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 Dubey Associate Professor CMES, UPES

Submitted By: Neha Sukhija R300208034 MBA (LSCM) 3rd SEM 2008-10

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 consumers 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 highquality 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 products 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 , y 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. y 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/

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.

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

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 in place of customer order decouple point. 1. Selling from local stock to purchase manufacturer

Purchase

Manufacture

Assemble

Distributor

Seller

2. MTS- Make to Stock

Purchase

Manufacture

Assemble

Distributor

Seller

3. ATO- Assemble to Order

Purchase

Manufacture

Assemble

Distributor Seller

4. MTO- Make to Order

Purchase 5. Project

Manufacture

Assemble

Distributor Seller

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 j Delay critical product development decision _ Price postponement j Delay the pricing decision until customer demand is known _ Postponement of passage of title j Delay the transfer of product ownership from seller to buyer _ Demand postponement j 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 GMs 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 WU, Lei-Yu (2002) Context Conclusion & Finding Adoption of Postponement Case of Taiwanese IT firms Strategy in a global logistics was studied and studied system postponement benefitted it, different types of postponement was studied A Conceptual framework of Postponement Strategy postponed manufacturing practiced by Benetton was and its impact on global studied, increase in sales competitive performance. and reduction in inventory because of postponement. The benefits of design for Benefits of Postponement postponement Improving Supply Chain Performance and Managing Risk Under Weather-Related Demand Uncertainty Postponement Strategy in Supply Chain Management Postponement Strategies for channel derivatives Supply Chain Coordination, Price Postponement Different types of postponement strategy The value of postponing product differentiation until final distribution for manufacturers who market a family of product derivatives through multiple channels is examined.

Yang,B & Burns,N ( 2001)

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

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

Johnny WAN, (2006) M. Eric Johnson, (2000)

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 customers 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 companys flexibility to respond to customers 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. ii. iii. If it markets/produces products under different brand names. The final product is not labeled before receipt of purchase order. 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. ii. iii. iv. It markets/produces products in different bundles or sizes. The final product is not packed before the purchase order is received. After receiving orders, proper bundles are packed and shipped. 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. ii. iii. iv. It markets/produces products which are configured/customized from a base product using a number of common parts. The assembly of final product from base product is not made until purchase order is received. After receiving the order, final product is assembled/customized from the base product to meet the configuration requirements. 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. ii. It delays fully or partially manufacturing of process until it receives the order. 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 dateideally 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 products unique characteristics differs and customer order point is the point at which customer places order.

Point of Differentiation

COST
Customer Order Point

TIME

2.3 Factors Affecting Postponement Strategy There are four main drivers of postponement strategy, these are :y y y y 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 customers 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 customers demand and taste. With product proliferation, a companys 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:y y y y 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

y y y y

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:

y y

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. y y ANALYSIS OR RESOURCES NEEDED TO CARRY OUT RESEARCH Review Papers Online Journals decrease in cost increase in profit flexibility in organizations increase in customer satisfaction Application of postponement strategy in the production process of Liberty Shoes Ltd. y Benefits of postponement.

6. EXPECTED FINDINGS & CONCLUSIONS y y y y

7. LIMITATIONS & FURTHER SCOPE OF STUDY y

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 of postponement, 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 of postponement, 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, 3345 Akif Asil Bulgak, Ashish Pawar, (2006), Analysis of Postponement Strategies in Supply Chain, _stanbul Ticaret niversitesi Fen Bilimleri Dergisi