An empirical test of inventory, service and cost benefits from a postponement strategy

Abstract

Postponement of the point of product differentiation is a potentially powerful strategy to improve supply chain management. The literature offers theoretical arguments supporting the relationship between postponement and improved inventory turns and customer service quality, as well as lower operational costs. This study empirically examines these proposed benefits. Data from a disk drive manufacturer that applied postponement to simplify its supply chain are used to test the benefits of this strategy. During the time of the case study, the company implemented an initiative to create a generic product that needed less customization; what configuration remained could be delayed until the product was integrated at the customers’ sites, instead of at the company's distribution centres. Regression analysis is used to investigate whether higher levels of postponement are associated with better service, lower inventory, and lower cost. Our results indicate that higher levels of postponement—measured as the percentage of generic products shipped—are associated with better on-time delivery and lower variable costs. Our results also indicated the importance of redesigning products and processes and working together with customers.

Keywords:

• Postponement
• Product variety
• Empirical research
• Supply chain
• Case study

Acknowledgements

We would like to thank participants at the 2001 Stanford Accounting Summer Camp, participants at HEC, the EAA Congress, George Foster, Mahendra Gupta, Madhav Rajan, Shannon Anderson, Eva Labro, and the Reviewers for their helpful comments.

Notes

† The technical changes to implement the Generic Drive Program were minor, but the changes in the structure of the supply chain were major. The thrust of the effort was postponement although its implementation included broader efforts including product redesign, parts commonality, re-sequencing, negotiations with customers, and pricing policies.

† The variables in the model (other than the dummy variables) were defined as the change between consecutive months.

† We also used a simultaneous equation specification to control for the potential endogeneity of on-time delivery and inventory turns. Such specification requires the isolation of exogenous variables to identify the simultaneous equations is hard and may lead to misspecified models, moreover the results on tables 3 and 4 do not suggest that endogeneity is a problem. The results were very similar to those in tables 3 and 4.