Postponement Strategy

In my 1^st Quarter e-mail newsbrief, I discussed the importance of net working capital management to the health of the business.  For supply chain executives and managers, the focus is on the inventory component of working capital. 

My 2^nd Quarter topic highlights the issue of supply chain cost reduction—specifically the strategy of “postponement”.  There are many ways to cut costs throughout the supply chain including product design strategies, raw material assessments, procurement tactics, manufacturing efficiencies, distribution assessments, and customer service policies.  One of the most innovative and effective cost reduction strategies is postponement. 

Simply said, postponement is adding the latter stages of product value as close to the customer order stream as possible.  For instance, a postponement strategy may be found in a packaging operation, where work-in-process (WIP) or bulk product can be tranferred into specific package sizes or types as the customer orders become known.  In addition to several process components that have cost saving potential through elimination of wasted activity, the strategy can also deliver inventory reduction opportunities—both at the raw material and finished goods levels—as a result of holding inventory at the WIP level.  These types of postponements are often opportunities in the food, beverage, pharmaceutical, chemical, and other process industries where product is made in “batches” and then transferred to various package types.

The specific network design around various supply chain “postponement” options can be quantitatively evaluated through network analysis and optimization.  Assessing options and determining the best alternative on the basis of least cost, minimal inventory, and service attainment can be accomplished through a strategic network project.  In the example above, the options of co-mingling packaging operations with distribution vs. with manufacturing, can be explicitly assessed and compared for determining the best option that fits with the overall business strategy. 

With the best option determined and quantified, it is best to develop an implementation plan that addresses actions, timing, resources, and milestones.  Important to the implementation plan are the issues of process change and the information required (both timing and granularity) from the IT applications.

Not all businesses lend themselves to the opportunity for postponement, but many do that have multi-step operations in their manufacturing and/or procurement environments.  With alignment of processes and IT to facilitate postponement, the benefits in cost reduction and inventory velocity can be enormous.

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