Warehouses play critical roles in third party logistics


Warehousing is an integral part of every logistic system in which it plays a vital role in providing a desired level of customer service at the lowest possible total cost. The warehousing activity is the link between the producer and the customer, and is increasingly playing a critical role in the function of Third Party Logistics. Warehousing can be defined as that a component of a firm's logistic chain that stores product such as raw materials, parts, good-in-process and finish goods at and between point-of-origin and point-of-consumption, and provides information to management on the status, condition, and disposition of items being stored. In simplicity, warehouse is a temporary storage of goods before their use.

With rising customer expectations and companies less willing to hold finished goods inventory, industry and market leaders are struggling to find ways to improve efficiency while remaining agile enough to respond to changes in the global marketplace. One innovative response to this challenge is postponement (The Adaptive Supply Chain: Postponement for Profitability 2003, p. 1). Postponement was visionary when it was originally introduced to reduce risk and uncertainty cost tied to the differentiation (form, place and time) of goods. In the later years, postponement has further developed in the supply chain framework to find an optimal balance in the upstream and downstream activities (Yang & Burns 2003, pp. 2076-20780)

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The aim of this essay is to investigate how the major postponement strategies are applied in organization. The purpose of the essay is to show how organizations have benefited from applying those strategies, particularly the role in warehousing. The essay will examine in detail the relationship of postponement strategy and show how many companies have applied postponement strategy, particularly time postponement strategy, and how warehouse has played a significant role to bring about change in the supply change activities by using time postponement. As many companies have applied time postponement successfully, the essay will highlight in detail a case study on Benetton Group. Benetton is a company that manufactures and markets fashion apparel in wool, cotton and woven fabrics for its apparels. The case study will show how the role of warehouse in postponement strategy has played a significant role in improving customer satisfaction while minimizing inventory costs to the organization. By improving their ability to respond to changes in demand from local and global markets, they were better able to compete on time while remaining cost competitive. The essay will conclude by supporting the hypothesis of this essay and show how warehouse plays a critical role in postponement.

In a supply chain management, postponement refers to a strategy aims at delaying some supply chain activities until customers demand is revealed in order to maintain both low system-wide cost and fast response (Wan 2006). According to the APICS dictionary, postponement is defined as a product design strategy that shifts product differentiation closer to the consumer by postponing identity changes, such as assembly or packaging, to the last possible supply chain location. The four major postponement strategies are purchasing postponement, manufacturing postponement, and place and time postponement. The role of warehouse in postponement allows manufacturer's to delay for the customization of products and this customization increases the company's flexibility to respond to changes in the mix of demands from different market segments (Van Hoek 1999, p. 1). Postponement results in savings because it is able to move differentiations nearer to the time of purchase, when demand is more easily forecast. This reduces cost from risk and uncertainty.

One of the fundamental ways that logistics add value is by creating utility in postponement. From an economic standpoint, utility represents the value or usefulness that an item or services has in fulfilling a want or need. In purchasing postponement strategy, purchasing of some expensive and fragile materials is delayed. In the case of GM Motors, on-line purchasing was introduced through the use of Internet. Customers log on and make their purchases that offered 99 percent guarantee on the projected delivery date. Hence the cars were in modular subassemblies stored in the warehouse waiting for customization (Rietze 2006, pp. 43-46).

In form postponement, products are stored in semi-finished forms and are later customized quickly in production facilities when demand (Wan 2006). Form utility creates the goods and services, or putting it in the proper form for the customer to use. When Honda of American Manufacturing transforms parts and raw materials into a car, form utility is created. During this transformation process, parts and raw materials are placed in the warehouse in semi-finished forms and later assembled into cars in the production facilities (Lambert, Stock & Ellram 1998, p. 11).

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In place postponement strategy, products stored in semi-finished forms are customized quickly in production facilities close to customers. If a product desired by customers is in transits, in a warehouse, or on another store, it does not create any place utility for them (Lambert, Stock & Ellram 1998, p. 11). In the case of HP DeskJet printer, HP put off the final assembling activities and made the final product at their distribution center point. It reduces the response time to customer order and inventory cost since risk pooling produced a positive effect in this case. Here delaying the differentiation task downstream in the final processing by holding the products in the warehouse contributed to the positive effect (Enarsson 2006, p. 178).

In time postponement finish products are kept in central location and are distributed quickly to customers. Here value is added by having an item when it is needed. This could occur within the organization, as in having all the materials and parts that are needed for manufacturing, so that the production line does not have to shut down. In the case of Pillsbury, flour from its mills is temporarily stored in the warehouse and delivered to the production facility so that cake mix may be produced on schedule and as demand (Lambert, Stock & Ellram 1998, p. 11). JC Penney is another case where time postponement was regularly applied. JC Penney regularly practices time postponement in its retail catolog operations by filling orders on demand from relatively few warehouse locations (Ballou 2004, p. 50).

Star-Kist Foods, a canner of tuna products, changed its distribution strategy to take advantage of the postponement principle and lower inventory levels. Historically, the company packed fish in its California cannery for both company label and private label markets. The end products were shipped to field warehouses for storage. A decision had to be made at the time of canning as to what proportion of the catch would be committed to the two end products, since there was too little capacity to store fish as a raw material. There was no difference in the quality of the final product under the two labels. The company established a forward labeling operation on the East Coast to serve the eastern markets. The fish was packed in unlabeled can called "brights" and shipped to the Eastern Coast warehouse. At the warehouse, the unlabeled cans were labeled and shipped to the customers upon demand. Inventories were lowered through avoiding the cost associated with having too little or too much of the product with a particular label (Ballou 2004, pp. 50-51).

In the case of Stevensons, one of the largest dedicated garments dyeing facility in Europe dyes the garment after the garment is produced in its ecru form (natural color of the yarn). Manufacturing a garment in ecru effectively postpones the decision to commit to certain colors and this allows the production run longer and easier to control. There is no yarn change or adjustment to accommodate the dye related yarn properties. Stevenson invested in additional finishing process that includes dyeing, label, press, and examines, packaging and dispatch that were facilitated at the distribution centers. This postponement avoided mismatch and effectively avoids the trade-off by holding ecru inventory and assigning responsive capacity to the dye and finishing process (Stratton & Warburton 2004, p. 19-21).

In the case of Whirlpool, a manufacturer of washing machines applies time postponement strategy very effectively in its US operation by configuring its supply chain so that inventories at department store were kept to a minimum and it delayed deliveries until orders had been received. Through market research, the company found that most consumers did not expect to their order to be delivered immediately, since many customers buy for houses that cannot be moved into immediately. The washing machine stored in the distribution centers are then labeled and packed once demands for orders are confirmed. This reduced the need to cross-docking and dramatically reduced inventory and transport cost while decreasing stock outs and improves customer service (Bullock 2002, pp. 4-5).

In the case of Reebok, sales are not predictable as it very much relies on the outcome of the NBL matches. Reebok uses to keep white or black shirts in hand ready for printing. Because of the long lead-time, sales opportunities are missed. So what Reebok did was that it outsourced the cutting and sewing of fabric to contract manufacturers in Central America. Some of the jerseys sent to Reebok are finished meaning that there is a customized team and player name already on the garment. Other jerseys called "team finished" jerseys are sent with everything but a player's name. These are sent to its distribution centers own by Reebok. Once the outcomes of the matches are known, the jerseys are customized according to the order demand (Rietze 2006, pp. 55-58).

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The Case study on Benetton is about a company that manufactures and markets fashion apparel and how it applied postponement strategy successfully. Benetton is involved in three distinct segments: apparel, textile, consisting of production and sales activities of raw material (fabrics, yarns and labels), and semi-finished products (Feuling 2007, p. 2). Benetton has only one distribution center, in Cestrette, Italy, serving stores in 120 over countries (Rapoport & Martin 1995). Benetton has consistently refined its operation and supply chain process. One example is a drying method that involves hanging finish goods instead of tumbles dry and another is a method for making wool fabric easier to form, cut and stitch. Benetton's commitment to supply chain improvements has been quite lengthy, but rewarding process. Postponement in dyeing was one of the specific areas in which Benetton made improvements (Feuling 2007, p. 2).

Let's examine the factors behind the company's success in applying postponement in dyeing. Benetton produces its most popular styles as 'grey' goods, or undyed garments. When it sees what the actual demand pattern is for a certain sweater or a pair of leggings by color, it can dye the grey goods quickly and speed them off to the market. For this to happen, Benetton refined its manufacturing process operation to be flexible in achieving sales increase, expand sales network and minimize cost. In the old method, the manufacturing process steps start from the purchase point of the yarn, next dye the yarn, finish yarn, manufactures garment parts and later join parts (Refer to fig 1). In this flow, postponement was not applied. However, in the new method as illustrated in fig 2, the manufacturing process steps starts from the purchase point of the yarn, next manufactures garment parts, join parts, followed by dye garments (this is where the postponement kicks in) and finally finish garment (Ng n.d.).

Benetton realize that the new process in which the garment produced in unfinished without color will give greater flexibility in the demand production and could lower the inventory significantly. With the addition of postponement to the logistic system, Benetton gained many significant competitive advantages in the industry. Instead of preparing an entire season product line, and holding a large safety stock, the company produced smaller batch sizes to initially stock stores and adjusts to customers' preference as the season went on. In the old manufacturing process method, low volume colors would be marked down in price to clear inventory. However, in the new manufacturing process method, the same inventory is prepared in lower sizes so once the low volume product is gone, there is more retail shelf space for higher demand products and Benetton can produce these colors as needed. Benetton generally would use the first 5~10% of the seasonal sales to project this into the postponement strategy for continued manufacturing during the season. (Feuling 2007, p. 6).

Benetton also began to use 10% of its production line for what the company calls the "Flash Collection". These 50 or so products are designed as customer demand is identified early in the season, primarily by highlighting desired colors and styles. Benetton limits the production of this line, but with the flexibility of the postponement strategy, these products can be produced and designed in much lesser time, and further lowered the manufacturing and shipping time significantly. This process improvement has helped to increase customer satisfaction and improve the lead-time for new product introductions. Postponement has also decrease the risk significantly that a new product will fail and the inventory cost of these failures will hurt profitability across the board. The investment in adding dyeing machines and applying the postponement strategy has contributed to the cost savings and improved profit margins, while retails outlets are able to maintain greater level of selling space, and are able to receive new shipment which go directly to the shelf for purchase (Feuling 2007, pp. 6-7).

In conclusion, the essay has showed how the major postponement strategy offers opportunities to achieve delivery of products in a timely and cost effective manner by rearranging the conventional production and logistic structures. By employing the concept of postponement, companies have managed to increase the performance of their firms and the supply chain as a whole. The essay has shown that the application of the major postponement strategies has increased across and allows for operations such as labeling and packing, and in some cases even light manufacturing and final assembly to be done at the confirmation of the order demand. The essay has highlighted on the major postponement applied by companies in which certain of the activities were shifted to the warehouse before assembled in finish goods as demand.

As highlighted in the case study, Benetton made changes in its manufacturing process by investing in the equipments to apply postponement strategy that provided flexibility in its operations. In its new manufacturing process, postponement was applied at the dye garment stage after the garments had gone through the join parts stage. In doing so, it was able to produce and designed products in much lesser time, and further lowered the manufacturing and shipping time significantly. This process improvement has helped to increase customer satisfaction, contributed to the cost savings and improved profit margins. It also has improved the lead-time for new product introductions and decreases the risk significantly for new product failures. With the continued increase in customer demands and customers having ever rising increased options, warehouse performance in postponement will remain critical.