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July 24 2006 04:40 PM

Putting things off until later is often a favorite pastime or, more likely, a bad habit. The old saying Dont put off until tomorrow what you can accomplish today, for who knows what tomorrow will bring, has been pounded into us since childhood. The slogan suggests that what we could do today, but choose not to, could easily put us even further behind when tomorrow arrives. Within the clouded uncertainty of what tomorrow will bring lies the fear that we will pay a penalty for choosing to put things off.

 

However, it is often possible to put things off without a penalty. The Theory of Postponement (TOP) brings this advantage. TOP is the process of delaying customization (e.g., kitting, final assembly, personalization and labeling) until the specifics of an order are known. Products that have advanced through processing yet are still generic can be finalized and shipped.

 

For some time now, warehouses and distribution centers have been forced to adapt to smaller, more frequent orders. They are also faced with increased customer requests for a multitude of special features, forcing them to completely revamp back-end operations to meet these demands. Customer satisfaction is built upon customers getting what they want, when they want it and for a fair price.

 

To satisfy this demand, SKUs have proliferated. The uncertainty about what tomorrow will bring has swelled inventory as safety stocks have increased. And as demand forecasts do not materialize, warehouses fill up. Full warehouses do not add value. Customer satisfaction issues are at the forefront while internal operational issues slowly mount. But TOP responds to both sets of issues. With postponement, manufacturers have less inventory to control, warehouses take on an important role in the supply chain process and customers get what they want, all at lower annual operating costs.

 

TOP manifests itself in two basic types. The first simply delays the customization of a product. Using the principles of Supply Chain Synthesis (SCS), a company utilizes its production resources while its warehouse performs the customization. For example, an apparel manufacturer may produce the same dress for several different distributors. The dresses are sent to distribution centers (DCs) where order-specific labels, tags, personalization and overwrapping are applied.

 

The second form of postponement is called merge-in-transit and is a process common to the consumer electronics industry. An array of components arrives at the warehouse from OEMs and CEMs: a keyboard from source A, a hard drive from source D and so on. The warehouse handles the kitting and packaging based on the specifics of the order.

 

Customization represents additional processing time that must be considered with respect to the total customer lead-time framework. In most cases, relocating customizing activities such as personalization, labeling, kitting and final packaging to DCs closer to the origin of orders is an economically sound practice. It vastly improves response to customer lead-time pressures and minimizes transportation costs.

 

TOPs most notable benefit is reducing inventory. For example, a major tobacco products retailer services 20 distinct market areas through several DCs. Before the retailer implemented TOP, separate taxing authorities controlled each of the market areas. Each DC would receive the products, apply tax stamps particular to the taxing authority where the products would be sold and place the products into inventory. So if a given DC serviced eight market areas, then there were eight separate inventories of the same product, all with safety stock. The effect of adding a new product was eightfold for warehouse storage space, pick facings, tracking, physical inventory and so forth.

Using TOP, the DC operations were redesigned so that applying stamps became an integral part of wave picking. The operations immediately dropped 30% of inventory, saving approximately $1.2 million in annual inventory carrying costs. SKUs dropped from approximately 6,000 to 300, freeing up pick facings and improving storage density. The DCs were in an improved position for customer response. In a later vendor program, the on-hand product inventory levels at the store level were reduced from a 10-day to a two-day supply.

 

Another example of a company that implemented TOP to reduce SKU proliferation and warehouse inefficiencies is a major fabric printer that produces bolts of patterned fabric for retailers. Before the TOP implementation, the fabric printer based its inventory policies on historical sales data and customer service variables. The warehouse was bulging with remnants and obsolete product. The same fabric pattern could be held in inventory under several SKUs, depending on the size of the bolt, how it was wrapped onto the bolt (printing inside or out) and how it was packaged.

 

After adopting TOP, the company revised its manufacturing processes to create large bulk fabric rolls downstream from the printing process. Given the specific order information, rolls were retrieved for final cut-to-length, bolt winding and final packaging stations. The changes reduced warehouse storage space by 25%, reduced handling labor 50% and virtually eliminated remnants and obsolescence.

TOP also brings about significant savings in operating costs. Consider the comparative economics for a foods packager. Many types of its canned food are generic and are private labels for store brands. The foods packager may have 10 different SKUs for #303 cans of green peas, beans, corn, etc. The storage space, pick faces and labor issues are similar to those faced by the tobacco products retailer and the fabric printer. Instead of receiving canned product from production and applying labels for specific stores plus enough for safety stock, TOP would move unlabeled canned products directly to storage and label them upon receipt of specific orders for that product. There are plenty of costs involved in the supply chain for this operation including that of labels, label inventory holding and handling labor; label storage space, shrinkage and overhead; and finished product inventory holding, storage space, shrinkage and overhead.

 

Preprinted labels held in inventory represent money at risk. Newer technologies use online digital processes that offer the flexibility of changing print patterns on the fly. Digital processes only require a just-in-time (JIT) inventory of blank label stock. Therefore, the need for preprinted label inventory subject to shrinkage is virtually eliminated. TOP can also reduce operating costs associated with label overhead (e.g., ordering and pattern/text changes), labor for handling labels to storage areas and out to the packaging lines and label storage space.

 

Finished-goods inventory puts company resources at risk when it is in storage. Digital systems create rapid line changeovers, quick response to actual demand and significant finished-product inventory reduction. Less inventory in storage reduces storage space, handling labor and loss through shrinkage. The annual operating cost savings opportunity for the foods packager is evident in Figure 1.

 

TOP reduces manufacturing lead time, finished product inventories and labor costs, but most importantly, it increases customer satisfaction levels. Postponement isnt procrastination; its smart business!

 

Wayne Coates is project manager at Tompkins Associates, which provides expertise in areas such as warehousing, logistics, order fulfillment and manufacturing. He can be reached by telephone at 919-876-3667 or e-mail at wcoates@tompkinsinc.com. For more information, visit www.tompkinsinc.com.

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