The Postponement Strategy in Logistics
Sometimes companies produce and stock too many different variants of the same product. Some of them sell, whilst others may sit on the shelves for a long time. As a result, money ends up tied up in stock that does not generate a profit. The postponement strategy helps to solve this problem. It involves only producing the final version of the product once an order has been received. We’ll take a closer look at this in a new blog post from Sargona Private Capital.
For example, a company sells T-shirts with different prints. Instead of producing all possible variants in advance, only plain white T-shirts are stocked. When an order comes in, the required design is applied just before dispatch to the customer.
Ultimately, the postponement strategy not only helps to free up warehouse space and reduce the amount of dead stock, but also allows the company to test demand for a new product variant.
Ultimately, the postponement strategy not only helps to free up warehouse space and reduce the amount of dead stock, but also allows the company to test demand for a new product variant.
The idea is quite simple: the product is not brought to a fully finished state in advance. The final specifications are only added once a specific order has been received. In other words, a basic version of the product is created first. The final assembly, packaging or configuration is then carried out at the last minute. Instead of stocking dozens of possible variants of a single product, the company keeps a single universal semi-finished version in stock, explain the experts at Sargona Private Capital Ltd. When an order comes in, this basic version is quickly transformed into the required variant.
The essence of the postponement strategy
Working capital (the funds used for day-to-day business operations) includes money tied up in stock. Every item of stock represents money that has already been spent but has not yet been recouped by the company through sales. If stock remains in the warehouse for a long time, these funds are effectively ‘tied up’. The company cannot use them for other purposes, note managers at Sargona Private Capital.
The postponement strategy helps to mitigate this problem. Funds are invested in core components that can be used for different product variants, thereby enabling goods to be sold more quickly.
The postponement strategy helps to mitigate this problem. Funds are invested in core components that can be used for different product variants, thereby enabling goods to be sold more quickly.
Impact on working capital
For the strategy to work, processes within the company must be well organised, as emphasised by Sargona Private Capital. A demand forecasting system (an assessment of future sales) is required to help determine how much product may be needed. A warehouse management system (WMS) - software for monitoring warehouse operations - is also essential.
Furthermore, according to Sargona’s experts, a flexible manufacturing system (FMS - a system capable of rapidly changing product configurations) is essential. If these elements do not function effectively, inventory management becomes more difficult and the strategy may fail to deliver the expected results.
Furthermore, according to Sargona’s experts, a flexible manufacturing system (FMS - a system capable of rapidly changing product configurations) is essential. If these elements do not function effectively, inventory management becomes more difficult and the strategy may fail to deliver the expected results.
The postponement strategy does not always automatically reduce costs. If processes are poorly organised, it may, on the contrary, create new problems. For example, if final assembly is slow or inefficient, daily operating costs will increase. When the warehouse cannot process orders quickly enough, delays occur. And if order management and production systems are not coordinated, errors and disruptions in order fulfilment may arise. As a result, instead of saving money, the company may face additional costs and wasted time.
System requirements
Risks of the strategy
To successfully implement a postponement strategy, Sargona’s experts recommend taking the following steps:
It is very important not to implement the strategy across the entire system straight away. It is much safer to try it out on a single product group first. This will allow you to understand whether the approach works in a specific situation and avoid significant financial risks.
- Carefully analyse the product range and identify which product variants make up the bulk of the stock.
- Determine which product components can be made universal.
- Calculate the potential savings from reducing stock levels and compare them with the costs of organising final assembly.
It is very important not to implement the strategy across the entire system straight away. It is much safer to try it out on a single product group first. This will allow you to understand whether the approach works in a specific situation and avoid significant financial risks.
Practical steps to take
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