Supply Chain Strategies

Rajesh Piplani, Ph. D.

Director, M.Sc. (Supply Chain & Logistics)
Nanyang Technological University, Singapore
Innovative Supply Chain Strategies
• Postponement
• Innovative Supply Chain Strategies

Dr. R Piplani © 2006 2

Principle of Postponement

“The time of shipment and location of final

product processing in the distribution of a
product should be delayed until a customer
order is received.”

Dr. R Piplani © 2006 3

Postponement can only apply for modular product

n Time Postponement
n Avoid shipping goods in anticipation that demand
will occur (Time Based Logistics).
n Form Postponement
n Avoid creating the final form of the product until
demand occurs
n Examples: Computer systems, Steel tubes /sheets,
Paper, Paint.
n Also known as manufacturing postponement or
delayed differentiation.

Dr. R Piplani © 2006 4

Without any Commonality and
Postponement
Operation Buffer

Model A

Model B

Model C

Dr. R Piplani © 2006 5

 With Postponement and
Commonality
Operation Buffer

Incremental investment push pull

for producing common components
and exploiting economies of scale
Model A

Model B

Model C

Potential savings due to

decide which
reduction of inventory model to be
created at this
point --> delayed
differentiation

Dr. R Piplani © 2006 6

 Push-Pull System
n Not practical to implement a pull-based system
throughout the entire supply chain.
n Lead times may be too long, or
n Need to take advantage of economy of scale in production or
transportation
n Delayed differentiation is a way to combine push and
pull systems within a single supply chain.
n The portion of the supply chain prior to product differentiation is
typically a push-based supply chain
n Undifferentiated product is built and transported based on long-
term forecasts
n The portion of the supply chain downstream of the point of
differentiation is a pull-based supply chain.
n Point of differentiation is the push-pull
Dr. R Piplani © 2006 boundary 7
 Push-Pull System
n Postponement allows firms to realize advantages of pull-based
systems, while at the same time allowing for economies of
scale inherent in push-based systems.

Dr. R Piplani © 2006 8

 With Postponement and Commonality
Operation Buffer

Incremental investment Manufacturing

for producing common components plant
and exploiting economies of scale
Model A

Model B

Model C

Potential savings due to Distributor

reduction of inventory or
Retailer

Driven Driven better

by aggregate Make to Stock Make to Order by individual match of
forecast demand supply with
Dr. R Piplani © 2006 9
demand

Push-Pull boundary
 Key Issues in Postponement
Quantify the costs and benefits
n Costs n Benefits
n May involve product, n Reduced levels of safety
process and packaging stocks (risk pooling)
redesign so that semi- n Fewer SKUs
finished products can be n Simplified forecasting
assembled and
configured at a later n Generic product provides
may due to stage greater flexibility and less
assembly, obsolescence
packaging at n Increase in production
different
costs n Reduction in freight handling
warehouse
costs
n Distributors and/or
retailers may be n Customization material can be
required to develop locally sourced
capabilities to facilitate n More responsive to customers
dont use customization n Increased sales
postponement if it
is not effective Dr. R Piplani © 2006 10
Postponement: Case Studies
n HP Deskjet Printer
n Universal Power Supply
n Benetton
n Re-configuration of production sequence

Dr. R Piplani © 2006 11

 Case: HP DeskJet Printer

Ref: Kopczak and Lee

Dr. R Piplani
12 © 2006
 Case: HP DeskJet Printer

5-6 weeks
lead time

Ref: Kopczak and Lee, Stanford Teaching Case

Dr. R Piplani
13 © 2006
Case Study
Problem

n Printers required different power supplies and manuals for

different countries in Europe
n HP configured the printers completely at its Vancouver
facility, sorted and shipped overseas as final products
n Large variety and long lead times (5-6 weeks) required the
European DC to carry a fairly large amount of inventory to
assure a high level of availability to its customers
(resellers)

Dr. R Piplani © 2006 14

Case Study
Solution

n HP redesigned its printer and production process so that

local customization (installing power supplies and
manuals) could be carried out at the DC after observing
the demand
only need to forecast the total
number of printer. previously need
to forecast the number of printer for
different country

Dr. R Piplani © 2006 15

Printers
European DC Inventory Analysis

Lead time = 5 weeks, Review time = 1 week and Service level=98%

Average Std Dev Average Std Dev Weeks of

Safety Coeff. of
Options Monthly Monthly Weekly Weekly Safety
Stock Variation
Demand Demand Demand Demand Stock
A 42.3 32.4 10 16 78 8.0 1.59
AA 420.2 203.9 97 98 493 5.1 1.01
AB 15,830.1 5,624.6 3,656 2,702 13,593 3.7 0.74
AQ 2,301.2 1,168.5 531 561 2,824 5.3 1.06
AU 4,208.0 2,204.6 972 1,059 5,328 5.5 1.09
AY 306.8 103.1 71 50 249 3.5 0.70
Total 23,108.6 5,337 22,565 4.2

Generic 23,108.6 6,244.0 5,337 3,001 15,095 2.8 0.56

Dr. R Piplani © 2006 16

 Computing Safety Stock
Option AB

Mean weekly demand 3,656

SS = zs EXP Std Dev of weekly demand 2,702

Safety stock usually is calculated as a
Lead time (week) 5
multiple of standard deviation of demand
during the exposure period. This multiple Review period (week) 1
is referred to as a safety factor and is
based on cycle service level. Std Dev of exposure demand 6,619

Cycle service level 98%

Std deviation of demand during the
exposure period must be computed as z-value 2.05

s EXP =s * Lead Time + Review Period

Safety stock 13,593

Safety stock in weeks of supply 3.7

Dr. R Piplani © 2006 17
Printers
European DC Inventory Analysis

Lead time = 5 weeks, Review time = 1 week, and Service level=98%

Average Std Dev Average Std Dev Weeks of

Safety Coeff. of
Options Monthly Monthly Weekly Weekly Safety
Stock Variation
Demand Demand Demand Demand Stock
A 42.3 32.4 10 16 78 8.0 1.59
AA 420.2 203.9 97 98 493 5.1 1.01
AB 15,830.1 5,624.6 3,656 2,702 13,593 3.7 0.74
AQ 2,301.2 1,168.5 531 561 2,824 5.3 1.06
AU 4,208.0 2,204.6 972 1,059 5,328 5.5 1.09
AY 306.8 103.1 71 50 249 3.5 0.70
Total 23,108.6 5,337 22,565 4.2

Generic 23,108.6 6,244.0 5,337 3,001 15,095 2.8 0.56

sqrt(sum of square
of std dev)

Postponement strategy results in a

33% reduction in safety stock
Dr. R Piplani © 2006 18
Case Study
Problem

n Benetton’s knitwear includes more than 500 color and style

combinations
n Store owners required to place orders for wool sweaters up
to seven months in advance
n In fashion industry consumer preferences change rapidly,
but because of long lead times company had little flexibility
to respond to changing tastes of consumers

Dr. R Piplani © 2006 19

Case Study
Solution

n Traditionally, wool is dyed before it is knitted, Benetton

developed a process where garments could be dyed after
knitting (increased production cost by 10%)
n Uncolored sweaters are made to forecast, but dyeing takes
place as a reaction to customer demand

Dr. R Piplani © 2006 20

Case: Benetton Manuf. Process
Before After

Spin or Purchase Yarn Spin or Purchase Yarn

Dye Yarn Manufacture Garment Parts

Finish Yarn Join Parts

Manufacture Garment Parts Dye Garment

Dyeing is
postponed

Join Parts Finish Garment

Dr. R Piplani
21 © 2006
DATA RED BLUE GREEN YELLOW
Retail price $50 $50 $50 $50
Production cost (option 1) $20 $20 $20 $20
Production cost (option 2) $22 $22 $22 $22
Salvage value $10 $10 $10 $10 SUMMARY OPTION 1 OPTION 2
Mean demand 1,000 1,000 1,000 1,000 Quantity 5349 4524
Std dev of demand 500 500 500 500 Profit $94,578 $98,092
Overstock 1647 715
OPTION 1 RED BLUE GREEN YELLOW Understock 298 190
Optimal service level 75% 75% 75% 75%
Optimal purchase quantity 1,337 1,337 1,337 1,337

Expected profit $23,644 $23,644 $23,644 $23,644

Expected overstock 412 412 412 412
Expected understock 75 75 75 75

OPTION 2 AGGREGATE
Optimal service level 70%
Mean demand 4,000
Std dev of demand 1,000
Optimal purchase quantity 4,524
Expected profits $98,092
Expected overstock 715
Expected understock 190
Dr. R Piplani © 2006 22
(Tailored Postponement)

n Use lower-cost production to satisfy the predictable part of a product’s

demand and use postponement to meet the portion of the demand that
is uncertain
n Benetton requires retailers to commit 70% of their volume about seven
months in advance and the remaining orders can be placed much
closer to or even after the start of the season
n Firm orders are subcontracted to low-cost sources that have long lead
times and manufactured using option 1 (knitted using colored thread)
n Uncertain part of the demand is produced by Benetton in its own
flexible facility using option 2 where safety stock is held as Greige
goods and manufactured on demand (10% more expensive but short
lead times)

Dr. R Piplani © 2006 23

 Forecasting
Each data point represents the forecast and the actual
Actual total sales season sales for a particular item (at the style-color level).

4000 4000 4000

3500 3500 3500

3000 3000 3000

2500 2500 2500

2000 2000 2000

1500 1500 1500

1000 1000 1000

500 500 500

0 0 0
0 500 1000 1500 2000 2500 3000 3500 4000 0 500 1000 1500 2000 2500 3000 3500 4000 0 500 1000 1500 2000 2500 3000 3500 4000

Updated Forecast Updated Forecast

Initial Forecast after observing 20% of sales after observing 80% of sales

Increase in forecast accuracy decreases both the overstock and

Under-stock quantity and improvesDr.the firm’s
R Piplani © 2006profits 24
 (Tailored Postponement)

Quantity Orde re d Ave rage

Option 1 Option 2 Profit Ove rs tock Unde rs tock
0 4,500 98,751 680 204
100 4,000 98,763 630 247
200 3,500 99,841 551 247
300 3,000 100,236 484 313
400 2,500 100,435 417 383
500 2,000 98,715 381 432
600 1,800 100,600 490 339
700 1,600 101,313 633 273
800 1,400 102,273 752 252
900 1,200 101,335 925 202
1,000 800 100,579 902 244
1,100 500 98,661 987 253
1,200 300 96,444 1,179 256
1,300 100 93,943 1,346 272
1,400 0 94,046 1,550 267
Dr. R Piplani © 2006 25
Simulation using Crystal Ball
 Insights on Postponement Strategy
n Large variety of products (customization) and long lead times make
forecasting and inventory management a difficult task
n Demand for the products is not positively correlated and is of about
the same size for all the products
n May reduce the overall profits for a firm if a single product accounts
for majority of its demand
n If there is more than one possible differentiation point
n It may be useful to think in terms of locating the push-pull
boundary in order to achieve a balance between the advantages
of the push and pull-based systems
n Tailored postponement will typically improve profits only if
n the uncertain part of the demand is postponed and
n the predictable part of the demand is produced at a lower cost,
without postponement
Dr. R Piplani © 2006 26
Additional reading
n AMEInfo (useful article covering some important considerations)
n http://www.ameinfo.com/40996.html
n Logistics Today (the difficulties and rewards of implementing a
postponement strategy)
n http://www.logisticstoday.com/displayStory.asp?sNO=8187
n Supply Chain Brain (postponement as part of the response to an
increasingly “on-demand” environment)
n http://www.glscs.com/archives/06.04.fulfillment.htm?adcode
=10
n Modern Materials Handling (a short case study from Gillette)
n http://www.mmh.com/article/CA6369923.html

Dr. R Piplani © 2006 27

Discussion

Dr. R Piplani © 2006 28