Should you assemble products before an order is received?

Abstract

Most companies address these questions by supplying stores on the basis of a sales forecast that estimates sales by product and by store. Benetton's alternative approach illustrates the subject of this article. The company keeps inventories of white clothing components that are only knit and dyed once an order specifying the desired style and color is received from a store. This delay in finalizing the configuration of a product until a customer order is received is known as postponement. Postponement is effective as a distribution strategy when errors in demand forecasting are high. Difficulties in forecasting demand arise from uncertainty regarding future market conditions and are enhanced by the size of a firm's product line. It is clearly more difficult to predict sales for sweaters of a certain color and style than sales for sweaters in general. Thus, the greater the number of colors and styles made, the greater the percentage error in sales forecasting. Forecasting error causes inventory misallocations when stores are supplied on the basis of sales forecasts, creating understocks in some stores and overstocks in others. Typical quick fixes for this situation are costly transfers between stores or price reductions in stores sustaining an overstock. When pos tponement is applied, assembly of a product is not finalized until a customer order is received, thereby eliminating the uncertainty involved in deciding where to ship it. The distribution system is hence adjusted to become less dependent on demand forecasting. Assembling in smaller batches does raise production costs, but these increases can be more than offset by savings in other areas. For example, reductions in the number of inventory misallocations reduce transportation costs. Inventory carrying costs are also reduced because separate inventories for each color and style are no longer needed. In addition to savings in transportation and inventory carrying costs, pos tponement provides greater flexibility in assembly. Products are assembled in response to a customer order, allowing the firm to improve customer choice of colors and styles with less investment in inventory. Benetton enjoys a competitive advantage in the market by offering a greater variety of garment colors and styles and by tailoring them to specific market segments. A much larger inventory would be needed if Benetton decided to keep stocks of all colors and styles in their product line. A final advantage of pos tponement is sustainability. Postponement decisions require significant changes in manufacturing and distribution. The amount of time and organizational commitment required to implement such changes makes pos tponement a difficult target for emulation by competitors and, hence, a source of lasting competitive advantage. This discussion on pos tponement will (1) distinguish among four types of pos tponement and examine costs associated with each; (2) show pos tponement research results pointing to managerial guidelines for the identification of pos tponement opportunities; and (3) discuss the measurement and implementation of decisions regarding pos tponement opportunities.