Conventional wisdom holds that the best way to improve responsiveness and cost savings in the supply chain is to “go direct” and “eliminate the middleman.” However, the migration to demand driven supply networks is leading many to reconsider the use of middlemen in the supply chain. A new type of supply chain service provider is emerging to provide late-stage configuration of products closer to the end consumer. These middlemen are typically referred to as postponement specialists or light manufacturing providers. Regardless of the name that is used, they can enable new levels of product differentiation and supply chain efficiency for manufacturers.
The Downside of Global Sourcing
The past decade has witnessed a mass migration of manufacturing activities to lower-cost geographies. The economics of manufacturing in regions with large, low-cost labour pools such as China, India, Mexico, Eastern Europe and Southeast Asia have driven billions of pounds of new plant capacity by multi-national corporations. While low-cost geographies can provide lower per-unit production costs, numerous logistical and supply chain challenges are introduced through such an approach. Many of the products manufactured in China, India and Southeast Asia are exported to North America and Europe. It can take between 4 and 6 weeks to ship a cargo container from the Eastern ports of China to the East Coast of the United States. One of the challenges introduced by these long-distance supply chains is the ability to rapidly respond to changes in demand. Forecasting demand four to six weeks in advance can be extremely challenging for many product categories. Consider products with short lifecycles such as high-fashion apparel and consumer electronics. In many cases the time to transport these products via ocean and ground freight represents 50% or more of the product lifecycle.
The SKU Proliferation Challenge
The forecasting challenge is compounded by the increasing number of configuration options being offered for each product. Several factors are driving the proliferation of product SKUs. First, products being manufactured in centralised locations are being exported to more and more countries. The rise of markets such as the Middle East, Southeast Asia, Latin America and Eastern Europe are driving the demand for a wider variety of products that meet the price points, regulatory requirements and cultural preferences of each country. Even within countries the product requirements can vary widely. Larger countries such as India and China have a number of different demographic groups and population segments each with different tastes, budgets and purchasing behaviours. The second driver for SKU proliferation is the Long Tail effect driven by consumers in mature markets such as Western Europe and North America who are demanding more specialised, niche products. The combined result is a wide proliferation of SKUs for each different product offering that need to be stocked in sufficient inventories at retail locations around the world.
The high tech industry has one of the most complex supply chains due to the growing level of configuration required for consumer electronics. Consider the following product categories each of which require different configurations for individual countries or consumer categories:
- Mobile Phones – Consumers are demanding different configuration options offered at different price points. Manufacturers need to supply phones with various colour face plates; different pre-loaded software applications and combinations of accessories (e.g. chargers, headsets).
- Broadband – Primarily sold for home use through local telecommunications service providers. Each provider will have unique requirements for firmware configurations, branded packaging and instruction manuals to support their service offerings.
- Personal Computers – The country in which the sale occurs will drive the need for different power supplies, external cables, instruction manuals and operating system configurations. Additionally, consumers increasingly prefer highly customised PC configurations with different graphics cards, speaker sets, software applications and hardware upgrades.
- Consumer Software – Publishers are offering more variations of each software application to service different price points and consumer needs. External packaging, instruction manuals and product warranties will vary based upon the country of sale and the software version.
Demand Forecasting Approaches
The variability required for these high tech product configurations makes accurate advanced forecasting extremely challenging. For example, there may be 2500 different variations of a single mobile phone packaged and sold around the world. Research studies have found that SKU forecasts in the consumer electronics sector are typically only 60-70% accurate. Manufacturers have responded to the forecasting challenge for remotely sourced products in a few ways:
- Air freight – Rather than shipping product via slow-moving ocean and ground freight, manufacturers could ship product express via air freight. While air transport offers much faster delivery of goods, the speed comes at a cost. Air freight is considerably more expensive than ocean freight especially for heavier items.
- Inventory buffer – To account for the potential deviation from forecasted demand patterns, manufacturers often buffer their supply chains with excess inventory. If customer demand exceeds forecasts the supplier will be well positioned to capitalise on the market opportunity. However, if demand is lower than the forecast, the manufacturer will be left with excess obsolete inventory.
- Limit configurations – Another strategy is to limit the variability of product configurations developed. With fewer SKUs a manufacturer can simplify forecasting and inventory management challenges in the supply chain. Fewer SKUs reduce the risk of any one configuration suffering from inventory excesses or shortages. However, such an approach limits the competitiveness and market opportunity for the product.
Late Stage Configuration and Postponement
Late stage configuration and postponement techniques can alleviate many of the demand forecasting challenges associated with these highly configurable technology products. The process works as follows. A generic version of the product is manufactured in a low cost geography to leverage the reduced cost of production. Generic versions of the product are then shipped to various locations around the world. Inventory is staged in areas of high consumer demand (i.e. within 100 miles of a major retail centre). The generic products are inventoried in specialised distribution centres operated by postponement/late stage configuration specialists. End user sales are monitored by the postponement specialists through point-of-sale data feeds from retailers. The final product is then configured and packaged as appropriate based upon actual consumer demand patterns. For example, the postponement specialist can rapidly respond to demand for mobile phones by configuring different colour variations along with the appropriate accessories, packaging and instruction manuals. Software packages can be quickly assembled by burning the latest version of the application onto a physical DVD then packaged along with the appropriate documentation. Personal Computers can be configured with the appropriate hardware, software and peripheral options then bundled with country-specific cabling, documentation and packaging.
The Value of the Middleman
By keeping product as generic for as long as possible the impacts of forecast inaccuracies can be minimised. Configuration and final packaging of products can be postponed until there is a high degree of confidence in end user demand. Postponement specialists usually operate multiple manufacturing sites that are located in geographic regions with a concentration of consumer demand enabling much faster levels of responsiveness. The need to ship products via expensive air freight is eliminated. There is less risk of product obsolescence resulting from buffering inventories throughout the supply chain.
Postponement companies are not limited to late-stage configuration in their scope of services. Many also perform procurement and supply chain management of various commoditised parts such as cables and cardboard packaging. Some postponement firms also provide post-sales service, repair and warranty functions as well. The benefits of distributed locations that can provide rapid response time offered by postponement companies can provide equal benefits for reverse logistics and manufacturing functions.
A successful postponement strategy requires tight integration between a manufacturer and the third party configuration specialist. ERP applications must be connected to facilitate the exchange of real-time data about orders, inventory, sales and logistics. Initial costs to redesign products and setup late-stage configuration centres can be significant. However, substantial return on investment is achieved over a longer term by minimising waste and excess inventory.