The role of mass customization and postponement in global logistics

* designing and developing products and services (P&S) to meet those needs.

* manufacturing and delivering the P&S.

* supporting the customer throughout the P&S life cycle, possibly including disposal.

Like all businesses it must achieve all this profitably and speedily.

4.4.7 The benefits of MC are:

* greater customer satisfaction and repeat business due to a better fit between customer needs and the P&S offering.

* greater conversion of inquiries to sales because there is less time for assessing competitive offerings.

* a capability to address a wide and fragmenting market (the core mass market as well as many niches).

* ability to "stake-out" a market position due to being first to market to meet new needs.

* higher profits due to the greater value added but at a cost that is comparable to a mass production.

4.4.8 Compared to 1-to-1 Marketing, fewer of the interviewees had heard of the term MC but they understood the concept. They stated:

* a range of core products with limited options provides sufficient capability to make customers feel they are getting a product(s) tailored to their needs. Brokers can better serve those high net worth customers with a need for personalised P&S.

* in time the market may embrace MC as consumers became more experienced and knowledgeable in financial matters, or embrace other criteria than costs (e.g. ethical investments based on personal attitudes and beliefs).

* MC makes it difficult for customers to do comparative shopping, especially if they are deploying automated Internet robots.

* MC may help to meet the competitive threat posed by the new entrants who tend to "cherry pick".

* by internally applying some of the principles of MC, it helps to achieve fast NPD.

* customising the service element may be the first application of MC. For example, letting customers communicate with the company when and how they want to, as in telephone banking.

4..4.11 The use of MC and Mass Personalisation is becoming more prevalent:

* Gateway 2000, suppliers of PCs, allows customers to use the Internet to specify a unique personal configuration. An opening page lists a number of useful starter configurations (www.gw2k.com).

* Various motor manufacturers provide showroom systems to customise a car from the hundreds of permutations available. A specified delivery date is usually within a few days. The necessary finance can also be arranged online at the same time.

* Other web sites re-route e-mail, telephone and fax communications to customers wherever they are in the world.

* Motorola Pagers produce custom pagers in lots of 1, from a possible 29 million permutations. From entering the custom order on a portable PC at the customer's office, the order hits the production line within 20 mins and rolls off in a box at the other end within the hour (www.motorola.com).

* Personics Corp., a music store, allowed customers in the stores to put together their own personal compilations that were then created in 5 minutes complete with custom labels. (Recording companies objected to the scheme).

* Federal Express customers track the whereabouts of their parcels in real-time (www.fedex.com).

* The Yearlings TV Guide Internet web site creates a personalised TV listing guide based on a personal list of interests (www.yearling.com).

* Sabena Airlines will page a friend an hour before your flight lands.

* Zacks Stockwatch allows investors to keep track of their personal investment portfolio (www.zacks.com/docs/investorama/). Each day they receive an up-to-date statement.

What are the benefits?

Increased retention of individual customers, Ability to satisfy niche markets, Potential for premium pricing, Strong competitive advantage.

For manufacturers, mass customization typically means putting together a sophisticated infrastructure that ties together suppliers, customers, and themselves, almost as codevelopers. This lets manufacturers communicate in real time with customers to ascertain requirements, and with suppliers to learn what's doable within an allotted period.

ABSTRACT

A key challenge for companies is to combine the high flexibility required to operate

according to customer needs and wishes with the high level of efficiency required to

stay competitive in terms of costs. Recent research on supply chain management

suggests that companies in highly dynamic industries need not only to constantly

develop their supply chain, but also simultaneously develop their product structure and their manufacturing process. In this paper we explore ways in which a company can create competitive advantage in a mature industry through a Build to Order Supply Chain.

INTRODUCTION

Today's highly competitive global market is redefining the way many companies do business. The new form of competitive advantage is mass customization, and is, as Pine [1, p. xiii] writes, "a new way of viewing business competition, one that makes the identification and fulfillment of the wants and needs of individual customers paramount without sacrificing efficiency, effectiveness, and low costs." In his seminal text on mass customization, Pine [1, p. 6] argues that "Customers can no longer be lumped together in a huge homogeneous market, but are individuals whose individual wants and needs can be ascertained and fulfilled." He attributes the increasing attention on product variety and customer demand to market saturation and the need to improve customer

satisfaction: new products must be different from what is already in the market and must meet customer needs more completely. Mass Customization can be defined as the provision of customized products and services using stable business processes, at a cost and fulfillment time similar to standard, or mass produced, products. Providing customization itself is nothing new, many specialist companies have been doing it for years.

Sustainability of Mass Customisation as a Competitive Strategy

Mass Customisation has become one of the important modes of facing competition thorough adding value to the product offerings. Mass Customisation enables not only value addition thorough variety but also make the consumers realise how important they are in determining the product they require. Thus Mass Customisation has been touted as a lucrative way of achieving competitive strength. The information collected in the course of individualization serves to build up a lasting individual relationship with each customer and, thus, to increase customer loyalty (relationship level).

What is Mass Customisation?

Mass customisation is the ability of an organisation to offer individually tailored products or services on a large scale. "Mass customization means that the consumer can get only and exactly what he wants, at a price he is willing to pay," says Joe Pine, who together with Jim Gilmore wrote the book 'Markets of one' about the emerging trend. "When companies mass customize their goods and services, consumers no longer have to sacrifice what they want exactly by buying mass-produced offerings designed for some average, and non-existent, customer," adds Gilmore. Mass customization offers an important competitive advantage to the firm especially with the increase in consumer awareness and shrinking PLC. Unlike, mass production which is product centric, mass customization is consumer centric. However, one cannot replace another as part of firm's overall strategy.

Mass Production (vs) Mass Customisation:

Mass production intends to produce uniform products whereas customization can notes small-scale crafts. Most of the commodities are typically manufactured under mass-production systems. The distinctions between Mass Production & Mass Customisation are as follows:

Mass Production

Mass Customisation

* Higher Economy of Scale.

* Lower Inventory carrying costs.

* Expensive and Inflexible production facilities.

* Highly flexible production facilities.

* Lower variable production costs.

* Higher variable production costs.

* Requires efficient Inventory Management System

* Require richer information flows

* Product centric

* Customer Centric

* Lower consumer waiting time

* Higher consumer waiting time.

Mass Customisation features:

Mass Customisation gives competitive advantage to the firm. However the delicate features of Mass Customisation makes it difficult to adopt in an uncertain environment.

Examining these features reveals the difficulties companies can face when they attempt to master the skills that are key to Mass Customisation.

i. Obtaining information from the customers is hard. There exists a gap in what the customer wants? What he communicates? And how he acts? Most of the time customers could no clearly articulate their requirements. They are easily taken away by what is available in a store shelf or a B-page. Any elicitation process is an artful means of leading customers through the process of identifying exactly what they want. The emergence of Customer Relationship Management (CRM) can aid the firm in the elicitation task. Computers are becoming extremely useful in the elicitation of information like physical movements in Apparel Industry, prototypes in house construction, etc. Obtaining customer information though sounds simple is hard to elicit.

ii. The process dynamism in Mass Customisation helps a firm in translating the elicited information into a product. Through infusion of flexibility, the mass production system can achieve mass customisation. Flexibility enhancing innovations range from modular design and lean operation to the increasing use of digital-information technology for controlling manufacturing equipment. In paint industry introduction of colour mixing machines helped to customise the interior paints at the distributor end and thus offer variety and choice to the ultimate beneficiary. Such innovations have also been used in metal fabrication, Apparel Industry etc. by firms to gain competitive advantage. Though full-customization in certain industries is difficult to achieve, customization has been resorted to by such industries also thorough infusing production process dynamism from consumer end. In the wake of growing competition, even government controlled firms have started to practice customisation in limited ways. Cooptex, the Cooperative textile firm of Tamil Nadu, Government has introduced recently the free selection of design, pattern etc. for the silk and cotton sarees by the consumers through computers which can be produced and delivered in a definite period. Thus to assess the potential for mass customization of a particular process, a good starting point is to determine how many spatial dimensions are involved in each step. Processes that involve only one dimension are naturally easier to customs than three-dimensional ones.

iii. Distribution:

iv. The distribution aspect is one of the important requirements of mass customization. After passing through the flexible production process each individual product must reach to the right person. Also, as the production stages may be in different places, the passage of the semi-finished products within the process should be fool proof. As the technologies underlying logistics like the Internet, automated warehouses and package-delivery service continue to dev elope, they will help bring mass-customisation systems to fruition. (Paul Zipkin, 2001)

v. Information flow:

• Information flow can be regarded as the most important factor for the implementation of mass customization. Being truly customer focused is not possible if the organization is not, first information intensive. Mass customization is successful only when it can cover this need for information and communication both purposefully and efficiently. The reason for this information richness is based in comparison to the traditional push-system of mass production on the need for direct interaction between the customer and seller for every single transaction. Every order implies a coordination about the customer specific product design as a result of the divided construction process of mass customization. The flow of information in the form of investigation and specification of the desires of consumers the configuration of individual products, the transfer of the specifications to majority, the complexity in production planning and control, the coordination with the suppliers involved in the individual prefabrication etc. account for the customization costs. Thus the firm resorting to mass customization should

ABSTRACT

Price, precision, and speed will remain major competitiveness determinants, but manufacturing companies will increasingly need to provide greater

product variety and customer focus. The challenge is therefore to achieve mass

customization - the ability to provide variety, and individual customization, at prices

comparable to standard goods and services. Principles of this methodology include differentiation of manufacturing, simplification of material flow, strategic positioning of stocks, decentralized decision making in clearly defined control areas, and flow-orientated information.

The challenge is therefore to achieve mass customisation - the production and

distribution of customised goods and services on a mass basis (Pine II, 1999). Mass

customisation involves responsiveness to customers' changing demands, and requires

performance and flexibility improvements. In their desire to become customer focused, many companies implement new programs and procedures to meet customers' requests.

Mass customization-the selling of highly individual products but on a mass scale-is a logical next step in the progress of BTO ("build-to-order"), the manufacturing of goods only as and when there is an order from a customer. Companies such as Dell Computer and Renault already make extensive use of BTO systems, shortening delivery times and trimming work-in-progress.

Mass customisation is probably best defined as a process which individualises mass-market goods and services for specific customer needs. Given the public's demand for personalisation, Mass Customisation is emerging as a key business principle of the 21st century.

To a large extent Mass Customisation is about having choices; and choice is a vital consumer demand in today's markets. A defining example of Mass Customisation is the way in which Dell operates; you can order your PC designed to your specific requirements and Dell will only produce that PC once payment has been received. It's a win/win - good for you to have a bespoke product, good for Dell to avoid stock-holding costs and related cash-flow drains.

Mass Customization, the production of unique products at a mass produced cost, sounds like a contradiction, but by using the new interactive mediums it's now possible to meet the individual needs of customers in a mass market and make superior profits. Many though are still sceptical. They continue with the familiar mass production model of few product choices, long production runs, uniform distribution, and apparent low cost.

This incremental, low risk approach allows a company to sense, lead and retain their existing customer base. At the same time, they can also acquire more advance customers and gain valuable knowledge and ideas from their needs.

Mass Customisation is defined as the mass production of individually customized products and services. In its more sophisticated form this means meeting each customer's individual wants and needs exactly, but at prices comparable to those of standard mass produced goods.

The dominant system of production for large volume manufacturers during the first half of the 20th century was mass production - an approach based on producing and selling standard mass produced items, exploiting economies of scale to achieve prices that everybody could afford. The major assumption being that markets were homogeneous - everybody had basically the same wants and needs that could be satisfied by a few standard products.

Over the past 40 years significant changes have occurred in the business environment - increased pace of technological change, more fashion consciousness, globalisation of the economy, imbalances between supply and demand, fragmentation of markets, to name but a few. These changes have made it impossible for most manufacturing companies to adhere to strict mass production principles, and many now seek to differentiate themselves from competitors on the basis of customer choice and customisation capabilities.

The purpose of this web site and other Cheshire Henbury publications is to explore the emerging paradigm of Mass Customisation and the nature of the radical internal changes that companies need to make in order to prosper in this new era. The publications will focus on:

* Defining and understanding the social and market factors driving the development of Mass Customisation;

* Outlining the techniques that are being developed to support Mass Customisation;

* Exploring the technological, organizational, human resource and cultural implications of Mass Customisation;

* Examining the real business benefits that companies are achieving through Mass Customisation and the problems that they have to deal with.

The Demand for Mass Customization

Who Wants It? Many custom products are essentially novelties. Their appeal is precisely their entertainment value or surprise value. Examples of such products include soap stamped with your name and cookies glazed with your picture. The value of such products is by nature transitory.

Customers also demand variety when they differ sharply in their preferences for certain attributes of a product. In such a case - for example, when products require matching different physical dimensions - customization may truly add value. Clothing is a good example. People have different shapes, and they care deeply about a garment's fit. Similarly, a window either fits or doesn't fit a particular house, and if it doesn't, it's useless.

Mass Customization vs. Mass Production

What exactly does a mass-customization system consist of? How does it differ from traditional mass production?

The great virtue of mass production is economy of scale. Production facilities are typically expensive and inflexible, but variable production costs are low. Also, after production, the finished product is stocked in inventory, which serves to meet customer demands.

The basic structure of mass customization is similar to that of mass production with variety, but there are important differences. Instead of selecting one variety of a product, each customer provides unique information so that the product can be tailored to his or her requirements. The production process must be very flexible in order to meet those requirements. There is no finished-goods inventory -- there can't be if the product is really customized. The lack of inventory has advantages (low carrying costs) and disadvantages (customers have to wait). It also involves a delivery capability that reaches directly to the customer.

The technological differences between mass production and mass customization, while considerable, are matters of degree: Mass customization entails richer information flows and more-stringent requirements for process flexibility.

POSTPONED MANUFACTURING IN THE CONTEXT OF MASS CUSTOMIZATION

Mass customization aims at customizing goods and services at the cost-efficiency levels of mass production. Like postponement, mass customization of products can occur at various points along the value chain from design and fabrication to delivery and sales, and it does not necessarily have to involve the logistics function. There are five methods for achieving mass customization: (1) Create products and services that are customizable by customers (involving the design phase); (2) Modularize components to customize end-products and services (for example postponed manufacturing, involving the design, manufacturing, and distribution phase); (3) Provide quick response throughout the value chain (involving the distribution phase); (4) Customize services around standard products or services (involving the distribution and sales phase); and (5) Provide point-of delivery customization (involving the sales phase).23 Methods 2 to 4 involve the logistics function. Further methods to create cost-efficient customization in the logistics system are accommodating special logistics service requests, offering logistics support to sales and marketing incentive programs, offering customized logistics service levels.24

Postponed manufacturing is thus one method for achieving mass customization that involves the logistics function. Companies can choose to implement other methods. The choice may be based on the applicability of the various methods, which varies among industries. A modular product design, common in electronics and increasingly in the automotive industry, for instance, allows for the rapid final manufacturing of customized products at low processing costs. A high product cube or weight increase through final manufacturing, as in the soft drink industry, favors postponement for reasons of reduced transportation and inventory carrying costs.

We begin with the constructs of product customization and postponement. We then extend the latter (originally introduced by Alderson10) to include production postponement, up/downstream postponement, and distribution postponement. This expanded concept encompasses different strategies along the total supply chain that may be employed to meet customer demands while controlling costs. Next, we discuss the relationship between product customization and postponement and its potential for developing alternative market-oriented supply chain management strategies.

Postponement delays manufacturing, assembly, configuration, or logistics operations until customer commitments are known. Postponement increases a company's flexibility to respond to demand shifts with minimal inventory, but on the other hand, it can make products more expensive because economies of scale associated with make-to-stock are difficult to duplicate.

For example, Zinn and Bowersox find that products marketed under different brand names benefit from labeling postponement. In contrast, products sold in various configurations benefit from assembly postponement.

Postponement strategies can be applied to form, time, and place. Form postponement means that companies delay production, assembly, or even design until after customer orders have been received, which increases the ability to fine tune products to specific customer wishes. Time and place or logistics postponement means that the forward movement of goods is delayed as long as possible in the chain of operations, and goods are kept in storage at central locations in the distribution chain.

Taylor (1996) noted that postponement strategy is especially important for an international enterprise. International enterprises, with diverse markets, tend to have more extensive supply chains and encounter greater degrees of risks resulting from inventory management. These enterprises have to critically examine the trade-offs between reducing inventory risks (postponement strategies) and increasing the economies of scale in productions (anticipatory strategies).

These combine the three areas of postponement: customization of products (form postponement) is delayed until goods are ordered (time postponement) and have reached the international distribution chain, frequently followed by direct delivery to retailers or customers (place postponement). This system allows companies to separate the customization of products from the primary or basic manufacturing of standard products or generic modules. This separation frees primary manufacturing to focus more on large economical runs, while secondary or final manufacturing can be focused on responding to customer wishes. Thus, this system simultaneously enhances customer service and efficiency.

Value of Postponement

Postponement allows a company to be flexible in developing different versions of the product as needed, to meet changing customer needs, and to differentiate a product or to modify a demand function. For example, 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. Benetton's market-oriented supply chain management is illustrated through the ability to adapt internal processes to create superior customer value based on information about customer demand generated at the store level.

Postponement can be extended further upstream in the supply chain to suppliers of components and raw materials, or downstream in the delaying of transportation costs, warehousing and storage costs. According to Alderson's definition, postponement also can be used in distribution if the company delays transporting the finished product to the retail store until the order is received. The ability to postpone distribution resulted in significant savings inventory and transportation costs.

The Relationship Between Product Customization and Postponement

Decisions concerning product customization and postponement are related, but they are still separate. It is possible for a company to choose high product customization but very little postponement within the supply chain. For example, suppliers of car stereos produce a wide variety of models and options and hold them in inventory in anticipation of demand. Occasionally, they may not have a particular stereo that a customer wants, but usually they can fill most orders from inventory.

The opposite strategy is no product customization but the highest level of postponement. This is the case for a company that offers only one product with no variations and does not manufacture or assemble it until an order is received.

The notion of manufacturing postponement is to retain the product in a neutral and noncommitted status as long as possible in the manufacturing process. This means to postpone differentiation of form and identity to the latest possible point.

The notion of logistics postponement is to maintain a full-line of anticipatory inventory at one or a few strategic locations. This means to postpone changes in inventory location downstream in the supply chain to the latest possible point.

In the key work by Zinn and Bowersox, five different types of postponement strategies are identified. Four different strategies of form postponement (labeling, packaging, assembly and manufacturing) which, when combined with time postponement, constitute the five postponement strategies.

Key Benefits:

- Inventory held at generic level - fewer SKU's hence less inventory in total

- Flexibility is greater

- Forecasting is easier at generic level

- Ability to customize products locally means that a higher level of variety may be offered at lower total cost - this is the principle of "mass customization"

To manage inventory effectively, companies not only must anticipate demand, but also when it will taper off. Not having sufficient inventory early in the product cycle can cost market share. Products at the end of life cycle lose value quickly and risk obsolescence, which can lead to large inventory write-offs. Moreover, with customer demand increasing for product specification, companies must produce several versions of each model.

Many manufacturers and retailers today are turning to postponement or delayed differentiation strategy to strike the right balance. By holding inventory in a less finished state - that is, postponing final product assembly until actual customer demand is known - companies can more quickly respond to market opportunities and offer greater customization options. However, postponement can require the fundamental redesign of a company's decade-old manufacturing processes. It also calls for a high degree of collaboration and visibility across the supply chain.

To Postpone or Not To Postpone'

Postponement is a systematic approach to designing and developing standard, configurable products that can be differentiated, quickly and inexpensively, once actual customer demand is known. This model allows organizations to transition from a "push"-oriented supply chain to a "pull" or a demand-driven supply chain.

For more than a decade, a small but influential group of sector leaders in the consumer electronic and semiconductor industries, such as Dell, HP and Xilinx, and major retailers like Wal-Mart and Home Depot, have implemented delayed differentiation strategies to reduce manufacturing, shipping and inventory costs, while improving order fill rates.

Market Inhibitors

The Oracle/Cap Gemini Ernst & Young study determined that nearly half of responding companies had not implemented postponement strategies to date. This was attributed to 'little knowledge of postponement benefits and associated costs, perceived technology limitations and ineffective organization alignment.'

Implementing a postponement strategy involves fundamental changes to a company's manufacturing processes and internal operations. Configure-to-order production demands a high degree of collaboration and visibility across the supply chain. If poorly implemented across the supply chain, mass customization can result in cost overruns and longer lead times.

Traditional manufacturing practices - mass-producing finished products in predetermined, set quantities - are about as straightforward as it gets. In sharp contrast, stopping production at a generic product state, and offering a range of different configurations and options, requires a flexible, just-in-time production model.

Incorrect decisions increase procurement costs, and if product doesn't move, the costs are unrecoverable. Therefore, postponement strategies must manage variability in supply, as well as demand, and recognize that cost and risk characteristics will change over time.

A postponement strategy also is dictated by the product lifecycle: not having right inventory early in the lifecycle will mean missing customer service level targets and the opportunity to gain market share. Products at the end of life cycle lose value quickly and risk obsolescence, resulting in costly write-offs. Moreover, if old products are held in a generic state, their components and parts can be 'recycled' for next-generation products.

A postponement implementation involves fundamental changes to a company's manufacturing processes and internal operation. Product design and production must be restructured to support product standardization and design modularity. The company must convince its supplier and partner network to go along with pushing the point of product differentiation closer to the customer.

Market Drivers

Economics also play a decisive role. In boom times, inventory moves at a clip and postponement is less of an issue. But when the world economy slows and market demand is unpredictable, the financial consequence of stockpiling finished inventory, or wildly miscalculating market demand can be disastrous.

In a recent conversation, Joe Pyne, a UPS Supply Chain Solutions senior executive, struck at the heart of postponement when succinctly noting, 'Inventory is cash.' Obsolescence issues aside, companies with warehouses full of ready-to-shift merchandise must ask themselves: Is this the best use of company assets? Might the money tied up in inventory-related costs be more wisely invested in R&D, plant upgrades or marketing and sales.

The stage at which inventory is held directly impacts a company's bottom-line. For example, within the semiconductor industry, it is twice as expensive to warehouse finished chips, as it is to hold them in an undifferentiated die batch state. And with as many as 20 different assemblies for a basic circuitry, maintaining inventory at the 'lowest common denominator' allows the chip manufacturer to forecast demand at a more granular level, based on quicksilver changes in market demand.

Global manufacturers also are recognizing that postponement strategies improve demand forecasting. Standard product offerings must be tailored for local consumption in accordance with a host of criteria: among them, language, currency, business and regulatory practices, user preferences and purchasing trends, and rates of technology adoption.

In the next section, we shall see how postponement strategies enable companies to lower inventory risks while actually expanding their market reach and opportunities.

Postponement Comes of Age

Postponement adopters are finding innovative ways to support delayed differentiation, such as transforming warehouses into advanced fulfillment centers to perform customization of goods at a point closer to the consumer. Instead of pre-configuring product for different languages and countries, product is shipped in a generic state, in bulk, to these regional centers. The final customization, assembly and packaging are undertaken as orders come in.

From an operational and logistical standpoint, this is the preferable model for a multinational product vendor. Bulk shipments of 'raw' equipment are considerably less expensive to ship and store than 'shrink-wrapped' products. Moreover, with common inventory, companies can more effectively weather market fluctuations in world markets. Now if a shortage exists in one market, excess inventory from another can be sent to close the gap.

Postponement In Action

By pushing the point of product differentiation closer to the customer, postponement can improve service level and delivery performance, while reducing inventory investments and improving margins.

The constantly changing business environment will force all of us to address some aspect of postponement in order to remain competitive.'

Postponement already is shaping customer expectations. Ninety-one percent of survey respondents implementing postponement strategies noted 'significant improvements in customer satisfaction and inventory costs.' A majority (83 percent) also reported that their customers were seeing 'significantly improved order fill rates with decreased lead times.'

For all of the aforementioned reasons, devising a postponement strategy is not an easy undertaking. There is a welter of complex technology, process and management issues. There are no hard and fast rules. The right postponement model will vary company, by product group, by market.

The planning, inventory optimization and decision support systems help companies set the right postponement levels and targets, and make accurate service and delivery commitments.

Yet the job cannot be left to technology alone. Implementing a delayed differentiation strategy requires major business process alignment and greater organizational accountability. The manufacturer must secure the participation of suppliers and contractors, since the, too, must retool their operations to support postponement.

The survey identified the success factors that drive successful postponement strategies. Heading the list is an organization's ability to produce standardized products and to incorporate customization at the most advantageous point in the supply chain. Also termed essential is resolving competing interests within the company's own supply chain. This extended to changing reward and metrics structures to support collaboration. Another critical element is external collaboration with ones suppliers and customers.

However, none of the above can be accomplished without a commitment for the board suite. The study states: 'Without consistent top-down sponsorship and support, from design through implementation, a postponement implementation is destined for failure.'

Ideal Candidates

The survey posits business conditions that make strong postponement candidates. 'Prominent among these are companies that produce a significant variety of products with short product life cycles and which have a supply chain able to support mass customization.'

Benefits

The most important benefits of a successful postponement implementation are improving customer satisfaction while minimizing inventory costs, according to 91% of survey respondents. Another chief benefit noted is increased flexibility that increases a company's ability to offer a wider range of customized goods. Customers reportedly are seeing improved fill rates (83% of respondents) and decreased lead times.

The company and its suppliers enjoy reductions in inventory costs through better resource planning and allocation. This is attributed both to shorter forecast cycles and shifting inventory upstream to a less expensive generic state.

Overall, postponement's primary benefits are to reduce the effects of market uncertainty and to meet customer needs, while effectively managing supply chain costs,' the survey finds.

In summary, the time is right for postponement and the benefits of a well-implemented strategy will deliver new 'highs' and 'lows': lower overall supply chain costs, lower inventory obsolescence, lower procurement costs, lower infrastructure costs (i.e., people, process, technology, equipment) and lower manufacturing and shipping costs, as well as; higher order fulfillment accuracy and higher levels of customer satisfaction.

• Form postponement

• shifting value-adding activities e.g. final assembly forward in the supply chain

• Time postponement

• production/delivery at the latest possible moment

• Geographical postponement

• Large product range in centralized inventory

• Mainly two forms

- Logistics Postponement: moving customisation point closer to customers - out of mgr functions

- Form Postponement: delaying differentiation point by standardisation or process re-sequencing

"Postponement allows manufacturers to limit their finished goods inventory by postponing production of the final product as long as possible. Often production of the finished product doesn't happen until the order is in hand, and then it is shipped out immediately. As a result, some manufacturers are keeping little, if any, finished goods, which delays the investment a company has to make in its finished goods inventory."

The greater use of postponement or deferred customisation (such as labelling or wrapping) lets companies achieve the flexibility to respond to the fast changing demands of the market.

Postponement principles

By adopting such a comprehensive

approach, companies can operate at nearer to maximum efficiency and quickly meetcustomer's orders with a minimum amount of inventory.

Three basic postponement strategies are used in supply chain management

*?Logistics - Executing activities at the most effective location.

*?Form - Designing a product so that it is composed of a number of standard

components or process steps

*?Pull- Delaying manufacture until a customer order is received.

Postponement, now or later

In many mass markets, companies are facing a predicament. On the one hand,

customers are demanding that their orders be fulfilled ever more quickly, whereas on the other, they are demanding highly customized products and services. Time and mass customization, are considered to be two of the most important areas for

competitive advantage in 21st century.

In response many major companies are considering their options, taking a long hard look at the supply chains in which they participate and questioning whether activities are appropriately positioned in terms of time and location. The key to mass customizing effectively is called postponement.

In the past five years, the demands of managing global product offerings have pushed managers in many industries to seriously consider postponement as a supply chain strategy for mass customization

Through a case study of a manufacturing supply chain, Hoek and Weken (1998) concluded that modular practices such as manufacturing process postponement facilitates mass customization.

Logistics innovation has played a key role in making sure that global companies can still react effectively to local market demands, even when their production facilities are distant. The application of the principle of "postponement" is an important case in point [19]. This allows for some activities normally associated with production to be performed downstream in the supply chain, delaying the point in time when goods become dedicated to particular markets or customers. Take, for example, the case of Caterpillar in its production of lifttrucks. In order to save on production costs the company moved manufacturing offshore from the USA. But lifttrucks come with a variety of options and it would be excessively costly to stockpile lift-trucks fitted with a host of option permutations at a US warehouse, so that any one customer order can be rapidly filled from stock. Much better to ship across part-finished lift-trucks and to finish assembly, using the required options, at the warehouse. The important point here is that the warehouse has become an extension of the assembly line, allowing Caterpillar to maintain (or even improve) levels of service at an acceptable cost.

In a number of cases these can be related to the principle of postponement, the application of which can lead to superior systems in logistics, not least because inventory levels can be cut and problems associated with uncertainty of demand in particular markets can be considerably reduced. Postponement in a global context can be related very readily related to "yes" or "no" answers to three questions which relate to secondary product characteristics. These questions are:

(1) Brand: Is it global?

(2) Formulation: Is it common to all markets or different between countries/customers?

(3) Peripherals: Are labels, packaging and instruction manuals common to all markets?

Starting from the perspective of global brands only, there can be only four different combinations of answers to these questions, as indicated in Table I, using illustrations from consumer markets. These combinations underpin four strategy options in logistics which are based on different kinds of postponement in the supply chain.

The postponement option which applies furthest upstream in the supply chain is "bundled manufacturing" (see Figure 4). (Figure 4 omitted) This is where the product formulation differs by market, either because of customer preference or varying. technical standards. In the case of bundled manufacturing, the postponement aim is to retain product commonality for as long as possible in the production process. Only at the last possible opportunity should the product be configured to meet the needs of a particular market. This approach is exactly that taken by Sony in its Welsh factory, making television sets for Europe. The company began production by making different product ranges for countries, according to the broadcasting and technical standards used locally. Each product range had a very different manufacturing specification. Sony succeeded in simplifying production through the introduction of a "Eurochassis", which was a base design for all European television sets. Only at a late stage in the production process was the Eurochassis tailored specifically for, say, the French or German markets[21]. Key benefits, alongside not having to commit production to specific countries until a late stage, were the rationalization of the range of components required for television manufacture, the simplification of inbound logistics planning and improved product quality.

The unicentric postponement option takes effect downstream from the manufacturing plant. Under this option global branding, together with common labels and peripherals, mean that the decision to allocate products to particular customers in world markets can be postponed until the product reaches a central warehouse; there is no need to earmark particular batches in production for given customers on account of their unique branding, formulation or packaging requirements.

Further downstream in the supply chain come the deferred assembly and deferred packaging options, both of which take place at theatre warehouses serving regions of the world or specific countries. Deferred assembly means that it is the final configuration of the product itself which happens at theatre warehouses rather than at production plants.

Market Share Via Share of Customer

The traditional market share model, in which market share is the ultimate goal of the combined marketing, operations and logistics functions of an organization, presupposes that competition occurs mainly on the basis of price alone, rather than on fulfillment of consumers' wishes. It has resulted in market share wars, profitability decline in many industries and price-based competition which drives down margins and often results in the unfortunate shake-out of many players within a marketplace.

In the retail sector, as traditionally in the aerospace, automotive and software industries, the market share model is being questioned. Market share is seen as increasingly being won on the basis of customer satisfaction rather than price competition. The notion of 'customer share' is customization techniques, enterprises can respond effectively to the changing needs of customers, and thus gain customer share. In the long run, these responsive companies exhibit sustainable market share, based on satisfying each customer's changing needs within market. Those companies that continue to crudely assume that price alone can gain market share will be left behind as customers feel increasingly alienated from those organization cannot adequately address their evolving needs.

Building customer loyalty

In conventional Mass Production, low costs are achieved primarily through economies of scale, resulting in little variety. In contrast Mass Customisation achieves low cost primarily through economies of scope, i.e. the application of a single process to produce a greater variety of products or services more cheaply and more quickly. Therefore Mass Customisation creates variety and customisation through flexibility and quick responsiveness.

Form postponement has been proposed as one of the more effective approaches to mass customisation (for example Amaro et al. 1999, Bowersox and Closs 1996, Pine 1993, van Hoek 1998, van Hoek et al. 1996 and 1998, Zinn and Bowersox 1988).

Postponement, in general terms, seeks to delay final formulation, or movement, of a

product until after customer orders are received (Zinn and Bowersox, 1988). In contrast the MTS approach aims to conduct final manufacturing, and most inventory movement, in anticipation of customer orders - normally to sales forecasts. Thus postponement reduces the risk of improper manufacture or inventory distribution associated with

MTS. At the other extreme, make-to-order (MTO) is where the manufacturer takes no

action until receipt of a customer order. Therefore the entire production process is

order driven. In practice this is rarely practicable and many raw materials are

purchased in anticipation of customer orders. Postponement compared to MTO

improves responsiveness and still enables a high level of customisation. It should be

noted that here, and throughout this thesis, responsiveness is the ability to respond to

fluctuating customer demand in terms of delivery speed or order lead-time. This is an

element of responsiveness as described by the framework developed by Kritchanchai

and MacCarthy (1999). Not the Matson and McFarlane (1999) definition of production

responsiveness as the ability of a production system to achieve its goals in the presence

of disturbances.

Postponement is thus widely recognised as an approach that can lead to superior

logistics systems or supply chains (for example Cooper 1993, Jones and Riley 1985,

Scott and Westbrook 1991, Shapiro and Heskett 1985). Further, the application of

postponement has been observed as a growing trend in manufacturing and distribution

by various surveys (CLM 1995, Ahlstrom and Westbrook 1999) and prominent

researchers (Christopher 1998, Lampel and Mintzberg 1996).

Yang and Burns (2003) point out that 'postponement fosters a new way of thinking

about product design, process design and supply chain management. For example it

encourages companies to decide which components will be modular, standard and

customisable....where and which inventories are justified, and what activities are based

on forecast (or order)'. However Yang and Burns (2003) further comment that

'although much is written in the literature on the benefits of postponement... little is

still known about the implementation of postponement'.

.2 THE FORM POSTPONEMENT CONCEPT

This section introduces the concept of form postponement by considering form (or

manufacturing) postponement and logistical (or time) postponement - the two main

types of postponement. A definition of form postponement is provided and the

dichotomy in manufacturing arising from the application of form postponement is

discussed.

.2.1 Logistical or Form Postponement

The key distinction between logistical and form postponement is the extent to which the

manufacturing process is driven by customer orders rather than by forecasts. In turn

this hinges on the location of the Customer Order Decoupling Point (CODP) as

illustrated in Figure 1.1. The CODP is the point in the chain of value adding processes

where a product is linked to a specific customer order, therefore downstream from this

point production is order-driven and upstream it is forecast-driven (Browne et al. 1996,

Hoekstra and Romme 1992, Van Veen 1992). This usually means that the CODP

coincides with the final speculative stock point.

In the case of form postponement the CODP is at the semi-finished product stage, where

the product or component modules are in a generic form. The final manufacturing

which differentiates the product is performed to specific customer orders (Zinn and

Bowersox 1988, Bowersox and Closs 1996).

Bowersox and Closs (1996) offer the following definition of logistical postponement:

'The basic notion of logistical or time postponement is to maintain a full line

anticipatory inventory at one or a few strategic locations. Forward deployment of

inventory is postponed until customer orders are received.'

In the late 1980s postponement became known as a logistics strategy (Cooper 1993).

Subsequently much of the research over the last decade of the 20th century regarding

postponement appears in the logistics literature. In a key paper by Zinn and Bowersox

(1988) which attempted to operationalise the postponement-speculation principle the

following definition of postponement was given:

'Postponement consists of delaying movement or final formulation of a product

until after customer orders are received.'

This definition is more specific than Alderson's stating that the postponed activities

should take place after the receipt of customer orders. Two main types of

postponement (implied by Alderson's original definition) are defined, 'form or

manufacturing postponement' and 'logistical or time postponement'.

The benefits of logistical postponement are widely professed in the logistics literature.

For instance Bowersox and Closs (1996) claim it improves customer service and lowers

overall inventory investment, whilst preserving mass manufacturing economies of scale

in their entirety. Van Hoek (1998b) suggests that the centralisation of inventories in

European Distribution Centres (that service a number of countries from one location) is

a practical example of logistical postponement. However many applications of

logistical postponement involve service supply parts, where critical and high cost parts

are maintained in a central inventory to ensure availability to all potential users

(Bowersox and Closs 1996). When demand for a part occurs shipments are made

directly to the service facility using fast, reliable transportation.

Volvo GM Heavy Truck Corporation applied logistical postponement to the supply of

commercial truck parts for emergency roadside repairs in the United States (Narus and

Anderson 1996). The initiative was prompted by the discovery that inventories at the

dealers were exceptionally high but the parts actually needed were rarely in stock.

Volvo set up a national warehouse stocking the full line of truck parts and used FedEx

Logistics to ship parts within 24 hours to the roadside repair site. This had the effect of

both dramatically reducing parts inventory and improving service.

Logistical postponement is basically confined to the design of distribution networks.

New and Skipworth (2000) conclude that it is concerned with 'the issue of where to

hold finished stock in a distribution system in order to minimise stock holding but

maintain a high level of customer responsiveness. This has been one of the classic

problems of inventory theory for most of the last century and the solution involves

balancing lead-time response, inventory location and transportation costs'. Logistical

postponement is outside the scope of this research project which is principally

concerned with the postponement of manufacturing transformation processes. These by

definition involve the use of resources to change the state or condition of materials to

produce goods (Slack et al. 1998). Thus this research project focuses exclusively on

form postponement. The abbreviation FPp will be used for form postponement from

this point on.

FPp enables the supply of a broad product line 'without the risks associated with

building large finished inventories in anticipation of uncertain demand for specific

items' (New and Skipworth 2000). It also partly preserves the mass manufacturing

economies of scale arising from the MTS approach. This is illustrated by a well known

example of FPp, which was applied in the Benetton clothing factory in Italy (Harvard

Business School 1985, Dapiran 1992). In response to highly volatile demand for the

different coloured jumpers Benetton postponed the dying process. The result was that

the jumpers were manufactured in high volume from bleached yarn thus creating high

manufacturing economies of scale, and only dyed upon the receipt of customer orders

based on actual jumper sales. Consequently finished jumper inventory levels and the

associated carrying costs, both at the factory and at the retailers, were radically reduced.

.2.2 Defining Form Postponement

There are many FPp examples in the logistics and operations literature illustrating its

benefits, but crucial to this research is a precise and clear understanding of what FPp is.

At present the literature provides no consensus on such a definition of FPp. Instead

there are a host of definitions expounding different ideas to varying levels of detail ( for

example Zinn and Bowersox 1988, Lee and Billington 1994, Van Hoek 1998a and

998c, Van Hoek et al. 1996 and 1998). The following working definition was

developed from a review of existing FPp definitions (detailed in section 2.1) and was

used for this research:

'FPp is the delay, until customer orders are received, of the final part of the

transformation processes, through which the number of different product items

proliferates and for which only a short time period is available. The postponed

transformation processes may be manufacturing processes, assembly processes,

configuration processes, packaging, or labelling processes.'

It broadens the Zinn and Bowersox (1988) definition, commonly used in logistics

literature, by not stipulating the geographical location of the postponed process. It

acknowledges that the postponed process may take place not only at a warehouse but at

a factory (as in 'bundled manufacturing' defined by Cooper 1993) or even at the

retailers, and these locations may be near to or remote from the customers. The

diversity suggested by this definition is evident in practice. For example Benetton dyed

their jumpers in their main factory in Italy (Harvard Business School 1985) and Xerox

configured their office digital products to order at their Gloucester plant (Christopher

998). Caterpillar attached options such as lifts and forks to their forklift trucks to

customer order in a US warehouse. Some paint retailers stock the generic paint and a

variety of pigments mixing them to specific customer orders (Feitzinger and Lee 1997).

Logistics literature has naturally focussed on FPp applications where variety is added in

the distribution chain. These tend to involve the postponement of relatively simple

activities that are not operationally challenging in comparison with manufacturing

operations. For example the postponed processes conducted in the warehouses by

Motorola consists of programming the frequencies into the radios and labelling them

accordingly (Andel 1997). It can be argued that when variety is added in the factory it

is likely to involve the postponement of substantially more complex processes and the

operational implications are more significant and difficult to manage. For example the

postponed processes conducted in the Sony Manufacturing (UK) factory at Bridgend

involved fitting PCBs and other components to the 'Eurochassis' (common to all

products) which then underwent final assembly (Ferguson 1989).

Figure 1.2: A matrix of generic postponement-speculation strategies (adapted from Pagh

and Cooper 1998)

This research project was therefore confined to FPp applications where the postponed

process was performed in the same location as the generic processes - adding variety at

the point of manufacture rather than in the distribution chain ('bundled manufacturing'

according to Cooper 1993). Pagh and Cooper (1998) present a two by two matrix of

generic postponement-speculation strategies (see Figure 1.2 for an adapted version).

The dimensions are the degree of postponement-speculation in logistics and

manufacturing. Logistics can range from a speculative strategy where inventories are

speculatively distributed, and therefore decentralised, to a postponement strategy where

distribution is postponed, and therefore inventories are centralised. Manufacturing can

range from a speculative strategy characterised by MTS, to a FPp strategy. Pagh and

Cooper (1998) term this 'MTO'. This cannot be so, because part of the manufacturing

is still conducted speculatively. Therefore this strategy is more accurately referred to as

FPp (as labelled in Figure 1.2). Similarly Pagh and Cooper (1998) term the fourth

quadrant strategy where both logistics and manufacturing is postponed as 'full

Chapter One

8

postponement'. It can be argued that 'full postponement' would be ETO or MTO

(depending upon the type of product) where all activities are postponed, therefore

another row has been added to the matrix to represent this.

The term 'unicentric FPp' is given to applications where the postponed process is

performed in the same location as the generic processes (normally the factory) - adding

variety at the point of manufacture rather than in the distribution chain. Alternatively

the term 'distribution FPp' is given where the postponed process takes place in the

distribution chain.