How centralized delayed assembly drives value up and down a custom-order manufacturing supply chain.
Does your company produce a relatively complex durable good? Materials-handling equipment? Recreational vehicles (e.g., boats, motorcycles)? Lawn and garden equipment? Appliances?
If so, there’s a good chance you invite customers to add on features and upgrades to suit their business needs or personal preferences. If you then distribute custom ordered products via a dealer network, you have a strategic decision to make:
- Leave it to dealers to handle final installation of custom-ordered optional equipment.
- Or, finish multiple custom-configured versions at your manufacturing facility, then hope you’ve accurately forecasted demand for how many of each “flavor” customers will order.
Deciding where, how and when to finish custom product involves several variables, including cost, customer service and quality considerations. The good news? There’s a smart middle ground between A) putting too much strain on your ability to accurately forecast demand for finished goods, and Z) pushing the cost and complexity of parts inventory and finished assembly and quality onto dealers.
That middle ground is “postponement,” or “delayed assembly.” Let’s take a look at its advantages.
A Postponement Scenario
For purposes of this QuickStudy, let’s assume you make one of the increasingly popular utility vehicles used in golf course and building maintenance, farming, wildlife habitat management, and the like. You let customers order as many as 10 add-ons — a safety roll cage, a seat with head rests, a winch, a toolbox.
Say you have 1,500 dealers across North America. In an average quarter you sell 100 vehicles featuring an add-on winch. You commit to letting customers pick up their custom vehicles from the dealer within five business days of the order being placed.
Reduce Inventory Carrying Costs, Eliminate Rework
Right away you see the cost and complexity of doing custom assembly at the dealer level. If every dealer must be ready to install a winch, then someone — you or them — needs to invest in having at least a few winches in stock at every dealership, since you never know where or when demand for those parts will come. Just two winches, multiplied across 1,500 dealers, equals working capital tied up in 3,000 winches on a rolling basis.
Or, dealers could order as needed from your winch supplier. But all those shipments will drive your transportation costs up. They might put your five-day order cycle time at risk. Piecemeal ordering could erode your ability to gain volume discounts from that supplier.
Plus, to add a winch, dealers must uninstall the bumper that comes standard on each vehicle in order to install a heavier-duty version. So dealers need rugged bumpers in inventory. And, at 100 per quarter, you’ve got standard bumpers being uninstalled and left “trapped” in inventory downstream.
Contrast all of this with a delayed-assembly production line located at or relatively near your main manufacturing plant. A certain number of base units lacking front bumpers roll off your production line and await final configuration. When a winch order comes in, the heavy bumper and winch get installed. That custom-ordered unit and others get added to truckloads of standard units moving to your dealers this week, in time for delivery to customers.
Meanwhile, you might need as few as 100 winches in central stock to meet demand. Or, even if you stock a full year’s worth to optimize transportation and volume discounts, you’re stocking 400 winches versus 3,000-plus if dealers handle assembly.
Starting to see postponement’s possibilities?
Greater Quality Control
When you spread final assembly across hundreds of locations, you all but surrender control over finished quality. Will each dealer have the tools to do the job right? Will their assemblers be experienced and well-trained — or will finishing be handled by a part-time employee who lacks adequate training? Can you even afford to provide proper training to a constantly shifting population of dealer workers?
With centralized postponement, you can implement quality inspection and process improvement techniques to continuously improve quality. Key performance indicators can be defined, tracked and managed. Employee recruiting, training and competency testing is focused and efficient.
Predictable Order Cycle Time
Many of us have experienced it when buying a car. Our preferred model isn’t available on the dealer’s lot. They offer to search the network to see where and when that exact car might be available. The same goes with our utility vehicle scenario. If a dealer is out of winches and needs to order more, or go searching for a custom unit at another dealership, your five-day order commitment might be out the window.
By contrast, a well-run centralized postponement strategy, integrated with a dependable transportation model, can allow control over order cycle time at high performance levels.
Increased Sales of Upgrades
Manufacturers who do postponement right tend to see higher “take rates” on value adding upgrades. Confidence in the ability to sell, configure and deliver a high-quality custom product is critical. It means the dealer, and you, the manufacturer, can fully leverage opportunities to promote features that differentiate your product and boost per-unit revenue and profit.
That’s in part because dealer sales reps have confidence that when they sell a custom product, it will arrive on time, with the upgraded equipment installed properly.
Putting Postponement Into Practice
Whether you design and build it on your own or contract with a third-party logistics partner, an effective postponement strategy requires:
- Locating and staffing the operation to allow maximum flexibility and control over operating costs and production scheduling.
- Technology integrations needed to get custom orders quickly and accurately from dealers to the postponement team.
- Thorough, ongoing analysis of which parts it makes sense to treat as add-ons, and the levels of inventory needed to be both effective and efficient.
All that said, postponement as a supply chain strategy comes with a bundle of benefits. It might be just the add-on your company needs to distinguish its products from competitors’, satisfy more customers and dealers, and still maximize control over inventory cost and product quality.
Postponement is just one of the supply chain value strategies revealed in 10 Supply Chain Value Secrets. Download the e-Book now.
VP, Supply Chain Solutions
Jim Massengill’s career spans more than 25 years as an operations leader, consultant and executive manager for logistics and transportation organizations.