Warehouse Role in Postponement Over

Warehouse Role in Postponement

Over the years, businesses have faced a number of different challenges as far as their supply chain and inventory management is concerned. Where, changes in demand from consumers would mean that during times of economic prosperity, many retail locations would often experience a shortage of various products. This would cause some retailers to seek out ways, to respond more effectively to demand. At which point, they would begin to increase their overall available supply. However, the problem was that each location could not carry a large inventory of various products, which led to the creation of various warehouses. This would help to supply numerous locations and allow an organization to deal with different issues, as far as changes in demand are concerned. Yet, this kind of strategy required a company to make considerable upfront investments, with executives attempting to guess what demand will look like in the future. To address this issue, many retailers believed that if they could overcome these problems. Then, storing the different products at warehouses that were strategically placed near the different stores would help to mitigate these effects. As a result, a large of number of retailers began to use this strategy, as a way to always be prepared for changes in demand. The idea was that if demand was slow, the warehouse could store the various products until demand would increase. During times when demand was high, the warehouse would provide a way of always meeting increased levels. The problem with using this strategy is that the large upfront investments and storage of inventory, could affect the liquidity of the company and cause earnings to become volatile. Evidence of this can be seen by looking no further than, May Company. Where, after implanting such a strategy, the company was taking large write downs within two years of: $3.9 million. (Bates 1977, pg. 74) This would lead to the development of strategy of postponement. Simply put, this is when a business will wait for the order to be placed, by the customer and then will build the product, to the specifications of the customer. The idea is that this strategy is that, it can keep the amount of working capital tied up in inventory low, while allowing the company to more effectively respond, to changes in demand. As a result, this means that the role of warehouse will change when this theory is being used. To fully understand this changing role of the warehouse requires: examining how postponement can affect operations. Once this takes place, it will highlight how a warehouse can adapt to this changing role.

Explain how a warehouse may play a role in Postponement?

The idea of waiting to produce a product based on demand from customers was: originally created during the 1920's. However, it would not be until the 1950's that these ideas began to gain traction. (Chiou 2002, pp. 107 -- 125) Yet, one key component within the system is the role that the warehouse will play as a part of the process. Where, its traditional role is changing, as the forces of globalization require: the warehouse to be used as a way, to identify and store those items that are most in need. When you are using any kind of postponement strategy, there are a number of different tools and tactics that are available. This is because each business has different needs, where they will apply them based upon the organization itself. At which point, the role the warehouse plays, as a part of the strategy will vary. As a result, a number of different postponement strategies have been developed a few of the most notable would include: form postponement, the two level warehouse inventory system and the combination of different inventory systems.

Form Postponement

Form postponement is when the company is delaying the production of a particular product, until a specific order has been placed with them. Under this kind of system, various commodities and other related goods are: stored at a warehouse near the manufacturing facility. Many companies will use this form of postponement, as a way of providing numerous products to customers. Where, they will manufacture a certain amount of products following general product specification guidelines. At the same time, they will have a second production line that will build specific products; which are based upon what a customer is requesting. The use of this kind of system, allows an organization to be able to build up inventory, to a certain point and adjust to changes in demand. The way that a warehouse would play a role under this postponement strategy is through: a central location approach. What happens is the warehouse would be used as the central location for storing the various raw materials and other goods, to create the product. They will then, distribute the different parts / materials to the various production facilities. This is important, because the use of such a system can help to streamline the operations within company. (Van Hoeck 1998 pp. 33 -- 55) Where, the warehouse could severe as the central supplier to the products that are being produced, for the general public and those that require being designed to customer specifications. The results of using this kind of system would include: reduced inventory levels, lower costs, improved customer service and a reduced risk of having inventory that is sitting, becoming obsolete. However, there are two main problems that exist with implementing this kind of supply chain; it is vulnerable to increases in the costs of natural resources and the culture within an organization. (Van Hoeck 1998 pp. 33 -- 55) The below example illustrate the use of this system in a real world environment.

Form Postponement Diagram

Manufacturer

Central Distribution Facility

General Production Line

Specific Production Line

Final Product that is delivered to Customers

This is significant, because it shows how this kind of system can work well for a variety of businesses. That being said, in order for this kind of strategy to be effective, requires that you consolidate to one central warehouse; that will serve as the central distribution center. At which point, the warehouse would be able to supply the right amount of parts to each type of production line (general and customer specific product lines). Over the long-term, this would increase the operational efficiency of the organization and it would be able to adjust to changes in demand, quickly. As a result, executives must have flexibility when applying this postponement strategy and be watchful of the inflexibility from other managers. If these two factors can be mitigated as much as possible, this kind of system will allow the company to effectively utilize its warehouse, to control the distribution of various parts and raw materials. (Van Hoeck 1998 pp. 33 -- 55)

Two Level Inventory System

The two level inventory system is when a company is establishing two different warehouses in the region. The idea is that they can use both locations to maintain a large inventory of supplies, while having a second warehouse to serve as a type of stop gap for the other. Under this system, both warehouses would able to maintain a large inventory of supplies. If one of the two warehouses does not have the inventory, there is a sufficient amount of time, that a location can receive the required amount of products needed, by having the company deliver them directly from the manufacturer. The results of using this kind of system are: the ability to quickly replenish stores, improved cost efficiency and it reduces the chances of seeing long back orders. In order for this kind of system to work, means that both warehouses must be adequately supplied and the total amount of down time that a warehouse would have, for a product is days. If this takes place, the long-term impact that this will have would be: an improved understanding of the market conditions and the ability to respond to sudden changes in demand. This is important, because it shows how the system that is being used by a company will determine how productive they will be. Where, they must use a system that will give them the ability, to effectively utilize their different warehouses, while reducing risk as much as possible. Over the course of time, this will keep costs low and increase profits dramatically. This is assuming that the company will quickly resupply both warehouses. The below example illustrates how this system would be used in a real world environment. (Huq 2006, pp. 51 -- 66)

Two Level Inventory System Diagram

Manufacturer

Distribution Center Number 1

Distribution Center Number 2

Individual Store

Combining Different Postponement Strategies

It is also possible to combine different strategies that are being utilized, as a part of postponement. This particular strategy will help businesses, to use the different warehouse facilities more effectively. What happens is this model allows a business to utilize a number of different approaches as a part of an effort to maintain control of their supply chain. Where, you are bringing different elements of the business together, to be able to effectively address various supply chain issues. The most notable include: the business model, inventory reduction strategies / risk reduction strategies, inventory levels and effective warehousing. The business model is: where they are examining how the current model, could help to contribute to various supply chain related issues. The inventory reduction / risk reduction strategies are: when the business is seeking out ways to reduce the inventory levels and possible risks as much as possible. Inventory levels are when you are monitoring the effectiveness of using this strategy. Effective warehousing is when the company is utilizing its different warehouse space, to effectively control the inventory levels. These different elements are important, because they illustrate how the warehouse would play a vital role in the postponement process. Where, it is playing role in helping a company to: store, maintain and control inventory levels. As a result, the warehouse is the final point, that the total effects of a company's inventory management strategy will be seen. The below example illustrates how this system would work. (Baker 2008)

Combining Different Postponement Strategies

Business Mode

Inventory Reduction Strategies / Risk Reduction Strategies

Inventory Levels

Effective Warehousing

A Comparison of Postponement Strategies

When you compare the various systems side by side, it is clear that there are a number of different ways that this can help the warehouse adapt to the changes that are occurring. Under the form postponement system, there is one central distribution center that will distribute the different products to the various locations. The two level inventory system; is when you are using two different warehouses, to serve as a stop gap measure, to make certain that the different retail stores have the products they need. Combining the different strategies is when you are looking at the business model that is being used and the underlying inventory levels. Where, the main objective is to examine how both factors, could have an effect on inventory levels. These different strategies are significant; because they show how a shift has occurred in way warehouses are being used. Where, it is playing an increasingly important role in the management of the supply chain and inventory levels. For any organization, effectively being able to deliver the products that consumers need, at the prices they are demanding, will play a major role in determining how successful a business will be in the future. As a result, a variety of warehouse postponement strategies must be utilized, as a way to address the different changes that a business is facing, because of globalization. Where, the most profitable corporations have begun to embrace innovative warehouse postponement strategies, as a way to help improve their overall bottom line. Over the course of time, those businesses that can be able to effectively adapt their postponement strategies, to changes that are taking place in the economy, will see a dramatic improvement in the underlying levels of profitability. Where, the focus on this aspect of the business will help to give the company flexibility at all times. In many ways, one could effectively argue that the ability to control the supply chain and to adapt to changes the industry / economy are essential for continued economic growth. Therefore, it is in the best interests of the business, to utilize warehouse procurement strategies that will help it adjust, to the changes that are taking place.