Most small and medium-sized enterprises (SME) forego running a postponement supply chain strategy because they believe the success and failure of the strategy is entirely dependent upon them having strong purchasing power and economies of scale. While a postponement supply chain strategy does mitigate risk for large build-to-order companies operating in demand-driven industries, it simply doesn’t mean that a company has to be a dominant market player in order to benefit from its push-pull doctrine. A small company can run a postponement strategy provided it sets it up properly.
A Customised Order Fulfillment Strategy
A postponement supply chain strategy is nothing more than an order fulfillment strategy, one that reduces risk by making sure the company only manufactures, ships and invoices a customer what they want, when they want it. Ultimately, it’s a strategy that allows a company to deliver a customised product offering at the last possible moment. This allows the company to respond to sudden and unforeseen increases in customer demand by preparing most of the finished good well in advance of receiving the customer’s order.
The key is to manufacture, assemble, label and package a majority of the product and then hold it in stasis until the customer decides upon the final, distinguishable option they require. In essence, the company makes most of the finished good and then waits for the customer to decide upon what should be modified and when. So, how can an SME reduce risk with a postponement strategy? More importantly, what makes it so easy-to-manage and how should an SME go about setting it up?
Reducing Risk With a Postponement Strategy
There are essentially two benefits for companies that use postponement strategy. The first includes reducing, and or better managing, a portion of the company’s labour costs for each unit manufactured, assembled or sold. The second includes measuring the company’s costs of retaining semi-finished goods relative to the gross profit generated on final sales. Ultimately, the strategy works when the costs of holding semi-finished goods aren’t so high that it impacts gross profit on sales. Healthy gross profit margins are critical to the success of this order fulfillment strategy as the company is often required to hold the semi-finished product for long periods.
Reduced Labour Costs
Companies can reduce a portion of their labour costs by not completing the finished good until the customer has made or placed the order. By manufacturing a majority of the product, and waiting for the customer to decide upon the finalised version, an SME can better manage its overall labuor costs for each unit manufactured or sold. However, time is of the essence. If the company holds the semi-finished good for too long then it risks encountering inventory obsolescence and or damage. In this case, it’s not merely a question of protecting profit, but one of protecting costs so that this supply chain strategy is a benefit and not a hindrance.
Sustainable Gross Profit
The postponement strategy only works if the gross profit margins on the final sale are high enough to compensate for the costs of financing and holding the semi-finished goods. In essence, it costs money to manufacture, assemble and hold semi-finished goods. The longer it’s held in stasis, the higher the costs. These costs are manageable if the company achieves healthy gross profit margins on sales.
Managing Labour Costs
Find the ideal stage for the semi-finished good that minimizes labour costs, while also minimizing lead times to customers.
Reduce additional costs associated with obsolescence, damage, pilferage, counting and other miscellaneous inventory management costs.
Healthy Gross Profit Margins
Margins on final sales must be high enough to compensate for the length of time semi-finished goods are held.
Maximize seasonal business by anticipating high and low demand periods, thereby reducing how long the company holds semi-finished goods.
Vendor Management in Postponement Strategies
In the end, companies which use the postponement supply chain strategy must have strong vendor partnerships, ones where each vendor is able and willing to respond with critical parts and support in a timely manner. This involves relying upon proven vendors and partners. Their ability to match the market’s cyclical demand is essential. So, what are some of the aspects that must be present in a postponement strategy from the perspective of vendor management?
Strong Supply Contracts
A company must have strong supply contracts, ones that clearly define the costs of retaining inventory for both parties. Vendors will be required to hold inventory until demand is confirmed. This means they must incur their own costs to retain that inventory within their warehouse. A supply contract that doesn’t recognise these vendor costs won’t succeed. Ultimately, the vendor will be forced to abandon the pursuit altogether.
Clearly Defined Delivery Terms
Vendor delivery times must be clearly defined. Also, it’s sometimes easier to manage those delivery times when vendors are in close proximity to the SME. As such, if you want to run this type of supply chain strategy, then it’s essential that you align time-critical parts and raw materials to vendors who are close to your facility. This will ensure that delays are minimized and that they have little to no impact on final delivery dates to your customers.
Accounting for Vendor Lead Times
Last, but certainly not least, it’s important that the SME has accounted for those time-critical vendor lead times that are needed to move the semi-finished good to a finished good. This often requires having multiple agreements with multiple vendors in order to compensate for any delays in incoming shipments.
Running a Complete Postponement Strategy
It is wrong to assume that a postponement strategy only includes manufacturing semi-finished goods and waiting for the final option to be decided upon by the customer. A postponement strategy might also include completely producing a finished good and only packaging, labeling and invoicing the customer once they place an order. In addition, some strategies focus on delaying invoicing so that customers can better manage their own terms and credit.
A postponement strategy isn’t merely a supply chain strategy. At its core, it is a method of pushing products to customers and then relying upon those customers to determine when the supply chain should pull the remaining requirements to finish their purchase order. This is the essence of a push-pull strategy: it works because it pushes a custom product to customers where they alone can determine its final design.
The benefit for any SME is that it is able to run a strategy that meets the unique demands of its customer base, while also reducing the time it takes to deliver those products. Ultimately, the strategy adopts a time postponement approach, one where the customer gets a tailor-made finished good at the time of their choosing. The company reduces its time to market, while the customer gets a tailor-made solution.
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