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.

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 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 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.


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

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.


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, repricing, 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. 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. 

Cost restructuring

Benefits of Outsourcing
Improve quality

achieve a steep change in quality through contracting out the service with a new service level agreement. Access to intellectual property and wider experience and 



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
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. Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation. 

Enhance capacity for innovation

Benefits of Outsourcing
Reduce time to market

The acceleration of the development or production of a product through the additional capability brought by the supplier. 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
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. The outsourced company will usually be prepared to manage a temporary or permanent increase or decrease in production. Individuals may wish to outsource their work in order to optimise their work-leisure balance. 


Creating leisure time

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.

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 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.

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.

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.

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 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 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

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 successful implementations 

Reduces inventory costs by as much as 30% to 40% in  Improvement in Order Fill Rates

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.


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.


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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