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Supply Chain Management and Outsourcing,

Postponement decisions

Sangeetha Jayakumar

School of Management Studies

CUSAT, Kochi-22

E-mail: sangeeliya@gmail.com

Abstract: Supply Chain Management (SCM) and Outsourcing have been


widely recognised as important tools to enhance organisational performance.
Each has their own key characteristics, procedures and processes,
advantages and disadvantages, and has been viewed in various ways by
many parties. As both are commonly implemented in separation of each
other, this paper attempts to discuss the possible links between SCM and
outsourcing. The views on SCM and outsourcing are respectively elaborated,
followed by discussions on possible relationship and the study conducted.
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.
Key Words: Supply Chain Management, Outsourcing, Organisational
performance, postponement decision etc

1.0 INTRODUCTION

Since the 1960s, organisations begun to develop various market strategies especially
in creating and capturing customer’s loyalty (Handfield and Nichols, 1999). The
increasing number of competitors both in local and international market has put
enormous pressures on managers. Creative decisions have to be made, gaining
customers trust and preference is vital to stay in business. One of the ways is through
improvement of services and products.

Outsourcing and Supply Chain Management (SCM) have both been recognised as
alternative strategies to gain higher competitive advantage, other than to achieve
greater organisational performance. Outsourcing contracts secured with Service Level
Agreement (SLA) is an instrument to ensure that an organisation’s needs from the
outsourced functions are satisfactorily met by the service provider. It allows
organisation to use the expertise from outside of the company for its own benefits.
SCM, as strategy is practiced also to satisfy organisations’ needs. In comparison to
outsourcing, it could have a bigger impact, thus signify a higher degree of direct
involvement and effort from internal parts of an organisation, as well as from its
external parties. This is further to the need of a more complex and complicated
arrangements prior to its implementation.

Postponement is one of the supply chain strategies now gaining momentum. By


pushing the point of product differentiation closer to the customer, postponement can
improve customer service levels, reduce inventory costs, and increase top-line
revenue.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. A supply chain strategy, generally speaking, aims at either ensuring
immediate product availability or promising a short response time to a customer order.
The latter strategy is referred to as postponement because decisions about the
transportation of products or the transformation of product form in one of the supply
chain processes (purchasing, manufacturing or distribution) are postponed until an
order is received. The delayed decisions not only can enhance customer satisfaction,
but also can avoid stocking unwanted products. Together with the strategy that
focuses on immediate product availability, a range of supply chain strategies are
available for decision-makers to meet their divergent needs.
Published literature has revealed that the selection of one of these supply chain
strategies is associated with a number of drivers (such as demand uncertainty,
demand for customisation and cost reduction) and enablers (such as part and process
modularity, information system and supply chain collaboration). However, the
operationalisation of the formulation of a supply chain strategy is still under-
developed. One research direction is to develop a strategy formulation process.

2.0. OVERVIEW OF SUPPLY CHAIN MANAGEMENT

2.1 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
otherwise 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. That portion of the supply chain which comes
after the manufacturing process is sometimes known as the distribution network.
Meanwhile, summed up the many definitions of SCM by various authors and
researchers as ‘the task of integrating organisational units along a SC and
coordinating materials, information and financial flows in order to fulfill (ultimate)
customer demands with the aim of improving competitiveness of the supply chain as a
whole. Thus, in the end produce value whether in the form of products or services to
end user

2.2 ELEMENTS OF A SUPPLY CHAIN

A supply chain is a network of facilities and distribution options that performs the
functions of procurement of materials, transformation of these materials into
intermediate and finished products, and the distribution of these finished products to
customers. Supply chains exist in both service and manufacturing organizations,
although the complexity of the chain may vary greatly from industry to industry and
firm to firm. A simple supply chain is made up of several elements that are linked by
the movement of products along it. They are as follows:

Customer – The customer starts the chain of events when they decide to purchase a
product. The customer contacts the sales department of the company, which enters
the sales order for a specific quantity to be delivered on a specific date. If the product
has to be manufactured, the sales order will include a requirement that needs to be
fulfilled.
Planning - The requirement triggered by the customer’s sales order will be combined
with other orders. The planning department will create a production plan to produce
the products to fulfill the customer’s orders.

Purchasing - The purchasing department receives a list of raw materials and


services required by the production department to complete the customer’s orders.
The purchasing department sends purchase orders to selected suppliers to deliver the
necessary manufacturing site on the require date.

Inventory - The raw materials are received from the suppliers, checked for quality
and accuracy and moved into the warehouse. The supplier will then send an invoice
to the company for the items they delivered. The raw materials are stored until the
production department requires them.

Production - Based on a production plan, the raw materials are moved inventory to
the production area. The finished products ordered by the customer are manufactured
using the raw materials purchased from suppliers. After the items have been
completed and tested, they are stored back in the warehouse prior to delivery to the
customer.

Transportation - When the finished product arrives in the warehouse, the shipping
department determines the most efficient method to ship the products so that they are
delivered on or before the date specified by the customer. When the goods are
received by the customer, the company will send an invoice for the delivered
products.

2.3 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.

Two other formal definitions are:

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


The key elements of SC and its management from these definitions are
therefore the upstream parties, the downstream parties and the integration of all the
organisations involved, together with the internal function of an organisation itself. The
upstream parties, as been described by Handfield and Nichols (1999) consists of an
organisation’s functions, processes and network of suppliers while the downstream
function on the other hand concerns the distribution channels, processes and
functions where the product passes through to the end customer. Where external
downstream and upstream functions are concerned, the managers involved in each
upstream and downstream supplier and functions are responsible in making sure that
the deliveries of products and services are done as scheduled to their destinations. If
there are cases where delays are inevitable, the managers are to ensure that the
impact of the delays to the SC and the value it carries will be minimal.

Meanwhile, where organisational units belong to one single enterprise, the


hierarchical coordination is possible and prevailing . While managers in a SC involving
external organisations have to deal with the people outside of its own company, in this
situation mutual understanding have to be reached between the managers of
departments inside the company itself. The term SCM has been used to describe the
planning and control of materials and information flows as well as logistics activities
not only internally within a company, but also externally between companies. Due to
the increasing number of players and forces, a SC may develop into a supply network
which will require a more complex and complicated management system.

The idea of improving products and services through SCM; including to reduce
the production time and cost without compromising the product quality, is that the
managers have to work cooperatively with other organisations in the SC (Handfield
and Nichols, 1999). Eventually, through mutual understanding between them and
ability to reduce the risks of uncertainties in production processes, higher degree of
efficiency can be achieved. Though originally it was used mainly in manufacturing
industry to improve responsiveness and flexibility, and has been found to also
improve organisational competitiveness, SCM has now been recognised by many to
be an important strategic tool for organisation’s efficiency and to gain competitive
advantage.

Interestingly, argues that the SCM practice at present day is merely a


representation of what has been done by Toyota to minimise their waste production,
although it may appear in various forms of products or services SC. The approach
taken by Toyota for external resources management (commonly accepted as the ‘lean
approach’) consists of eight main characters .

Whatever happened, management today now realized that the way to survive is to
prepare oneself a strong and responsive SC; because it will no longer be company
against company, but SC against SC. The strongest competitors are therefore those
who could provide the leadership as well as management to the fully integrated SC;
including external customers as well as suppliers, the prime, their suppliers and their
supplier’s supplier.

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
and 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.

2.4 OBJECTIVES OF SUPPLY CHAIN MANAGEMENT

The traditional objective of supply chain management is to minimize total supply chain
cost to meet the fixed and given demand. This total cost may include a number of
terms such as raw material and other acquisition costs, inbound transportation costs,
facility investment costs, direct and indirect manufacturing costs, inventory holding
costs, interfaculty transportation costs. In building a model for a specific planning
problem we might decide to examine only a portion of company’s entire supply chain
and associated costs.

2.5 SUPPLY CHAIN MANAGEMENT ACTIVITIES

Supply chain management is a cross-function approach including managing the


movement of raw materials into an organization, certain aspects of the internal
processing of materials into finished goods, and the movement of finished goods out
of the organization and toward the end-consumer. As organizations strive to focus on
core competencies and becoming more flexible, they reduce their ownership of raw
materials sources and distribution channels. These functions are increasingly being
outsourced to other entities that can perform the activities better or more cost
effectively. The effect is to increase the number of organizations involved in satisfying
customer demand, while reducing management control of daily logistics operations.
Less control and more supply chain partners led to the creation of supply chain
management concepts. The purpose of supply chain management is to improve trust
and collaboration among supply chain partners, thus improving inventory visibility and
the velocity of inventory movement. Organizations increasingly find that they must rely
on effective supply chains, or networks, to compete in the global market and
networked economy. In Peter Ducker’s (1998) new management paradigms, this
concept of business relationships extends beyond traditional enterprise boundaries
and seeks to organize entire business processes throughout a value chain of multiple
companies.
2.6 SUPPLY CHAIN BUSINESS PROCESS INTEGRATION

Successful SCM requires a change from managing individual functions to integrating


activities into key supply chain processes. An example scenario: the purchasing
department places orders as requirements become known. The marketing
department, responding to customer demand, communicates with several distributors
and retailers as it attempts to determine ways to satisfy this demand. Information
shared between supply chain partners can only be fully leveraged through process
integration.

Supply chain business process integration involves collaborative work between


buyers and suppliers, joint product development, common systems and shared
information. According to Lambert and Cooper (2000), operating an integrated supply
chain requires a continuous information flow. However, in many companies,
management has reached the conclusion that optimizing the product flows cannot be
accomplished without implementing a process approach to the business. The key
supply chain processes stated by Lambert (2004) are:.

1. Customer service management process

Customer Relationship Management concerns the relationship between the


organization and its customers. Customer service is the source of customer
information. It also provides the customer with real-time information on scheduling
and product availability through interfaces with the company's production and
distribution operations. Successful organizations use the following steps to build
customer relationships: determine mutually satisfying goals for organization and
customers, establish and maintain customer rapport, produce positive feelings in the
organization and the customers.

2. Procurement process

Strategic plans are drawn up with suppliers to support the manufacturing flow
management process and the development of new products. In firms where
operations extend globally, sourcing should be managed on a global basis. The
desired outcome is a win-win relationship where both parties benefit, and a reduction
in time required for the design cycle and product development. Activities related to
obtaining products and materials from outside suppliers involve resource planning,
supply sourcing, negotiation, order placement, inbound transportation, storage,
handling and quality assurance many of which include the responsibility to coordinate
with suppliers on matters of scheduling, supply continuity, hedging, and research into
new sources or programs.

3. Product development and commercialization

Here, customers and suppliers must be integrated into the product development
process in order to reduce time to market. As product life cycles shorten, the
appropriate products must be developed and successfully launched with ever-shorter
time-schedules to remain competitive. According to Lambert and Cooper (2000),
managers of the product development and commercialization process must:
coordinate with customer relationship management to identify customer-articulated
needs, Select materials and suppliers in conjunction with procurement, and develop
production technology in manufacturing flow to manufacture and integrate into the
best supply chain flow for the product/market combination.

4. Manufacturing flow management process

The manufacturing process produces and supplies products to the distribution


channels based on past forecasts. Manufacturing processes must be flexible to
respond to market changes and must accommodate mass customization. Orders are
processes operating on a just-in-time (JIT) basis in minimum lot sizes. Also, changes
in the manufacturing flow process lead to shorter cycle times, meaning improved
responsiveness and efficiency in meeting customer demand. Activities related to
planning, scheduling and supporting manufacturing operations, such as work-in-
process storage, handling, transportation, and time phasing of components, inventory
at manufacturing sites and maximum flexibility in the coordination of geographic and
final assemblies postponement of physical distribution operations.

5. Physical distribution

This concerns movement of a finished product/service to customers. In physical


distribution, the customer is the final destination of a marketing channel, and the
availability of the product/service is a vital part of each channel participant's marketing
effort. It is also through the physical distribution process that the time and space of
customer service become an integral part of marketing, thus it links a marketing
channel with its customers (e.g., links manufacturers, wholesalers, retailers).

6. Outsourcing/partnerships

This is not just outsourcing the procurement of materials and components, but also
outsourcing of services that traditionally have been provided in-house. The logic of
this trend is that the company will increasingly focus on those activities in the value
chain where it has a distinctive advantage, and outsource everything else. This
movement has been particularly evident in logistics where the provision of transport,
warehousing and inventory control is increasingly subcontracted to specialists or
logistics partners. Also, managing and controlling this network of partners and
suppliers requires a blend of both central and local involvement. Hence, strategic
decisions need to be taken centrally, with the monitoring and control of supplier
performance and day-to-day liaison with logistics partners being best managed at a
local level.

7. Performance measurement

Experts found a strong relationship from the largest arcs of supplier and customer
integration to market share and profitability. Taking advantage of supplier capabilities
and emphasizing a long-term supply chain perspective in customer relationships can
both be correlated with firm performance. As logistics competency becomes a more
critical factor in creating and maintaining competitive advantage, logistics
measurement becomes increasingly important because the difference between
profitable and unprofitable operations becomes narrower. According to experts,
internal measures are generally collected and analyzed by the firm including Cost,
Customer Service, Productivity measures, Asset measurement, and Quality.

2.7 SUPPLY CHAIN MANAGEMENT PROBLEMS

Supply chain management must address the following problems:

Distribution Network Configuration: number, location and network missions of


suppliers, production facilities, distribution centers, warehouses, cross-docks and
customers.

Distribution Strategy: questions of operating control (centralized, decentralized or


shared); delivery scheme, e.g., direct shipment, pool point shipping, cross docking,
DSD (direct store delivery), closed loop shipping; mode of transportation, e.g., motor
carrier, including truckload, LTL, parcel; railroad, intermodal transport, including TOFC
(trailer on flatcar) and COFC (container on flatcar); ocean freight; airfreight;
replenishment strategy (e.g., pull, push or hybrid); and transportation control (e.g.,
owner-operated, private carrier, common carrier, contract carrier, or 3PL).

Trade-Offs in Logistical Activities: The above activities must be well coordinated in


order to achieve the lowest total logistics cost. Trade-offs may increase the total cost
if only one of the activities is optimized. For example, full truckload (FTL) rates are
more economical on a cost per pallet basis than less than truckload (LTL) shipments.
If, however, a full truckload of a product is ordered to reduce transportation costs,
there will be an increase in inventory holding costs which may increase total logistics
costs. It is therefore imperative to take a systems approach when planning logistical
activities. These trade-offs are key to developing the most efficient and effective
Logistics and SCM strategy.

Information: Integration of processes through the supply chain to share valuable


information, including demand signals, forecasts, inventory, transportation, potential
collaboration, etc.

Inventory Management: Quantity and location of inventory, including raw materials,


work-in-progress (WIP) and finished goods.

Cash Flow: Arranging the payment terms and methodologies for exchanging funds
across entities within the supply chain. Supply chain execution means managing and
coordinating the movement of materials, information and funds across the supply
chain. The flow is bi-directional.

2.7 RISKS AND CHALLEGES ASSOCIATED WITH SCM


To implement SCM is not an easy task. The managers who decided to do so will most
likely to face at least these challenges as been categorized into several categories
(Handfield and Nichols, 1999) i.e. information systems, inventory management, and in
establishing trust between SC members. In the implementation of information
systems, problems occur when appropriate information is not available to the people
who need it. Sometimes, the information is available but the SC members are
reluctant to share it due to the lack of trust and the fear that the information will be
revealed to competitors. For inventory management, although it has been shown to
be improving, the need for expediting late shipments never seems to disappear
entirely. There are always delays in shipments for various reasons; slowdown
because of customs crossing international boarders, adverse weather patterns, poor

communication and even simple human error are always inevitable. Finally,
establishing trust between parties in SC which is believed to be the most challenging
task of all. Legal experts may produce a huge quantity of contractual agreements
which in the end is useless when parties inevitably have a conflict. Conflict
management, especially in inter-organisational relationship is becoming more difficult
to manage everyday. Having broken the bond of trust, it will become even more
difficult to repair. In conclusion, SCM has been seen as a new era, other than a tool to
enhance performance and to gain higher competitive advantage. The significance of
its implementation is increasing everyday. If the trend of competition against other SC
or network should stay and proceed instead of amongst companies, it should also in
the end become vital for every company’s means of survival. The application of SCM
however requires higher degree of commitment among the participants. Undoubtedly,
to involve in SC collaboration will mean to put rather a lot of company’s valuables at
stakes. A company deciding to get involve in it should make adequate preparation,
including analysis on various aspects to ensure the company’s readiness to be
engaged in such demanding relationship.

3.0 OUTSOURCING

Outsourcing or sub-servicing often refers to the process of contracting to a third-party.


While outsourcing may be viewed as a component to the growing division of labor
encompassing all societies, the term did not enter the English-speaking lexicon until
the 1980s. Since the 1980s, transnational corporations have increased subcontracting
across national boundaries. In the United States, outsourcing is a popular political
issue.

A precise definition of outsourcing has yet to be agreed upon. Thus, the term is used
inconsistently. However, outsourcing is often viewed as involving the contracting out
of a business function - commonly one previously performed in-house - to an external
provider. In this sense, two organizations may enter a contractual agreement involving
an exchange of services and payments. Of recent concern is the ability of businesses
to outsource to suppliers outside the nation, sometimes referred to as offshoring or
offshore outsourcing (which are odd terms because doing business with another
country does not mean you have to go offshore) In addition, several related terms
have emerged to grasp various aspects of the complex relationship between
economic organizations or networks, such as nearshoring, multisourcing and
strategic outsourcing. Almost any conceivable business practice can be outsourced
for any number of stated reasons. The implications of outsourcing objectively and
subjectively vary across time and space.

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. CIO defines
outsourcing as an arrangement in which one company provides services for another
company that could also be or usually have been provided in-house. Automatic data
processing Inc. (ADP) defines outsourcing as the contracting out of a company’s non-
core, non-revenue-producing activities to specialists. It differs from contracting in that
outsourcing is a strategic management tool that involves the restructuring of an
organization around what it does best—its core competencies.

3.1 WHY DO COMPANIES OUTSOURCE?

There are several reasons why outsourcing. The simplest reason to outsource is to
alleviate administrative burdens and focus on strategic areas. As the companies move
from non-outsourcing environment to an outsourcing environment the profile of the
time spent by the executives on various activities change dramatically. According to a
non-outsourcing environment, executives spend 60 per cent of their time on
administration matters, while 30 per cent on tactical issues and this leaves only 10 per
cent of their time. The time spent by companies on various activities in outsourcing
and non-outsourcing environments focus on strategic matters. On the contrary when
they switch to an outsourcing environment and outsource some of the activities they
need to spend only 10 per cent of their time on handling administration issues, 30 per
cent time they focus on tactical matters while 60 per cent of their time they can devote
to thinking, strategizing and planning.

3.2 REASONS BEHING OUTSOURCING

1. Reduce costs:

A company may emphasize cost savings for a variety of reasons, such asbeing in a
poor financial position, or because of a goal to increase profits. Reducing costs by
using a supplier is possible, but not in all situations. A supplier has clearly lower costs,
if it can centralize the work of several companies at one location, such as central truck
maintenance facilities or a data processing centre. It can also lower costs if materials
or supplies can be bought at lower costs by using volume purchasing. It can also
purchase assets from a company and then lease the assets back as a part of an
outsourcing deal, thereby giving the companies an upfront cash infusion. Otherwise,
its costs will be higher than those of the company, for it must include a profit as well
as sales and marketing costs in its budget—an internal department does not have to
earn a profit, nor does it have a sales force. Thus, there are a few situations in which
a company can reduce its costs by outsourcing, but there are many more cases
where this is not a realistic reason for outsourcing.

2. Focus on core functions:


A company typically has a small number of functions that are key to its survival while
other functions or activities are required to be done but are non-core. It may want to
focus all of its energies on those functions and distribute all other functions among a
group of suppliers who are capable of performing them well enough that the company
management will not have to be bothered with any of the details associated with
running them. The company may even want to outsource those functions that are
core functions at the moment, but which are expected to become less important in the
near future due to changes in the nature of the business. In addition, a company could
even outsource a function that is considered key to the company’s survival if it can
find a supplier that can perform the function better—in short, only keep those
functions that are core functions and which the company can q j do better than any
supplier. For example, a company may be the low cost manufacturer in its industry,
which allows it to maintain a large enough, pricing — advantage over its competitors,
that it is guaranteed a large share of the market.

3. Acquire new skills:

A company may find that its in-house skill set is inadequate for a given function. This
is the most common reason and is used for outsourcing those functions that require
high skill levels, such as engineering and computer services.

4. Acquire better management:

A company may find that an in-house function is not performing as expected not
because of any problem with the staff but because of inadequate management
support or capability. Symptoms of this are high turnover, absenteeism, poor work
products and missed deadlines. It can be very hard to obtain quality management, so
outsourcing a function to a supplier just to gain access to the supplier’s better
management can be a viable option. It may also be possible to rent management from
the supplier. This can be a good option in all functional areas, though it is more
common in areas requiring high levels of expertise such as engineering.

5. Assist a fast growth situation:

If a company is rapidly acquiring market share, the management team will be


stretched to its limit, building the company up so that it can handle the vastly
increased volume of business. In such situations, the management team will
desperately need additional help in running the company. A supplier can step in and
take over the function so that the management team can focus its attention on a
smaller number of core activities. For example, a company in a high growth situation
may outsource its customer support function to a supplier, who already has the phone
line “capacity and trained staff available to handle the deluge of incoming calls.

6. Avoid labour problems:

If a company is constantly bogged down by labour problems which start affecting its
productivity and performance, outsourcing becomes a viable option. Companies can
in such cases use suppliers infrastructure, manpower and facilities for production and
concentrate on marketing or getting business.
7. Focus on strategy:

A company’s managers typically spend the bulk of each day handling the detailed
operations of their functional areas—the tactical aspects of the job. By outsourcing a
function while retaining the core management team, a company can give the tactical
part of each manager’s job to supplier, which allows the management team to spend
far more time in such strategy related issues as market positioning, new product
development, acquisitions, and long-term financing issues.

8. Avoid major investments:

A company may find that it has a function that is not as efficient as it could be, due to
lack of investment in the function. If the company keeps the function in-house, it will
eventually have to make a major investment in the function in order to modernize it.
Outsourcing this function can avoid any major investments. For example, by
outsourcing transportation activity, the company that owns an ageing transportation
fleet can sell the fleet to a supplier, who then can provide an upgraded fleet to the
company as part of its service.

9. Handle overflow situations:

A company may find that there are times of the day or year when a function is
overloaded for reasons that are beyond its control. In these situations it may be cost
effective to retain a supplier to whom the excess work will be shunted when the in-
house staff is unable to keep up with demand. This is a reasonable alternative to the
less palatable option ofoverstaffing the in-house function in order to deal with overflow
situations that may only occur a small percentage of time. This is a popular option for
help desk services as well as customer support, where excess incoming calls are sent
to the supplier instead of having customers wait on line for an excessively long time.

10. Improve flexibility:

This is similar to using outsourcing to handle overflow situations, except that the
supplier gets the entire function, not just the overflow business. When a function
experiences extremely large swings in the volume of work it handles, it may be easier
to eliminate the fixed cost of an internal staff and move the function to a supplier who
will only be paid for the actual work done. This converts a fixed cost into variable cost
—the price of the supplier’s services will fluctuate directly with the transaction volume
it handles.

11. Improve ratios:

Some companies are so driven by their performance ratios that they will outsource
functions solely to improve them. For example, outsourcing a function that involves
transferring assets to the supplier will increase the company’s return on assets (which
is one of the most important measurements for many companies). The functions most
likely to improve this ratio are those heavy in assets, such as maintenance,
manufacturing and computer services. Another ratio that can be improved is
profitability per person. To enhance this, a company should outsource all functions
involving large numbers of employees, such as manufacturing or sales.

12. Jump on to the bandwagon:

A company may decide to outsource a function simply because everyone else is


doing it, too. Also, a large amount of coverage of outsourcing in various national or
industry specific publications will give company management the impression that
outsourcing is the trend, and they must use it or fail. For example, due to the large
amount of publicity surrounding some of the very large computer services outsourcing
deals, the bandwagon effect has probably led to additional outsourcing deals for the
computer services function.

13. Enhance credibility:

A small company can use outsourcing as a marketing tool. It can tell potential
customers the names of its suppliers, implying that since its functions are being
maintained by such well-known suppliers, the company’s customers can be assured
of a high degree of quality service. In these instances, the company will want to hire
the best known suppliers, since it wants to draw off of their prestige. Also, for key
functions, the company may even want to team up “with a supplier to make joint
presentations to company customers, since having the suppliers staff present gives
the company additional credibility.

14. Maintain old functions:

A company may find that its in-house staff is unable to maintain its existing functions,
while transitioning to new technology or to a new location. Outsourcing is a good
solution here, for it allows the company to focus its efforts on implementing new
initiatives while the supplier maintains existing day-to-day functions. This reason is
most common in computer services, where suppliers are hired to maintain old ‘legacy’
systems while the in-house staff works on transitions to an entirely new computer
system.

15. Improve performance:

A company may find that it has a function that has bloated costs or inadequate
performance. To shake up the function, company management can put the function
out to bid and include the internal function’s staff in the bidding process. The internal
staff can then submit a bid alongside outside suppliers that commits it to specific
service levels and costs. If the bid proves to be competitive, management can keep
the function in-house, but hold the functions staff to the specific cost and performance
levels noted in its bid. As long as suppliers are told upfront that the internal staff will
be bidding and that the selection will be a fair process, they should not have a
problem with this type of competition. This approach can be used for any functional
area.

16. Begin a strategic initiative:


A company’s management may declare complete company reorganization and
outsourcing can be used to put an exclamation point on its determination to really
change the current situation. By making such a significant move at the start of the
reorganization, employees will know that management is serious about the changes
and will be more likely to assist in making the transition to the new company structure.

Usually one of the above reasons dictates an outsourcing decision. But before finally
taking the plunge, company should exhaustively evaluate the working and functioning
of the department/function concerned. Many a time there is a deeper problem where
the function in question is not doing a good job of presenting its benefits to
management. In such a case, the function manager may not be able to showcase its
accomplishments, or showing management that the cost of keeping the function in-
house is more favourable.

If the management suspects that this may be the reason why outsourcing is being
considered, it is useful to bring in a consultant who can review the performance of the
In-house employees and see if they are, in fact doing a better job than they are
saying. Sometimes investigating the ability of in-house staff prior to outsourcing
functions will keep the outsourcing from occurring.

The manager who is making the outsourcing decision should also consider that it is
not necessary to outsource an entire functional area—instead the manager can cherry
pick only those tasks within the function that are clearly worthy of being outsourced
and keep all other tasks in house. This reduces the risk to the company of having the
chosen supplier do a bad job of handling its assigned tasks, since fewer tasks are at
risk, and it allows the company to hand over the remaining functional tasks to the
supplier as it becomes more comfortable with the supplier’s performance. For
example, a company can outsource just the maintenance of its computer services
function, or it may add network services, telephone services, application development,
or data centre operations task to one or more suppliers. These options are all
available to the manager who is edging into a decision to outsource. The typical path
that a company follows starts with a function that has minimum strategic value and will
not present a problem even if the supplier does a poor job of providing the service. If
the company’s experience with these low-end functions prove successful, then
company management will be more likely to advance to outsourcing those functions
with more strategic value or with more company threatening consequences, if the
provided service is inadequate. These functions include accounting, HR and materials
management. Finally, if the company continues to perform well with all or part of these
functions; typically these are manufacturing, computer services and engineering
(though this may vary by industry). Only by considering the reasons in favour of
outsourcing alongside the associated risks can a manager arrive at a considered
decision to outsource a function.

3.3 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.

The practice of outsourcing is believed by many to be sustainable. Lankford and for


instance revealed that a study has 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.

Several outsourcing framework and models presented have signified the importance
of identifying the organisations’ core business and core competence . The core
competence paradigm is based on companies understanding what internal skills and
resources they should own and control through internal contracts in order to sustain
their business success. Other than core competence, the organisation must also first
understand the business perfectly in every possible aspect, namely the operations,
tactical and strategic.

Various forms of organisational benefits and advantages have been related to the
idea of outsourcing. Since outsourcing has attracted many parties to explore the
possible benefits and profits it may bring, outsourcing benefits, drivers and
advantages have been carefully scrutinised and clearly explained by many
researchers To summarise Outsourcing is claimed to reduce costs, expand services
and expertise, improve employee productivity and morale, and create a more positive
corporate image by allowing the organisation to refocus their resources on their core
business, buy technologies from vendors that would be too expensive for them to
reproduce internally, re-examine the organisations’ plans, make them more efficient
and save time and money while improving efficiencies, and improve the plans’ service
level to their employees by making the information more consistent and more
available. Nevertheless, the cost efficiency advantage could be gained only if the right
tasks are contracted out.

Outsourcing helps companies to improve competitive pressures, improve quality and


efficiency, increase the access to functional expertise, and raise the potential for
creating strategic business alliances and reduce internal administrative problems The
increasingly popular use of outsourcing is also caused by the strategic shift in the
ways the organisations are managing their businesses other than market forces and
technical considerations.

Outsourcing allows organisations to take advantage of strengths within the supply


market. It is therefore possible for one to conclude that the advantages could benefit
not only the end service receivers (customers) who get much better value for their
money, but also the numerous suppliers to be able to make profit. In the end, the
practice of outsourcing should results in the widening of business opportunities for
small firms and higher profit to the larger organisations practising it.

The conclusion is that the processes have evolved from ‘traditional’ to ‘strategic
outsourcing’. ‘Traditional’, is referred to when the functions outsourced are perceived
as non-core or business support functions – where the suppliers’ competencies are
not specifically required. They may include catering, cleaning, maintenance and so
forth. The outsourcing is said to be ‘strategic’ when a company delegates every other
processes and functions, except those special activities that they could achieve a
unique competitive edge.

The problems and risks which may be associated with outsourcing have been
classified by Gavin and Matherly (1997) into three main and overlapping aspects;
people, process and technology. The ‘people’ problems ranged from the risk of
employees’ emotional or psychological stress, reduction of loyalty to loss of internal
expertise. The declining in the morale and performance of the remaining employees
may also be one of the results of outsourcing. The ‘process’ meanwhile consists of
two categories; incompatibilities between the service provider and the organisation,
and the inability of organisations to sufficiently analyse their decision to outsource.
Among others, the considerations of the future plans made for the company should be
included. Nevertheless, many were revealed to have bound themselves with various
kinds of outsourcing contracts covering long period of ten years, regardless of the fact
that they have not made any future company plan beyond three years (Teresko,
1992). In the same time, Cox and Lonsdale (1997) have found that many companies
have embarked on outsourcing without any formal methodology or guidance. As been
noted earlier, core competencies have been highly related to outsourcing. Where
determining core competencies of one’s organisation could be tricky and the impact
of making mistake is very costly, the importance of careful analysis in making decision
is therefore undoubtedly vital.

Organisations involved in outsourcing are in danger of signing a blank check, as it is


very difficult to detail what are to be provided by the vendor, and it is very easy for the
vendor to persuade them to be given the trust. Outsourcing have also been claimed to
reduce the control of an organisation over the outsourced function, and thus in the
end could result in loss of interests from its customers. Other problems are poor
organisational communication, cross functional political problems, unclear
expectations, uncertainties associated with the stability of the service firms, the issues
of confidentiality, security, time schedules, lack of flexibility, and keeping a contract
shorts and other priorities taking precedence.

3.4 BENEFITS OF OUTSOURCING

Organizations that outsource are seeking to realize benefits or address the following
issues:

• 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.
• 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.
• 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.
• 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.
• 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.

Specific examples of corporate outsourcing

There are situations when a firm may consider outsourcing some of its R&D work to a
contract research organizations or universities. In this context, the two most populous
countries in the world, China and India, provide huge pools from which to find talent.
Both countries produce over 200,000 engineers and science graduates each year.
Moreover both countries are low cost sourcing countries.

Outsourcing in the information technology field has two meanings. One is to


commission the development of an application to another organization, usually a
company that specializes in the development of this type of application. The other is
to hire the services of another company to manage all or parts of the services that
otherwise would be rendered by an IT unit of the organization. The latter concept
might not include development of new applications.
4.0 OUTSOURCING IN SCM

Outsourcing logistics has been a favourite with companies since several years. It is
only recently that companies have started thinking about outsourcing other aspects of
SCM.

Despite the wide acceptance of outsourcing logistics functions, a variety of


organizational concerns inhibit the outsourcing of logistics processes, including:

1. 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.

2. 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 dieir needs.

3. 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.

4. 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.

For example, some companies feel that an outsourcer may not be sensitized to the
unique logistics needs of their product lines. Others feel that outsourcers are not
equipped to deal with dynamic or mission-critical operations. Due to this lack of
confidence, companies are cautious about getting locked into a long-term contract
with an outsourcer and are concerned about the associated legal fees and penalties
that would be incurred if disputes arose.

4.1 RELATIONSHIP BETWEEN SCM AND OUTSOURCING

SCM and outsourcing have both been given increasing attention since their
applications were recognised by many as significant profit and performance
enhancers. Every business is a part of a big SC and supply network (Handfield and
Nichols, 1999). Nevertheless, the management of a company could choose to either;
(a) implement only SCM, or (b) implement only outsourcing or (c) implement both
outsourcing and SCM.

The decision to apply either outsourcing or SCM or even both rests on the
management’s readiness to face the consequences each application brings. As
outsourcing may increase organisation’s operating flexibility and allows the transfer
of operational risks to another party, SCM though utilises more resources in a way
gives the organisation direct involvement with each stage of every processes and
functions, and thus allowing clearer view and direct control for improvements. A fine
example of situation (a) is a big company which has it all; from the acquiring of
resources from mother earth, manufacturing, processing, delivering and finally the
delivery of the final product to the end customer. It may not reside on one big area
but scattered around, but the asset and management of all processes however trivial
are the company’s own responsibility and done by its own staff.

A company may choose not to embark in the management of SC; the reasons may
range from inadequacy of assets or expertise, to the nature of businesses they are
in. It may however at that time outsource a number of the company’s functions, such
as those perceived as non-core activities like cleaning, maintenance of buildings and
so forth. These are the cases where outsourcing function stands individually to the
respected companies, though they may be involved in a SC managed by another
organization.

Increasing number of companies however has adopted a strategy which led to the
outsourcing of more activities to suppliers. This strategy has resulted in the company
becoming a ‘systems integrator’, in which it manages and coordinates a network of
best production and service providers. Such strategy is based on the premise that
the company should outsource those activities (both production and service) where it
can develop no strategic advantage, with the supply base comprising a network of
specialist focusing on their distinct area of competence delivering products and
services to the systems integrator. Therefore, it may be seen that the growing
practice of outsourcing by a company could in the end lead to the implementation of
SCM. This could be further encouraged by the intensifying competition among
industry players, and the widening trend of supply network competing against other
supply networks rather than single entity or company against others.

Interestingly, a company which has only been practicing SCM could also in the end
exercise both SCM and outsourcing. In a broad sense, SCM may also simply mean to
‘manage a SC’. Where this is the condition, an SCM itself can be outsourced by a
company to another, whereby the management of all external processes, information
and material flows and so forth to meet the main company’s needs become the SC
manager’s responsibility. The main company shall then focus on its internal core
processes while monitoring the performance of SC manager, by setting a certain
standard in which the service provider will have to meet. In this situation, the SLA will
become vital in the relationship.

Outsourcing may also be one of the important tools for a company practicing SCM to
reap as much benefits as possible. Whether outsourcing opens the door to practicing
SCM and/or plays a beneficial role to make SCM more effective and efficient, or; the
other way round, relies entirely on the practice and perception of a company.

4.2 RISKS IN OUTSOURCING

These can range from pricing issues to nonperformance by a supplier of a key


function. The person making the outsourcing decision must be aware of these risks
before making the decision to hand over a function to a supplier. Broadly, these risks
can be classified into short-term risks and long-term risks. Companies indulging in
outsourcing have to guard against both of these risks. Short-term risks can include
among others operational issues at supplier’s end, while long-term risks can be
nonalignment of company’s goals with supplier s goals in the long term.

Supplier’s situation may change in the future, causing problems in the outsourcing
relationship. For example, the supplier may have financial difficulties, be bought out
by a company that does not want to be in the outsourcing business, or undergo a shift
in strategy that forces it to provide different services. Also, the technology needed to
service the company’s needs may change over time and the supplier may no longer
be able to service that new technology. These risks can be lowered by ensuring that
there is a termination clause in the outsourcing contract that allows the company to
back out of the contract if any of the above circumstances occur. Also, these risks are
less important if there is a large number of competing suppliers to whom the business
can be shifted. Alternatively, the risk is greater if there are few competing suppliers to
whom the company’s business can be shifted. Supplier’s inability to grow in the same
proportion as the company can be another big risk. But this is a long-term risk and
can be gauged and understood beforehand.

4.3 NEW OPPURTUNITIES IN SCM OUTSOURCING

In today’s global economy, companies are making their best attempt at shedding their
flab and becoming lean and trim. This new avatar can ensure a faster response,
agility and better ability to handle pressure. These companies often find it much more
cost effective to outsource rather than build a proprietary infrastructure. They believe
in having no production facility, no warehouse, no loading dock, no boardroom—just
office space, a handful of employees, and a great idea for a product or service and
marketing strength.

In this case, outsourcing SCM can ensure that the entire necessary infrastructure is in
place, without actually having to spend on any infrastructure. This can save a lot of
working capital from getting locked. Moreover, companies can then focus on core
activity of getting the customers and servicing them efficiently.

Through the use of outsourced services, enterprises can avoid all or some of the
costs associated with physical plant, specialized IT systems and equipment,
telephone lines and bodies—and best of all—no distractions from the carrying out of
their core competencies. Especially young companies or new companies should not
waste their time focusing on building these operational infrastructures when their
primary business is to create.aud sell products and services—and not man, aging
supply chain activities.
5.0 SURVEY FINDINGS

A study has been carried out by random distribution of questionnaires to organisations


in the UK, with the objectives of (i) to observe the current view and practices of SCM
and outsourcing (ii) to distinguish the disadvantages and benefits of SCM and
outsourcing practices (iii) to find possible relationship between SCM and outsourcing
and, (iv) to gauge industry players’ view on both subject, focusing on their utilisation
as competitive tools and possible relationship between them.

The survey results have shown that more often, outsourcing and supply chain
management are practiced exclusively from one another. Meanwhile, majority of the
respondents believe that the benefits gained from outsourcing activities are expected
to be similar to those involved in supply chain, while the remaining believes that each
outsourcing and supply chain management brings exclusive advantage from one to
another.

The benefits which could not be gained by outsourcing but only by supply chain
management as given by the respondents include; being able to retain knowledge
and expertise within the organisation, appropriate allocation of risks, knowledge
sharing, common goals, long term cost and quality benefits, and that the advantage
of supply chain management is more to the end product quality than to service.

Meanwhile, the advantages which the respondents believe could be gained by


outsourcing but not through supply chain management activities are including ability
to change supplier more easily, internal headcount reduction, avoidance of internal
politics, reducing of staffing issues such as pension benefits and the like, transfer of
risks, reduced cost for better service quality, more control on workforce than in-
house, technical expertise on economy of scale, reduced risks, and focus on core
business.

Nevertheless, as to propose a possible link between SCM and outsourcing, 80% of


the respondents believe consensusly with the statement that outsourcing could in the
end, results in the implementation of supply chain management

6.0 CONCLUSION ON SCM AND OUTSOURCING

The act of outsourcing has been found to be able to promote the implementation of
SCM. The respondents in the survey also agree that SCM can be an eminent tool to
reap the maximum benefits of outsourcing. Outsourcing can also become an element
of great magnitude in SCM; especially since collaboration with downstream and
upstream parties appears to be one of the significant features in successful SCM.
Individually, each strategy has been proven to help to gain many benefits and has
their own exclusive advantages. Nevertheless, many also agree that they do have
common benefits, and together, they can offer a higher degree of impact towards an
organisation.

SCM and outsourcing have both been given increasing interest by organisations
worldwide, especially due to intensifying competition at both national and global
level. Managers have to act proactively and creatively in finding the best strategy for
their organisation to survive and excel in their market. As the consequence,
improvement in purchasing strategy and collaboration with suppliers and customers
emerged as one of the most widespread measures.

A conclusion can be made that there is a link between SCM and outsourcing. The
implementation of either strategy can also have impact on the other. The
implementation of both strategies however needs careful consideration. Detailed
analysis especially on the organisation’s readiness to embark on such decision
should also be done and not to be taken lightly. It has been shown that there are
many challenges to be faced and the risks associated with each strategy will affect
various aspects of an organisation. Though the price to pay is high, the benefits they
provide should in return ensure greater performance and even improve the chance of
higher profit. Most importantly, to survive the rapid wave of development and
competition, one has to be ready to invest and take risks.

7.0 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. An example of this strategy is Dell Computers' build-to-order online store.
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.

Postponement is one of the supply chain strategies now gaining momentum. By


pushing the point of product differentiation closer to the customer, postponement can
improve customer service levels, reduce inventory costs, and increase top-line
revenue. A supply chain strategy, generally speaking, aims at either ensuring
immediate product availability or promising a short response time to a customer order.
The latter strategy is referred to as postponement because decisions about the
transportation of products or the transformation of product form in one of the supply
chain processes (purchasing, manufacturing or distribution) are postponed until an
order is received. The delayed decisions not only can enhance customer satisfaction,
but also can avoid stocking unwanted products. Together with the strategy that
focuses on immediate product availability, a range of supply chain strategies are
available for decision-makers to meet their divergent needs.

Published literature has revealed that the selection of one of these supply chain
strategies is associated with a number of drivers (such as demand uncertainty,
demand for customisation and cost reduction) and enablers (such as part and process
modularity, information system and supply chain collaboration). However, the
operationalisation of the formulation of a supply chain strategy is still under-
developed. One research direction is to develop a strategy formulation process.
7.1 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.

To reduce the chance of a lost sale, companies have traditionally invested in demand
forecasting methods or have boosted inventory levels. But, now, companies are
recognizing that increasing finished goods inventory can be inefficient, and
forecasting methods are often unreliable. Changes in the global market place and
advancements in information technology have driven companies to reassess the
applicability and feasibility of postponement. Technological advancements,
specifically in supply chain software developed in recent years, have minimized and
often eliminated many of the risks and concerns traditionally associated with the
implementation of postponement Advanced supply chain technology now enables and
supports decision making about where to postpone, when to postpone, and how to
postpone. It also enables companies to connect with trading partners quickly and
easily, allowing for visibility across the entire supply chain. In addressing changes to
the global market place, forward-thinking managers are finding innovative ways to
increase demand for customized goods. One such example is the evolution of
warehouses into advanced fulfillment centers to perform customization of goods at a
point closer to the consumer.

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). This impact is sometimes not limited to the
company implementing postponement, but affects the other players in the
supply chain. As we will describe in the chemical company example,
postponing the process of dying the plastic by letting the selected customers
do it resulted in lower utilization of the company’s dying equipment and non-
recovery of a portion of the fixed cost.

The postponement concept can be compared to an option 1 and the cost associated
with it to the exercise price. Just like it makes sense to exercise only options that are
“in the money,” postponement makes sense to implement only if the benefits outweigh
the associated costs. But again, similar to options on financial assets, there is a lot of
uncertainty involved with regard to the costs and benefits - e.g. implementing
postponement can accelerate the learning process and unlock new options,
previously unavailable, such as attracting business from the customers whose
demands previously could not have been met.

That is why we have outlined in the beginning of the note, as a rule of thumb, certain
preconditions under which postponement is more likely to be successfully introduced.
Companies that experience a radically different picture in their business - demand
with little or no uncertainty, low value of short time to market, low product proliferation,
low inventory values etc. - would obviously gain very little from postponement. For
instance, if a farmer signs a long term contract to supply all (reducing demand
uncertainty) of his or her grain (no SKU proliferation) to a customer at the end of the
growing season (no need for unusual speed) then there really is no benefit to
postponement. However, the strength of postponement lies in its wide applicability as
speed becomes a more important capability. The fact that postponement finds its use
in such different situations as high tech manufacturers and fast food chains is the best
proof of this.

7.2 IMPLEMENTATION

To address the complexities of change associated with a postponement


implementation, many companies are looking for external help. Outsourcing
components of a company’s supply chain is becoming popular. Some vendors, for
example, offer specialized efficiencies in packaging, labeling, assembly, delivery, and
manufacturing at a point closer to the consumer. By leveraging the capabilities and
processes of logistics service providers, companies can rapidly acquire postponement
competencies. Companies are seeking strategic advice and consulting in order to
facilitate the transformation of processes, technology, and management.

1
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. (for
example, in assembling a notebook computer, it would make sense to delay
the installment and production of different LCD displays until the last minute
rather than the casing of the keyboard since an LCD display is much more
expensive than a keyboard casing).
• 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 (point of product
differentiation). It makes sense to defer these operations for the products in the
product line (for example, in Benetton’s case, it was difficult to forecast
demand for each sweater color; once the sweater has been dyed in a certain
color, it is virtually impossible to change it; if the color did not sell well, the
sweater could not be re-colored).
• 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.

Postponement can greatly improve the flexibility capabilities of the firms that employ
it. However, the basic operations framework implies that there is a link between
capabilities and strategy on one hand and capabilities and resources and
infrastructure on the other hand. Therefore the companies who implement
postponement will need to address these links.

First, they need to examine how coherent higher flexibility is with their strategy:

• Does the strategy need to be supported by this new flexibility?


• Is the flexibility position desirable with regard to the customers and competitors?

Second, they need to realign their resources and infrastructure to support the
flexibility capabilities.

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

7.3 BENEFITS

Successful postponement implementations improve customer satisfaction while


minimizing inventory costs. By improving their ability to respond to changes in
demand from local and global markets, companies are better able to compete on time
while remaining cost competitive.

• 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

Since finished products are manufactured from generic components, companies are
better able to deliver finished goods on time as a result of postponement.

Bottom-Line Benefits

Overall, postponement’s primary benefits are to reduce the effects of market


uncertainty and to meet customer needs, while effectively managing supply chain
costs. In many cases, lower overall supply chain costs were achieved by respondents.

7.4 CRITICAL SUCCESS FACTORS

To overcome these challenges, our survey identified a series of critical success


factors that drive successful postponement strategies. 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. In
addition, external collaboration with suppliers and consumers is critical. If suppliers
cannot respond to the changes as a result of postponement, and if product design is
not tailored to customer requirements, postponement can result in cost overruns and
increased lead times. The foundation of every successful postponement
implementation is organizational buy-in. If management is not willing to take risks,
implement significant changes, and monitor adjusted metrics, they will be less likely to
reap the benefits of postponement.

7.5 CHALLENGES

Since postponement often involves a fundamental redesign of decade-old


manufacturing processes, its implementation can be challenging. However, this can
be accomplished through an incremental implementation strategy. 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.

7.6 CONCLUSION

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.

8.0 REFERENCES

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