second option, dubbed Remaining Forecast-Driven, occurs when the PDA is based on revised forecasts rather than actual customer orders. Again, the manufacturer benefits because its speculation risk is reduced due to tighter forecast windows.

Thirdly, the so-called Remaining Order Driven postponement variant enables customers to place large, but partially unspecified, orders early and then provide final product configuration quantities later in the order fulfillment process. The benefits of such enhanced customer service are evident in project-driven environments such as telecommunications equipment.

A fourth type of postponement service involves the 3PL performing a PDA that the manufacturer is unable to carry out in-house, e.g. because it is cost-prohibitive to establish a network of postponement facilities. This PDA Enabling postponement service allows the manufacturer to create a new business by introducing product variants that previously were beyond its reach.

Each of the four versions of postponement outlined above has a slightly different value proposition, disparities that should be taken into account by 3PLs when pitching for this type of business. But perhaps more importantly, the research reveals that postponement can be much more than a way to lower cost by reducing speculation risk; it can also be a means to grow revenue through improved responsiveness or increased product variety.

This is an important finding for both parties. Enterprises often overlook the potential for capturing market advantage when deploying a postponement strategy. Postponing the final product until more accurate customer demand information is known makes it easier for manufacturers to introduce variants, particularly smaller enterprises that lack the scale to support a wider product range. These capabilities also allow enlightened 3PLs to sell their postponement expertise more effectively. For example, postponement operations that open up new product possibilities can be marketed to manufacturers' sales and marketing as well as the supply chain department.

In spite of the opportunities, many smaller companies cannot pursue a postponement strategy because they lack economies of scale. Researchers also evaluated one potential solution to this challenge--a 3PL "postponement campus" where synergies are achieved by serving different customers in the same location. Campus solutions appear particularly appealing for PDAs that are labor-intensive since they allow flexible allocation of skilled operators and offer potential to consolidate administrative staff. Additional resources such as production equipment or IT systems can also be shared. Benefits are especially high if a 3PL can serve customers with complementary demand patterns in the same campus.

Postponement campuses are in their infancy and further investigation, such as a longitudinal study of the implementation of the campus solution(s), is needed. For more information on ZLC's postponement research, contact Jarrod Goentzel.
http://ctl.mit.edu/index.pl?id=10784