Delays and postponements have always been talked about in a negative connotation. A delay in making a final product or a delay in servicing your customer doesn't sound good at all, be it any industry in the world. However, sometimes delay in some aspects of business can be more than just 'good'. This delay is in the field of supply chain, more generally called as Inventory Postponement strategy.
A few of us would have read about this during our UG/PG courses of Operations and related fields. However, most of us would have come across this concept regardless of reading about it in college. I have seen it being deployed in one of my previous companies, however what sparked this current blog post is when I saw this concept being used (unknowingly, perhaps) in areas where I had not given much thought earlier. I will continue with the instances where I observed the above concept in action, but first let us get to know what Inventory Postponement is all about.
Inventory postponement is about delaying the difference in your products. The lesser the differences between products, the fewer is the cost associated with holding the inventory. The differences should appear only when it is absolutely essential, the best situation being that differences are included just before shipping the products to the customer. This way a lot of costs can be saved by companies and their supply chain along with balance sheet will be stronger every quarter. Since, a company doesn't need to store all types of intermediary or final stock keeping units (SKUs) it sells, the amount of space required for the same, the amount of handling charges, the amount of other in-store/in-plant logistics, insurance, depreciation etc, everything comes down. And since all of the above (and some more) are part of inventory carrying cost, the direct impact of this strategy is reduction in capital tied, unprofitably, in stocks. Also, think about the reduction in the stress for the person who has been entrusted with the task of ordering different SKUs, when instead of 1000s of varieties, he has to place orders for 50. These 50 with suitable variations based on actual orders will get transformed to 1 of final 1000 SKUs, whichever a particular customer will order. This particular concept is also called Assembled to Order (ATO) and has been employed most notably by Dell and automobile companies. Giving an example of cars, a company will keep a basic model of its brand ready. Now, when an actual order comes from a customer (most of the times, they work on forecasts as well), the company will fit other different features which the customer desires and finally assemble the car as per the order. Inventory postponement with ATO's best examples are seen in this industry. The other end of the spectrum sees another concept called Make to Stock (MTS). In MTS strategy, a company will keep its final products ready and ship it as soon as the order from a customer comes. Although different industries will employ ATO or MTS for their products, inventory postponement will help any company in any industry.
The above can be made more evident by real life examples which I encountered recently.
1. Recently enough, we were getting our house painted and is normally the case, every person in the family wanted a special and different color for his/her room, with the just the right shade and hue. We had chosen Asian Paints for our coloring needs and (although I had studied about them and their extensive palette) we were surprised to know of about 3000 different colors they had on offer. To be frank, I was of the opinion that all these colors will only be available in bigger, metro cities and a city of Ranchi's size may not have the entire collection which Asian Paints had on offer. When I visited a retailer with our different choices and enquired him if he would be having all the shades I wanted, he calmly said that I can have a shade which is not even listed in the catalog. Pleasantly surprised, I asked him how was that even possible, he invited me to the opposite side of his shop which had an old desktop and red-colored machine with Asian Paints written on the top. He told me that he keeps around 7-10 different 'base colors' in cans and all the remaining pigments (for different shades) are in the red machine. Whatever color a customer might choose from the catalog, he just has to enter the code for that color in the desktop, fit a can containing the base color and within 2 minutes, the shade which the customer wanted is ready. Although I had seen the concept working in a different industry altogether, seeing it in action where I had least expected it was extremely pleasing. Imagine the reduction in the amount of inventory that retailer and people similar to him have to keep because of the concept of inventory postponement. This delay in differentiating the final product till the customer places an order has created immense value, both for retailers and customers. That particular retailer also showed me a similar machine of Berger Paints, installed at his premises, serving the same purpose.
2. Strolling in the evening, my friend wanted to have an Ice Gola, which is quite a rage among some people (although I am not a big fan of it). I had read a post on LinkedIn regarding these Golas and how inventory postponement is employed by the seller, and I was reminded of the same when my friend who had earlier ordered a particular flavor, changed her mind at the last moment and ordered some different flavor altogether. Although the seller had already made the Gola with the crushed ice he had in a bucket, he simply proceeded with the new order without ever complaining. He simply put down the bottle which contained the flavor my friend wanted earlier and took up another bottle which had the new flavor. Just imagine what would have been the size of his stall and the amount of different Golas he would have to keep had he not followed, probably unknowingly, the concept of inventory postponement. That same evening we went to a theater for a movie and came for some popcorns during the interval. Although, 7-8 different varieties of popcorns had been listed on display boards, the counter had just one big machine for making the popcorns. Based on the orders from the customers, he would give them chocolate-flavored ones, or cheese-and-butter ones, or caramel ones, or caramel-chocolate-with-extra-cheese ones. Another perfect example of inventory postponement.
This concept can be seen everywhere in today's world. Whether you are out shopping or getting something to eat, whether you are in your office or on the beach, inventory postponement can be seen in one form or the other.
Please post your thoughts in the comments' section below. You can describe if you also have encountered this concept in action. Reach me on twitter as well at @NishantSinha88.
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