SCM and Outsourcing,

Postponement Decisions
Supply Chain

 Supply Chain (SC) is a network of various

organisations involved both through
upstream and downstream linkages in
different kinds of activities and processes.
OR
 Supply chain is the system of suppliers,
manufacturers, transportation, distributors,
and vendors that exists to transform raw
materials to final products and supply those
products to customers.
ELEMENTS OF A SUPPLY CHAIN

A supply chain is made up of several elements

that are linked by the movement of products
along it. They are as follows:
 Customer
 Planning
 Purchasing
 Inventory
 Production
 Transportation
SUPPLY CHAIN MANAGEMENT

Supply chain management is a set of

approaches utilized to efficiently integrate
suppliers, manufacturers, warehouses, and
stores, so that merchandise is produced and
distributed at the right quantities, to the right
locations, and at the right time, in order to
minimize system wide costs while satisfying
service level requirements.
 The design and management of seamless, value-
added process across organizational boundaries
to meet the real needs of the end customer
Institute for Supply Management

 Managing supply and demand, sourcing raw

materials and parts, manufacturing and
assembly, ware-housing and inventory tracking,
order entry and order management, distribution
across all channels, and delivery to the customer.
The Supply Chain Council
 To ensure that the supply chain is operating as
efficient as possible and generating the highest
level of customer satisfaction at the lowest cost,
companies have adopted Supply Chain
Management processes and associated
technology.

 SCM has three levels of activities that different

parts of the company will focus on:
 Strategic
 Tactical
 Operational
 Strategic: At this level company management will be
looking to high level strategic decisions concerning the
whole organization, such as the size and location of
manufacturing sites, partnerships with suppliers,
products to be manufactured and sales.
 Tactical: Tactical decisions focus on adopting measures
that will produce cost benefits such as using industry
best practices, developing a purchasing strategy with
favored suppliers, working with logistics companies to
develop cost effect transportation and developing
warehouse strategies to reduce the cost of storing
inventory.
 Operational: Decisions at this level are made each day
in businesses that affect how the products move along
the supply chain. Operational decisions involve making
schedule changes to production, purchasing
agreements with suppliers, taking orders from
customers and moving products in the warehouse.
Outsourcing

 Outsourcing is defined as the contracting of

one or more of a company’s business
processes to an outside service provider to
help increase shareholder value, by primarily
reducing operating cost and focusing on core
competencies.

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Why Outsourcing

Focus on core competencies

Reduced Costs
Acquire new skills
Acquire better management
Assist a fast growth situation
Avoid labour problems
Focus on strategy
Avoid major investments
Handle overflow situations
Improve flexibility
Improve ratios
Enhance credibility
Maintain old functions
Improve performance
Begin a strategic initiative

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CURRENT VIEW ON OUTSOURCING
The numerously presented definitions of
outsourcing have been varied from what is
concerned with the transfer of goods and
services that have been carried out internally
to an external provider to the procurement
of products or services from external sources
of organisation.
 To describe the main features of outsourcing, the
transaction involved normally consists of two parts; the
transfer to a third party of the responsibility for the
operation and management of part of an organisation,
and the provision of services to the organisation by the
supplier, usually for a period of several years.

 Several studies have indicated that outsourcing

operations is the trend of the future, and those
organisations which already involved with outsourcing
are satisfied with the result. At present, the outsourcing
of selected organisational activities is an integral part of
corporate strategy.

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Benefits of Outsourcing
 Cost savings — The lowering of the overall cost of the service to the
business. This will involve reducing the scope, defining quality levels, re-
pricing, re-negotiation, cost re-structuring. Access to lower cost
economies through off shoring called "labor arbitrage" generated by the
wage gap between industrialized and developing nations.

 Focus on Core Business — Resources (for example investment, people,

and infrastructure) are focused on developing the core business. For
example often organizations outsource their IT support to specialised IT
services companies.

 Cost restructuring — Operating leverage is a measure that compares

fixed costs to variable costs. Outsourcing changes the balance of this
ratio by offering a move from fixed to variable cost and also by making
variable costs more predictable.
 Benefits of Outsourcing
(Contd..)
 Improve quality — achieve a steep change in quality through contracting
out the service with a new service level agreement.

 Knowledge — Access to intellectual property and wider experience and

knowledge.

 Contract — Services will be provided to a legally binding contract with

financial penalties and legal redress. This is not the case with internal
services.

 Operational expertise — Access to operational best practice that would

be too difficult or time consuming to develop in-house.
 Benefits of Outsourcing
(Contd..)
 Access to talent — Access to a larger talent pool and a sustainable source
of skills, in particular in science and engineering.

 Capacity management — An improved method of capacity management

of services and technology where the risk in providing the excess capacity
is borne by the supplier.

 Catalyst for change — An organization can use an outsourcing agreement

as a catalyst for major step change that cannot be achieved alone. The
outsourcer becomes a Change agent in the process.

 Enhance capacity for innovation — Companies increasingly use external

knowledge service providers to supplement limited in-house capacity for
product innovation.
 Benefits of Outsourcing
(Contd..)
 Reduce time to market — The acceleration of the development or
production of a product through the additional capability brought by the
supplier.

 Commodification — The trend of standardizing business processes, IT

Services, and application services which enable to buy at the right price,
allows businesses access to services which were only available to large
corporations.

 Risk management — An approach to risk management for some types

of risks is to partner with an outsourcer who is better able to provide the
mitigation.
 Benefits of Outsourcing
(Contd..)
 Venture Capital — Some countries match government funds venture
capital with private venture capital for start-ups that start businesses in
their country.

 Tax Benefit — Countries offer tax incentives to move manufacturing

operations to counter high corporate taxes within another country.

 Scalability — The outsourced company will usually be prepared to

manage a temporary or permanent increase or decrease in production.

 Creating leisure time — Individuals may wish to outsource their work in

order to optimise their work-leisure balance.
 OUTSOURCING IN SCM

 Fear of losing control:

Companies are hesitant to hand over important logistics
processes to a third party. As the third party might also be
managing the logistics processes of competitors, companies
are afraid that trade secrets might be misused, mismanaged, or
lost—or in the worst case, pass through the third-party provider
into the hands of competitors.

 Lack of confidence:
Compounding the fear of loss of control is the lack of
confidence companies feel about the ability of third-party
providers to meet their needs.
 OUTSOURCING IN SCM (Contd..)
 Lack of outsourcing education:
Many companies are familiar with outsourc-ing, in terms of the IT and
business-process enhancements that logistics service providers can
offer. However, they lack a thorough understanding of the experience
of managing the outsourcing service provider throughout the life of the
relationship.
 Management philosophy and tradition:
Many companies simply resist change. They may reject the concept of
outsourcing logistics activities due to a perceived potential negative
effect on their business model and operations. In addition, these
companies may have had poor outsourcing relationships in the past and
may be less inclined to initiate new outsourcing contracts. Furthermore,
they may believe that the geographical separation between them and
their outsourcer could cause service management issues.
Challenges for Outsourcing
Loss of Expertise – Can lead to decrease or total loss of in-house
expertise
Loss of Control – Increases organization’s vulnerability as it
becomes partially or totally dependent on a service provider
Conflict
Need to modify policies/procedures or develop new
policies/procedures to coordinate with vendor
Uncertainty
Cost (perspective)
Staff Morale
 Risks of Outsourcing
 Coordination costs: When any logistics function is outsourced coordination
costs typically increase. It is important for the company to account for these and
decide how they are to be managed with the 3PL.
 Loss of internal logistics management capability: The knowledge and expertise
generated on the day to day operation will reside in the 3PL company's
management team. This becomes crucial as a company grows and makes
reorganizing decisions. A close relationship with the 3PL can help in this regard.
 Reduced contact with final customer: Outsourcing the distribution function
might force the company to lose direct contact with the end customer (at least
physically). This has a critical impact on customer service. It is hard for a
company to define customer service for a 3PL if it does not itself have direct
customer contact. This can also have an impact on the introduction of new
products and services.
Risks of Outsourcing
 Biased choices of service providers: If a 3PL is owned by a large trucking
company and it's managing the distribution function, there might be some
pressure by the parent company of the 3PL to give a portion of the business,
even when it's not competitive.

 Loss of voice in public policy issues: For example, if the distribution and
warehouse functions are outsourced, and there is a threat of some legislation
that will affect the warehousing and trucking industries, the company will not
be able to represent those interests, since they are performed by the 3PL.

 Leakage of sensitive data and information: 3PL companies normally have

access to a lot of information that might be valuable to competitors, leaving
the company vulnerable.
POSTPONEMENT
 Postponement is a business strategy that maximizes possible
benefit and minimizes risk by delaying further investment into a
product or service until the last possible moment.

 The concept of postponement and its applicability to supply chain

management works best under specific demand, product, and
production preconditions. The 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.
AN OVERVIEW OF POSTPONEMENT
 The concept of postponement lies in organizing the production and
distribution of products in such a way that the customization of
these products is made as close to the point when the demand is
known as possible. Postponement belongs to a set of levers used in
inventory management to attack the variability of demand and
supply. This set of levers can be divided into proactive and reactive.
Proactive levers directly attack the causes of variability; reactive
levers help to cope with its consequences. Together with
substitution, specialization, and centralization, postponement is a
reactive lever.
DECISION-MAKING PROCESS
 When developing a postponement strategy, successful companies
create cross-functional teams and invest in information technology
in order to redesign their business processes. Increased visibility in
the supply chain, enabled by technology, allows these decision
makers to determine how changes in one area of the supply chain
will affect other areas. This data also allows decision makers to
model multiple postponement strategies in order to identify the
optimal scenario.
IDEAL POSTPONEMENT
CANDIDATE
 While many industries and companies are prime for postponement,
there are certain business conditions that position a company for a
more successful postponement implementation. 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. Regardless of business conditions,
effective postponement implementation still requires collaboration,
organizational buy-in, concerted effort, and the right information
technology backbone.
POSTPONEMENT COST

Postponement may increase company costs both directly

and indirectly.
 Direct cost increases can be caused by product or process
redesign. For instance, HP printers for dual volt networks
mentioned above had higher unit cost than printers that
were designed for one network only.
 Indirect cost increases can be caused by the changes in
the production and distribution processes with the
consequent impact on the infrastructure and resources
(including labor).
IMPLEMENTATION

Implementation of postponement works best under certain

demand, product and production preconditions.
 Demand Preconditions:
 Fluctuation (e.g. seasonal hikes in demand for ski equipment)
 Unpredictability (e.g. demand for high tech products with a short
product life)
 Urgency - operating on short required order lead times relative to
the production cycle (e.g. Benetton would not be able to run its full
regular production cycle after finding out which sweater colors sell
best in the season)
 Differentiation - associated with distinct customer segments that
require the company to provide a product line in which the products
have different performance characteristics (e.g. different
performance, technological or legal requirements on the same
product in different countries)
 Negative correlation for the products in the product line (e.g.
success of one line of printers can have an adverse impact
 line in which the products have different performance characteristics
(e.g. different performance, technological or legal requirements on
the same product in different countries)
 Negative correlation for the products in the product line (e.g.
success of one line of printers can have an adverse impact on the
demand for the remaining lines of printers)
 Product/product line preconditions:
 High product value - products with high unit value have high
inventory holding cost and high cost of oversupply. The
postponement concept is best applied if there is one particular
component (or step in operations) that has a significantly high value
added. It makes intuitive sense to delay it.

 High customization - product lines with highly customized end

products usually find it difficult to forecast demand on a product
basis. Additionally, it is usually difficult to find alternative uses for
them and therefore their cost of oversupply is high. Because of this,
it is important to realize which production step has the most
significant impact on customization of the product
 High component commonality / modularity - component
commonality refers to a high degree of shared components across
the product line. Shared components result in inventory pooling
effects and also shared production process steps. The component
commonality can be taken one step further in the modularity
concept, which uses sharing of bundles of the components instead
of single components.
 Production preconditions:

 Balanced process capabilities - capabilities, such as cost, time,

quality and flexibility need to be kept in balance. Delaying the
component production until shortly before the demand is known
may imply producing in small batches. However, if the set up and
changeover cost of the production equipment is high, there is a high
level of scale economies in running large batches that would be lost.

 Availability and quality of the outside suppliers - in order to serve

more flexible production needs, the outside suppliers need to
possess similar capabilities in terms of flexibility of deliveries, speed
of order fulfillment and quality of service.

 Availability of information and IT systems in place - a steady flow of

information is needed so that the company can effectively manage
the balance between the supply and the demand.
 Realignment of processes:
 Order taking – e.g., companies that used to collect customer orders
on a monthly basis will need to shorten the information collection
cycle time.
 Purchasing - more flexible and frequent purchasing operations need
to be established.
 Manufacturing – if the installation of the most expensive
components or the point of product differentiation is to be delayed
as much as possible, change in the sequence and timing of
manufacturing steps may be required.
 Warehousing – the function of the warehouse under the
postponement concept may have to be greatly expanded. Instead of
being only a store and shipping location, the warehouse may need to
take a more proactive approach and function as an order
consolidation and customization center.
 Expedition - more frequent and flexible deliveries may be required.
 Realignment of resources:

 Human resources – all of the product, process and infrastructure

changes outlined above will have an impact on the knowledge and
skills the employees will need to possess. Order taking and
purchasing employees will have to learn to manage shorter
deadlines, warehousing employees will have to adopt new skills e.g.
in assembling the products and accept greater responsibilities in
matching the orders and shipping in time. This, in turn, will have an
impact on hiring, training and compensation procedures.

 Supplies - requirements for suppliers’ reliability and timeliness may

be significantly stepped up, which may require supplier switching
and consolidation.
 Realignment of infrastructure:

 production and warehousing premises - it may be necessary to

reconfigure the plant and warehousing network to have the
premises close to the customers or to the distributors.

 Production equipment - set up and changeover times will have to be

decreased to increase flexibility on the production line.

 Information and IT systems - a major overhaul in information

systems may be needed, sometimes with a similar requirement on
the suppliers and the customers, to provide an adequate support.
Vendor managed inventories (VMI) are an example of such a
coordinated action
BENEFITS OF POSTPONEMENT
IMPLEMENTATION
 Improvement in Customer Satisfaction
 Increased ability to offer a wider range of customized goods
 Reduced lead time for orders
 Reduction in Inventory Costs shift upstream to less expensive
generic products, which also reduces inventory obsolescence
costs
 Enables better planning and allocation of resources by
reducing the forecasting horizon
 Reduces inventory costs by as much as 30% to 40% in
successful implementations
 Improvement in Order Fill Rates

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CRITICAL SUCCESS FACTORS

 The keys to a successful postponement strategy are to

produce standardized products and to incorporate
customization at the most advantageous point in the
supply chain. Resolving the competing interests within a
company’s supply chain is also essential. Without
collaboration, including changes in the rewards and
metrics structures of a supply chain, the changes
associated with postponement often result in poor
execution.

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CHALLENGES OF POSTPONMENT
IMPLEMENTATION

 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.

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CONCLUSION OF POSTPONEMNET
 Companies that are in industries where it is particularly difficult to
match supply with demand can benefit the most from implementing
a postponement system. As mentioned earlier, there are three
characteristics that stand out where postponement can have a large
effect: demand uncertainty, substantial product proliferation, and
importance of a quick response relative to the cycle time of
producing the product or service.
 Companies that display any of these characteristics are candidates
for performance improvement through postponement. And the
more of the characteristics companies display, the better candidates
they are. Today, where more and more industries move towards
creating markets of one and where success is driven not so much by
cost or quality but by speed, postponement becomes increasingly
important.

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