Supply Chain Management and Outsourcing, Postponement decisions

Sangeetha Jayakumar

School of Management StudiesCUSAT, 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 option1 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.

Implementation of postponement works best under certain demand, product and production preconditions.

Demand Preconditions:

Fluctuation (e.g. seasonal hikes in demand for ski equipment)

1

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

1. Jeremy F. Shapiro, 2007, “Modeling The Supply Chain”, Thomson Learning Inc., Second Edition, India.

2. John T. Mentzer, 2001, “ Supply Chain Management”, Sage Publications Inc., California.3. Martin Murray, 2008, “ Introduction

toSupplyChainManagement”,http://logistics.about.com/od/supplychainintroduction/a/into_scm.htm, downloaded on 26.08.2010.

4. Anonymous, 2006, “ Supply Chain Management”, http://lcm.csa.iisc.ernet.in/scm/supply_chain_intro.html, downloaded on 26.08.2010.

5. Anonymous, “ Supply Chain Management”, http://www.supplychainmanagement.in/scm/index.htm, downloaded on 26.08.2010.

6. K.Shridhara Bhat, “Essentials of Logistics and Supply Chain Management”, April 2007, first edition, pg 224-275

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(downloaded on 29.08.2010)15. www. outsourcing - supply-chain-management .com/strength.html (downloaded on 01.09.2010)16. http://www.bnet.com/topics/outsourcing+and+scm+and+supply+chain (downloaded on 01.09.2010)17. http://www.offshorexperts.com/index.cfm/fa/map.supply_chain_management_outsourcin (downloaded on 01.09.2010)18. http://eprints.utm.my/650/1/ CM_55%5B1%5D._Relationship_between_supply_chain._Raja_Marzyani.pdf (downloaded on 01.09.2010)

19. http://www.ltdmgmt.com/offshore-scm.asp (downloaded on 01.09.2010)20. http://www.ifm.eng.cam.ac.uk/csp/projects/postpone_scs.html (downloaded on 01.09.2010)21. http://en.wikipedia.org/wiki/Postponement (downloaded on 01.09.2010)22. http://www.supplychainmanagement.in/scm/postponement-risk-pooling-in-supply-chain- management.htm (downloaded on 01.09.2010)23. http://www.impetus-uk.com/html/inventory.html (downloaded on 01.09.2010)24. http://www.emeraldinsight.com/journals.htm?articleid=1626259&show=html (downloaded on 01.09.2010)25. http://www.oracle.com/us/solutions/scm/018543.pdf (downloaded on 01.09.2010)26. http://www.ifm.eng.cam.ac.uk/mtms/events/documents/Johnny_Wan.pdf (downloaded on 01.09.2010)27. Kellogg graduate school of management “Teaching note: POSTPONEMENT” (provided by Dr. Jagathy Raj V.P)