Postponement / Risk pooling in Supply Chain
 

Product design often plays an important role in supply chain management. Many products come in different varieties – meeting global demand for variety by holding multiple Stock Keeping Units (SKUs) of similar products can require vast inventories.
 

 

By redesigning the product so that more inventory can be held in a customizable, "lowest common denominator" form, inventory can be reduced.

This powerful supply chain management strategy is known as "postponement", or "risk pooling"; postponement of the point of product differentiation, or pooling of the risk of specific SKU forecast error.

A thorough study concluded that companies using postponement strategies in their supply chains typically showed significant

improvements in the following performance measures :

  • More accurate demand forecasting

  • Reduced inventory costs

  • Higher customer satisfaction

  • Increased revenue

The reason sales (demand) forecasts become more accurate is that postponement changes the entity to be forecasted, typically from item-level (SKU-level) sales to aggregated quantities such as sales by product family or group. Thus, while forecast error at the SKU level may actually be unchanged, there is a distinct benefit to postponement, since it is virtually always true that forecasting aggregated quantities (e.g., sales of a product family) is easier than forecasting detailed quantities (e.g. SKU-level sales).

With postponement, the new product design allows managers to make decisions based on the more-accurate aggregate forecast rather than less-accurate SKU-level forecasts. Inventory costs are lower because there are fewer overstocked products, customer satisfaction is higher because there are fewer stock-outs, and revenues are higher because there are fewer lost sales.

However, the survey also showed that many firms have not yet implemented postponement along with their supply chain management initiatives.

The major stumbling blocks are :

 

  • Lack of knowledge about benefits of postponement and costs

  • Belief that their product or technology limits postponement

  • Organizational misalignment (silo thinking)

   

The first two stumbling blocks can be solved through a greater understanding of postponement at all relevant levels of the company, including finance, manufacturing, sales/marketing, and engineering/design. Regarding organizational misalignment, we have noted elsewhere in our modules that as management discovers the real benefits to postponement, the organizational structure often becomes more accommodating to ensure success (this is true for many cross-functional supply chain initiatives). In the best cases, metrics, or performance measures, on which various departments are evaluated would shift to reflect a more cooperative environment; one in which corporate (and entire supply chain) performance is paramount.
 

 

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