Examination of logistic hub facilities available to CWT Limited

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Warehouse has been perceived as just a place for storage of goods. Today, the role of warehouse has evolved into a strategic distribution point catering value added services to semi-finished goods or finished goods on behalf of the manufacturing plant before distribution. The evolvement of role was due to the increasing trend in companies applying the concept of postponement to their supply chain to sustain their competitive advantage. This assignment aims to explain how a warehouse may play a role in various postponement strategies. The purpose of this assignment is to analyse critically on the role of warehouse in postponement strategy through literature research. The first section shall address the dilemma faced by companies in managing their supply chain, which could be resolved by implementing postponement strategy in their distribution activity. The second section shall touch on the importance of logistic management and focus on its distribution activity. The third section shall briefly address the background of postponement and its definition. Case studies of companies will be use to illustrate the role of warehousing in different postponements. The assignment shall conclude with a consolidation of the significant roles played by a warehouse in each of the strategies and reinforcing on the characteristics of postponement.

In today? context, consumers have defined their needs and beliefs differently. They become more value conscious (Christopher 2007) and expect instant product availability and in good condition when getting their products (Fernie & Sparks 2004). Pc ressures from customer? demand creates the need for companies to diversify their product range by m manufacturing many specialised versions of a product to meet the need and satisfaction of different group of consumers, in order to increase their market share (Dornier, Ernst, Fender & Kouvelis 1998) . This means shorter product lifecycles of the existing products and the demand for each of the specialised products is very volatile as each one is selling at a relative small quantity (Dornier et al. 1998). Furthermore, intense global competition has also pushed companies to globalize their operations by manufacturing their products in low labour cost countries to reduce their cost, leading to long forecast horizons and complexity in supply chain management (Sheffi 2005). Companies often find forecasting of the quantity to manufacture difficult as demand for each brand and range is unknown. Due to the uncertainties, companies tend to keep large safety stocks to avoid lost sales (Sheffi 2005). Having to hold stock or inventory in the warehouses is a highly costly activity (Fernie & Sparks 2004). Hence, there is a need for companies to build in flexibility into their supply chain structure through frequent review and redesigning, in order to create systems which are capable of more rapid response to the market demand instead of relying on forecasted figures (Sheffi 2005). 

Logistics management is seen as company? core capability to gain competitive advantage, which aims to achieve customer? satisfaction by ensuring inventory availability, timely delivery and less product failure to avoid complaints and reduce lost sales (toBowersox, Mentzer & Speh 2008). In some instances, through provision of good distribution service, the need for price, product, and promotional differentiation can be reduced (Daugherty, Stank & Ellinger 1998). Logistics management plays an important role in the entire supply chain as it is a consolidation of both material management and physical distribution management tasks according to Fernie and Sparks (2004) extracted illustration shown in Fig 1. It starts handling from arrangement for raw materials to be delivered to the factory for production and deliver finished products to the storage facilities or to the consumers. Five tasks has been identified under physical distribution management namely, storage facilities, inventory, transportation, unitization and packaging and communications as shown in Fig 1. 

Fig. 1 Logistic Management extracted from Fernie & Sparks (2004, p.2) 

Storage facilities refers to warehouse, distribution centre or stock room of retail stores, in which retailers manage the warehouse to allow them to keep stock in anticipation of or to react to consumer? demand for product (Fernie & Sparks 2004). s Christopher (2007) mentioned that the role of distribution is no longer seen as just an activity dealing with transportation and warehousing, but takes on a wider role as the provider of the final value added product in a postponement strategy. Having addressed the challenges faced by companies in today? competitive consumer market, the important role played by logistic management in the supply chain and the changing role of the warehousing in distribution activity, the next section of the assigtnment shall touch on postponement. It shall begin with an introduction of postponement? background, followed by its definition, identifying the type of postponements used and illustrating how warehouse play a role in each type of postponement helping companies to achieve competitive advantage. 

Postponement

The concept of postponement was originated from Wroe Alderson's marketing literature in the 1950's as a strategy to cut down on marketing risks and costs through postponing changes in inventory location, form and identity of product till the latest possible time (Wong, Wikner and Naim 2009). It is a strategy that ?llows businesses to take advantage of the offshore capacity and labour for manufacturing in addition to local finishing centres for final assembly, packaging, and distribution , widely used in the automotive, apparel, and consumer e lectronics industries?(Rietze 2006, p.3). Postponement aims to reduce risks associated with product variety by exploiting commonality between items and by designing flexibility into the production and distribution processes so as to delay the points of differentiation to minimized inventory (Christopher 2007). He illustrated the critical linkages which connects the marketplace to the supply chain and identifies postponement as one of the critical elements under the distribution activity as shown in Fig 2.

Fig 2. Critical linkages in the supply chain, abstracted from Christopher (2007, p.24)

Postponement can be used as a strategy by the companies to sustain its competitiveness by improving on its agility capability to response to any unforeseen circumstances and improve efficiency on the entire supply chain process (Sheffi 2005). Tangible benefits like lower inventory costs, quicker response time, better forecasts, and increase of product variety as well as the intangible benefits of better customer service and coordination and integration of manufacturing, sales and marketing functions has been observed from the result of postponement (Rietze 2006). 

The concept was later expanded by Bucklin in 1965 by introducing `postponement-speculation' which integrates logistics and manufacturing function together with speculation. However, Bucklin's principal of postponement-speculation was commented by Zinn and Bowersox (1988) that the theoretical structure of the principal does not aid in managerial decision making on when and how the principal can be applied. In 1988, Zinn and Bowersox came up with a decision framework on postponement which allows managers to decide when postponement is applicable. Through analysis of different distribution costs which considers categories like customer service level, processing, inventory carrying costs, warehousing and transportation, they have developed five types of postponement with clear procedures to guide managers in getting and consolidating cost data to support their postponement decision. Four different types of postponement falls under form postponement: labeling, packaging, assembly and manufacturing, together with time postponement, constitute the five types. As logistic elements are cost intensive activities which concerns the entire supply chain, this assignment shall use the principal of postponement by Zinn and Bowersox (1988) to illustrate the role of the warehouse in postponement and the cost effectiveness in implementing postponement. The following section will be divided according to the five postponements, each describing the characteristics of the postponement, and cost effectiveness of the implementation. Case study of companies will be cited for labeling, packaging and assembly postponement to illustrate the role played by the warehouse. 

Labeling postponement 

Labeling postponement works for a company on an assumption that a common generic product is being marketed under several brand names. In the traditional distribution approach, companies anticipate on the market demand to determine the lot size of each production and affixed the labels at the manufacturing plant. Under this postponement, labeling is being postponed by shipping generic unlabelled products to the warehouse. Upon receipt of customer's orders, the warehouse will take on the task of labeling and label the products according to the required quantity ordered. This postponement hence reduces duplication of safety stock and inventory holding costs due to consolidation of unlabelled common product. The opportunity cost would be the increase in labeling cost due to small economies of scale at warehouse level (Zinn and Bowersox 1988). Citing an example from Ballou (2004) on StarKist Foods, a canner of tuna products, forwarded their labeling operation to their East Coast warehouse to serve the eastern markets. The generic product for StarKist Foods is canned tuna fish. As the company does cannery for both company-label and private-label markets, they face uncertainty in allocating the proportion of the catch for each label at the point of canning. Since there was no difference in the quality of the product under the two labels, StarKist decided to change its distribution strategy by postponing their labeling operation. They canned the fish in unlabelled cans which they called "brights" and shipped directly to their East Coast warehouse. Upon receipt of customer's orders for each of the labels, the warehouse does the labeling accordingly before shipping out to the customer. The result of postponement was a reduce in inventories and cost relating to cost of lost sales or holding cost for each of the labels.

Packaging postponement

Packaging postponement can be applied to a specific product which needs to be marketed in various package sizes. In anticipation of sale, products are being packed according to forecasted quantity at the manufacturing plant and shipped to the warehouse for distribution. With the implementation of postponement, products are being shipped in bulk to the warehouse. Warehouse will then package the product according to customer's order. Similar to labeling, per unit packing cost will increase due to loss of economies of scale at the warehouse level. However, it can be offset against savings from reduced inventory carrying cost due to fewer stock keep units and lower transportation costs as products are being shipped in bulk from the manufacturing plant to the warehouse. 

A good example to cite is the business partnership between Borouge Corporation and Singapore's listed logistic company, CWT Limited, in building a logistic hub in Singapore for its South East Asia distribution (Borouge 2010). Borouge, a polyolefin producer based in Abu Dhabi, had signed a 10 year contract with CWT limited to design and build their Southeast Asia distribution hub with packaging capability to handle up to 330,000 tonnes of value-added polyolefins per year to serve their South East Asia customers (CWT 2009). Borouge ships the polyolefin in sea bulk containers from their plant in Abu Dhabi directly to CWT warehouse in Singapore for packing, storing and distribution. By outsourcing the packaging task to CWT is a form of postponement. Polyolefins can be packed either in 25kg bags or in 900kg jumbo bags depending on customer's requirement. Having the loose polyolefins shipped in sea bulk, reduce the transportation cost for each metric tonnes as more quantity can be loaded into the container as compared to shipping in bags and pallets. While the products are sailing to Singapore, Borouge's sales team can have more time to consolidate their customers order and inform CWT to pack the polyolefins according to the orders. With confirmed order and exact detail of packaging, Borouge is able to reduce their inventory holding cost. In this example, CWT warehouse works like a small `plant' dealing packaging to customize Borouge products. 

Assembly postponement

Assembly postponement works for products which has several selling versions. For this postponement to work, it is assumed that `a base product with a number of common parts is sold in a number of configurations that are customer unique' (Zinn & Bowersox 1988, p.124). Under this postponement, warehouse plays a role of an assembly line by assembling the parts to the base product according to the customer's order. Due to the customization, customers will have to expect longer delivery time which may lead to an increase in the cost of lost sales. Inventories carrying and transportation costs will be reduced as unassembled parts takes up lesser space than fully assembled products. According to Rietze (2006) postponement was used by Hewlett Packard (HP), manufacturer of Desktop printers. With the concept of "localization", they designed two types of printers in Vancouver, a US version and a generic version. The generic version exclude components like power supply modules, power cord plugs, and instruction manuals due to different global market needs. These components are then locally assembled in Europe, Asia, or Pacific distribution centers according to each country's specific order. Through producing generic products for global markets, HP is able to customize their product to meet local needs through postponement. Economics of scale in manufacturing generic models reduced the manufacturing cost of the product as compared to customization at the point of manufacturing. Transportation cost is reduced as more generic printers are being shipped in one bulk without the final packaging which is handled by the designated distribution centers.

Manufacturing postponement

The assumption used in manufacturing postponement is similar to assembly postponement. Zinn & Bowersox (1988) explained that the difference between assembly and manufacturing postponement is the degree of warehouse assembly. In this postponement, parts are delivered to the warehouse from a few locations while assembly postponement has the parts delivered to the warehouse only from a single location. In addition to the trade off mentioned in assembly postponement, manufacturing postponement enjoys transportation and inventory costs reduction from multi location supply of the components. 

Time postponement

Time postponement takes place when finished products are shipped to centralized

warehouses closer to the customer than the manufacturing location (Rietze 2006). This postponement aims to response quickly to customer's order to increase customer service level through reduction of customer lead time and by placing inventories closer to the customer prior customer's firm order (Rietze 2006). Its characteristic is the involvement of large number of distribution warehouses. Apparel industries like Benetton, Zara and Gap uses this postponement to compete in fashion market. 

Conclusion

Warehouse is no longer just a place for storage of goods to ensure product availability in the market. It plays a strategic role in company's distribution activity and this can be observed from case studies of different companies mentioned in the previous section, in which postponement has been implemented into their supply chain. The warehouse play the role of labeling and packaging the final products before distribution upon receipt of customer's firm order in the case of StarKist and Borouge in labeling and packaging postponement respectively. In the case of HP, warehouse takes up the role of assembling the customized components to the product to meet customer's need in different geographic locations. In all three case studies, postponement has helped companies in reducing their risks exposure relating to unknown consumer demands. The result of implementation allow companies to have a flexible supply chain that is capable of responding quickly to market demand, improvement on their customer service level, cost savings from the reduction of inventory holding costs and transportation costs.

Used References

Ballou 2004, Business logistics/ supply chain management: planning, organizing and controlling the supply chain, 5th edn, Pearson Prentice Hall, New Jersey.

Bowersox, DJ, Mentzer, JT & Speh, TW 2008, Logistics Leverage, Journal of Business Strategies, vol.25, no.2, pp.85-99, viewed 20 July 2010, Proquest 5000.

Borouge 2010, Borouge opens its logistics hub in Singapore, dated 16 May 2010, accessed 16 July 2010, http://www.borouge.com/MediaCentre/Lists/News/DispformCustom.aspx?id=142

Bucklin, LP 1965, Postponement, speculation and the structure of distribution channels, Journal of Marketing Research, vol.2, pp. 26-31, viewed 17 July 2010, EBSCOHost. 

Christopher, M 2007, `New directions in logistics' in D Waters (eds), Global logistics- new directions in supply chain management, 5th edn, Kogan Page Ltd, Great Britain.

CWT 2009, Annual Report 2009, CWT Limited.

Daugherty, PJ, Stank, TP & Ellinger, AE 1998, Leveraging logistics / distribution capabilities: the effect of logistics service on market share, Journal of Business Logistics, vol.19, no.2, pp.35-52, viewed, 17 July 2010, Proquest 5000.

Dornier, PP, Ernest, R, Fender, M & Kouvelis, P 1998, Global operations and logistics: text and cases, John Wiley and Sons Inc, USA.

Fernie, J & Sparks, L 2004, `Retail logistics: changes and challenges', in J Fernie & L Sparks (eds), Logistics and retail management: insights into current practice and trends from leading experts, 2nd edn, Clays Ltd, Great Britain. 

Rietze, SM 2006, Case studies of postponement in supply chain, Massachusetts Institute of Technology.

Sheffi, Y 2005, The resilient enterprise: overcoming vulnerability for competitive advantage, The Massachusetts Institute of Technology Press, USA.

Sheffi, Y 2005, The resilient enterprise: overcoming vulnerability for competitive advantage, video recording, MIT, Nov 2005 http://mitworld.mit.edu/video/322 , viewed 17 July 2010.

Wong, H, Wikner,J, Naim, M 2009, Analysis of form postponement based on optimal positioning of differentiation point and stocking decisions, International Journal of Production Research, vol.47, no.5, pp.1201-1224, viewed 18 July 2010, EBSCOHost.

Zinn, W & Bowersox, DJ 1988, `Planning physical distribution with the principle of postponement', Journal of Business Logistics, vol.9, no.2, pp.117-136, viewed 19 July 2010, EBSCOHost.

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