This paper examines how warehouses adapt their function when businesses adopt postponement strategies in supply chain management. Beginning with the historical context of inventory challenges and the development of postponement as a concept, the paper analyzes three key strategies: form postponement, the two-level inventory system, and combinations of multiple approaches. For each strategy, the paper explains how the warehouse shifts from a passive storage facility to an active distribution and control hub. A comparative analysis highlights how each approach reduces working capital tied up in inventory, improves responsiveness to demand fluctuations, and lowers operational risk in an era of accelerating globalization.
Over the years, businesses have faced a number of challenges in supply chain and inventory management. Changes in consumer demand meant that during periods of economic prosperity, many retail locations often experienced shortages of various products. This prompted some retailers to seek more effective ways to respond to demand, leading them to increase their overall available supply. However, individual locations could not carry large inventories of various products, which led to the creation of warehouses. Warehouses allowed organizations to supply numerous locations and deal with fluctuations in demand.
Yet this kind of strategy required considerable upfront investment, with executives attempting to forecast future demand. Many retailers believed that storing products at warehouses strategically placed near their stores would help mitigate these effects. A large number of retailers consequently adopted this strategy as a way to remain prepared for changes in demand. The idea was that if demand was slow, the warehouse could store products until demand increased, and during high-demand periods the warehouse would ensure that increased levels could always be met.
The problem with this strategy was that the large upfront investments and storage of inventory could affect a company's liquidity and cause earnings to become volatile. A clear example is May Company, which, after implementing such a strategy, took large write-downs within two years totaling $3.9 million (Bates 1977, p. 74). This experience contributed to the development of a postponement strategy.
Simply put, postponement is when a business waits for an order to be placed by the customer before building the product to the customer's specifications. The idea is that this strategy keeps the amount of working capital tied up in inventory low, while allowing the company to respond more effectively to changes in demand. As a result, the role of the warehouse changes when this approach is applied. To fully understand this changing role requires examining how postponement can affect operations and how a warehouse can adapt accordingly.
The idea of waiting to produce a product based on customer demand was originally conceived during the 1920s; however, it was not until the 1950s that these ideas began to gain traction (Chiou 2002, pp. 107–125). One key component within the system is the role the warehouse plays as part of the process. 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 most in demand. When using any postponement strategy, a number of different tools and tactics are available, since each business has different needs and will apply them based on its own organizational context. As a result, a number of different postponement strategies have been developed; a few of the most notable include form postponement, the two-level warehouse inventory system, and the combination of different inventory systems.
Form postponement is when a company delays the production of a particular product until a specific order has been placed. Under this system, various commodities and related goods are stored at a warehouse near the manufacturing facility. Many companies use this form of postponement as a way to provide numerous products to customers: they manufacture a certain quantity of products following general product specification guidelines while simultaneously maintaining a second production line that builds specific products based on individual customer requests. This kind of system allows an organization to build up inventory to a certain point and adjust to changes in demand.
The way a warehouse plays a role under this postponement strategy is through a central location approach. The warehouse serves as the central location for storing the various raw materials and other goods needed to create the product, and then distributes the different parts and materials to the various production facilities. This is important because such a system can help streamline operations within a company (Van Hoeck 1998, pp. 33–55). The warehouse serves as the central supplier for both the general production line and the line producing goods designed to customer specifications.
The following diagram illustrates how this system works in practice:
Form Postponement Flow: Manufacturer → Central Distribution Facility → General Production Line / Specific Production Line → Final Product Delivered to Customers
The results of using this kind of system include reduced inventory levels, lower costs, improved customer service, and a reduced risk of inventory becoming obsolete. However, two main problems exist with implementing this kind of supply chain: it is vulnerable to increases in the costs of natural resources, and it can encounter resistance from the culture within an organization (Van Hoeck 1998, pp. 33–55).
This approach demonstrates how a central warehouse system can work well for a variety of businesses. In order for this strategy to be effective, a company must consolidate to one central warehouse that will serve as the central distribution center. The warehouse is then able to supply the right amount of parts to each type of production line—both the general and the customer-specific lines. Over the long term, this increases the operational efficiency of the organization and enables it to adjust quickly to changes in demand. Executives must therefore maintain flexibility when applying this postponement strategy and remain watchful of inflexibility among 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).
The two-level inventory system is when a company establishes two different warehouses in a region. The idea is that both locations can maintain a large inventory of supplies, with the second warehouse serving as a type of stop-gap for the other. If one warehouse does not have the required inventory, there is sufficient time for a location to receive the products it needs, either from the second warehouse or delivered directly from the manufacturer.
The results of using this kind of system include the ability to quickly replenish stores, improved cost efficiency, and reduced chances of long back-orders. In order for this system to work, both warehouses must be adequately supplied, and the total amount of down time a warehouse would experience for any given product should be measured in days only. Over the long term, the impact of this approach includes an improved understanding of market conditions and the ability to respond to sudden changes in demand. This is important because it shows how the system a company uses will determine how productive it will be. Organizations must use a system that gives them the ability to effectively utilize their different warehouses while reducing risk as much as possible. Over time, this will keep costs low and increase profits, assuming the company quickly resupplies both warehouses (Huq 2006, pp. 51–66).
The following diagram illustrates how this system would be used in practice:
Two-Level Inventory System Flow: Manufacturer → Distribution Center Number 1 / Distribution Center Number 2 → Individual Store
"Integrating business model, inventory reduction, and effective warehousing"
"Side-by-side analysis of all three postponement approaches"
Postponement is having a dramatic impact upon the role of the warehouse in an organization. This is because globalization is changing the nature of business, where changes in demand can occur quickly. Over the years, various businesses have tried carrying large supplies of raw materials and parts; however, this approach has led to losses and is not economically viable. Instead, organizations have been resorting to postponement as a way to reduce the amount of working capital invested in inventory and to reduce the underlying levels of risk.
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