Maxing the gain: the key is delaying the point of "differentiation."

Chief Executive, The, August-Sept, 2005 by Yossi Sheffi

The paint department of your local hardware store may not seem like the place to go for strategic insights, but on display is one strategy that offers the potential to streamline offshore manufacturing operations, create markets and even generate new jobs.

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The strategy is called postponement, or delayed differentiation, and the paint blending service in hardware stores is an everyday example. Instead of trying to anticipate what colors customers will want to buy and producing batches of finished paints, the manufacturer supplies base colors to stores. The retailer then mixes the base with various pigments according to a computerized recipe, giving the customer the exact hue he or she is looking for.

In addition to providing great customer service on the front end, this strategy offers big benefits on the back end. First, it drastically reduces expensive inventory for both manufacturer and retailer, since the store needs only stocks of basic pigments rather than much larger quantities of the finished paint. Shipping the more compact pigments instead of bulky paint product also saves on transportation costs. And returns are minimized because the buyer specifies the product configuration.

That last part is crucial: The product is finished at the point of sale when the consumer has decided exactly what he wants. Accurately forecasting customer demand becomes easier the closer you are to the actual sale. In this case, demand is known because the final product configuration has been postponed until the point of purchase, the last stage in the supply chain.

It is this feature--the ability to refine demand information by delaying the finished product--that makes postponement such a powerful tool. Forecasting customer demand with precision is increasingly difficult in today's fast-changing markets. The migration of manufacturing to low-cost centers in countries such as China has stretched supply chains internationally, increasing lead times and making demand forecasting even more precarious. Further, customers have become choosier about the products they buy, and are demanding more customization. As ongoing research at the MIT Center for Transportation & Logistics shows, if companies can learn how to apply postponement effectively in this environment, they can meet the more stringent market demands and discover better ways to deliver the product variants that buyers want.

Since the paint mixing service was first introduced by manufacturer Sherwin-Williams decades ago, postponement has become an increasingly important tool. Today, delayed differentiation is used in numerous industries from aerospace to textiles. In technology, Dell is one of the most obvious examples. The company built a global business on configuring PCs when orders are received, rather than stockpiling finished product on the basis of demand forecasts. It postpones final assembly until an order arrives via its online retailing network.

Delayed differentiation also is embedded in the manufacturing processes of Hewlett-Packard. The company's Deskjet and Deskwriter printers are made in its Vancouver and Singapore plants and distributed to the U.S., Europe and Asia. Selling printers in Europe means following each country's requirements for printer configurations: different decals, a country-specific power plug and language-specific manuals. Six HP printer models and 23 different country configurations added up to 138 versions of the finished printers. In the past, the company forecast demand for each European country and then manufactured the appropriate numbers of printers for each one.

But forecast errors caused frequent product shortages. To increase product availability without increasing inventory costs, HP switched to pan-European forecasting and opted to postpone printer customization. Instead, HP began shipping generic printers to its European distribution center in Holland, where the units were configured to each country once local demand was known.

Shifting demand patterns pose major problems for the fashion industry, which must cater to multiple buying seasons and fickle consumers. Clothing manufacturers typically can't supply the product just when the customer is ready to buy it, which results in lost sales and markdowns that cut into profit margins. Benetton, the Italian clothing manufacturer and retailer, addressed the problem by changing its manufacturing and distribution process. Most clothing makers dye the yarn first, weave it into fabric, and then cut and sew the fabric to create the finished garments. Under this traditional system, the manufacturer must decide how much to make in each color six to nine months in advance of replenishing stores.

Benetton redesigned its manufacturing process to make some items of apparel--those with difficult-to-forecast demand for colors--in an un-dyed, generic state called greige. A test batch of each new garment was dyed and sent to a set of carefully chosen stores where its sales were monitored closely to gauge consumer preference for colors. With this more accurate demand information in hand, the company quickly dyes the greige garments and ships the items to retail outlets. Such postponement of dying increased Benetton's manufacturing costs per garment by about 10 percent, but it increased profits by a far higher margin. Among other things, it cut the expense of overstocking and the associated costs of discounts and merchandise liquidations.