Postponed manufacturing supplementary to transportation
services?
Remko I. van Hoek
a,b,c,*, Roland van Dierdonck
d aCran®eld School of Management, UK b
Erasmus University of Rotterdam, Netherlands c
University of Ghent, Belgium
dVlerick Leuven Ghent School of Management, University of Ghent, Belgium
Received 23 April 1998; received in revised form 26 August 1999; accepted 24 September 1999
Abstract
This paper empirically assesses the economic size (in terms of full time equivalent employees (FTEs)) of postponed manufacturing applications and related activities. Based on a survey among 782 companies, the dierences in size and scope of applications between manufacturers, wholesalers and logistics service providers are assessed. Currently, relatively simple postponement applications are practiced in wholesale and logistics services as supplementary services. More complex, high value adding manufacturing activities are still the primary domain of manufacturers and these are not often outsourced to logistics service providers. Based on future expectations of respondents this need not stay this way. Ó 2000 Elsevier
Science Ltd. All rights reserved.
1. Introduction
``Postponement is one of the only true logistics concepts'' (Prof. A.C. McKinnon, comment to the author).
``A critical paradigm shift is that from a Push products out - forecast driven supply chain towards a Market product in - postponement driven supply chain. [...] For which the development of inter-organizational supply chain postponement is a challenge.'' (Prof.
*Corresponding author.
E-mail address:remko.van.hoek@wxs.nl (R.I. van Hoek).
1366-5545/00/$ - see front matter Ó 2000 Elsevier Science Ltd. All rights reserved.
D.J. Bowersox during the Annual Conference of the Council of Logistics Management, Chi-cago, October 1997).
Postponement can be traced back to the 1950s and 1960s literature (Bucklin, 1965) and the 1920s in practice (CLM, 1995). Initially postponement was applied in the distribution sphere (logistics postponement), involving the delay of the forward movement of inventories in the channel. Bucklin (1965) covered the questions: where in the channel should inventory be posi-tioned (upstream ± downstream) and by which player (supplier, customer). The advantages of postponing the forward movement of goods until actual customer orders are received are avoiding obsolete inventories and low customer responsiveness by avoiding wrong time and place utility of products. The disadvantages may be that, as lead times may increase due to the longer trans-portation routes from central inventories to customers, some safety-inventories may need to be maintained by customers.
In addition to time and place utility, a third utility has been added to the postponement concept: that of form/function utility. In postponed manufacturing applications, ®nal processing and manufacturing activities are postponed until customer orders have been received and are performed from operations centrally located in the international supply chain to include customer and country speci®c characteristics in ®nished products. In the operating system generic products may be customized through adding product features or assembling speci®c products from generic modules. This would allow not only for customization but also maintain cost-eectiveness based on lowered inventory-levels and maintained economies of scale in upstream, forecast-driven, primary manufacturing. The emergence of this new form of postponement may be contributing to the turbulence of markets and demanding customers:
``Virtually all managers are keenly aware that the key to winning in market after market today
is excelling in tailoring one's oerings to the speci®c needs of each customer while still
main-taining low costs and prices''.(Anderson and Narus, 1995, p. 75).
Placing ®nal manufacturing activities in the distribution channel contributes to the role of the channel as a service channel. First, the logistics function is conceptualized as a service function because its output is not a product but a performance, like just-in-time delivery of the right amount of goods at the right place (Heskett et al., 1990). Second, postponed manufacturing activities are often included in the service oerings of logistics service providers as services sup-plementary to core-services of transportation and warehousing.
applied today and (B) to what extend the applications are still mainly kept in-house by manu-facturers and wholesalers or outsourced to logistics service providers.
Apart from the question whether or not postponed manufacturing is a viable area of supple-mentary services for transport and logistics service providers, it is also relevant to assess the size of employment created in postponed manufacturing applications. This oers not only insight in the size of the market for these supplementary services but also of the economic impact the principle of postponement holds for the area studied. The same publications predicted that a large eco-nomic impact could be created with postponed manufacturing coming to the forefront of inter-national business in countries that have a strength in transport and logistics. It is interesting to assess whether or not that is actually happening, thereby raising the economic impact of transport and logistics related business phenomena.
2. Literature review and development of hypotheses
This section reviews the relevant literature and develops research hypotheses.
Lampel and Mintzberg (1996) state that the history of most (US) businesses over the past 100 years has been one of fortunes built on the transformation of fragmented and heterogeneous markets into uni®ed industries: standardization of taste, allowing for the standardization of de-sign and mechanized mass production of standard products, distributed through mass channels. Increasingly however, they argue that companies are looking for ways to increase the share of customization oered. In a categorization of supply chains based on the amount of standard-ization versus customstandard-ization of activities in the supply chain they develop, customstandard-ization is ex-pected to start downstream in the chain with distribution activities, involving shipment to order (logistics postponement). Increasingly, it is expected that customization is working its way up into the assembly and ®nal manufacturing of products. This approach should allow companies to achieve mass customization through a combination of cost eective mass production in the up-stream stages of the supply chain and customization in the ®nal stages of the chain. Morehouse and Bowersox (1995) predicted that in the near future about 50% of all inventories (in agri-food) supply chains will be maintained in a semi-®nished state waiting for the ®nal processing and packaging based on customer orders.
(1997), some transport and logistics service providers even started marketing themselves as ``in-dustrial added value'' providers instead of transport and warehousing companies, indicating the attention paid to postponed manufacturing in this sector. Finally, there is a traditional role for wholesalers in customizing products (Daugherty et al., 1992; Stern et al., 1997). A fundamental distinction underlying the applications between sectors, however, is that manufacturers and wholesalers on the one hand perform the activities on their own account, while maintaining ownership of goods. Logistics service providers, on the other hand, perform these activities as a service (supplementary to traditional transport and warehousing services) while their customer maintains ownership of goods. Measuring the application of postponement activities, in terms of jobs involved, between sectors not only measures the application (and its economic impact through employment creation) itself, it also measures the degree to which the applications are kept in-house by manufacturers and wholesalers and the degree to which they are outsourced to service providers.
The ®rst hypothesis is:
H1: To date, most postponement activities will be applied to a larger extent in the transport sector and wholesales than in the manufacturing sector.
Further assessing the current application of postponement, a distinction in activities performed and the degree of outsourcing can be expected. Previous studies of the factors manufacturers use in outsourcing activities to transport and logistics service providers indicate the importance of factors such as the service supplierÕs manufacturing and product expertise, and the contact with the market (see for example: Daugherty et al., 1996; McGinnis and Kockunny, 1995). Performing ®nal manufacturing activities such as assembly requires manufacturing expertise critically dif-ferent from the traditional areas of expertise of service providers (warehousing and transporta-tion). Outsourcing postponed manufacturing can also result in a loss of contact with the ®nal customer, cutting o a channel of market signals of use in the manufacturerÕs future product development and marketing. Finally, these postponed manufacturing operations require trans-action speci®c investments of service providers which may only be justi®ed for long lasting and well established customer relations. Case studies indicate that third party ®nal assembly and con®guration applications can emerge in alliances that have developed over a large number of years (van Laarhoven and Sharman, 1994). This is in contrast to lower value-adding activities like for example packaging which are closer to the traditional warehouse functions and are more easily and often outsourced to service providers. Lieb and Randall (1996) for example show, based on bi-annual surveys, that product assembly is a less used third party logistics service than warehouse management and shipment consolidation. Finally, the role of wholesalers in customizing products may also be limited to lower value-adding activities because wholesalers, like transport compa-nies, do not have the industrial expertise of manufacturers. This leads to two variations of a second hypothesis:
H2a: The postponement applications in the manufacturing sector will be greater in the area of higher value-adding manufacturing activities, compared to those in transport and wholesale.
Following the increasing attention paid to the need for mass customization, it can be expected that the use of postponed manufacturing applications will increase over the next years. A number of authors (Anderson and Narus, 1995; Pine, 1993) indicate that postponing assembly and other manufacturing activities are the best options for achieving ecient customization. However, this type of customization is judged to be very complex, more complex for example than providing customization based on distribution service (see: Daugherty et al. 1992). In that respect, and given hypothesis 2, the future growth of postponement applications can be expected to become more important in the industry than in the transport sector. Therefore a third hypothesis is:
H3: The growth of postponement applications is expected to be greater in the manufacturing sector than in the transport sector.
Fig. 1 illustrates the conceptual model based on the above hypotheses.
3. Research methodology
A survey was developed together with the Dutch national bureau of statistics (CBS). The primary objective was to uncover thecurrenteconomic value of postponement in the Netherlands, measured in full time equivalent employees (FTEs). The study was limited to the Netherlands because this provided manageable population size for this ®rst survey of postponement appli-cations. Also the Netherlands is a country very active in international trade and distribution, with a large logistics service sector, providing a proper basis for the application of postponement (Kearney and Knight Wendling, 1993).
The preparation included a de®nition study and a question development phase based on 75 test interviews in dierent sectors, to assure that the right terminology was used and that the right questions and postponed manufacturing activities were included in the survey. The survey in-cluded a list of activities that could be performed in postponed manufacturing operations, ranging from high adding activities such as assembly and the sizing of products, to lower value-adding activities like packaging and labelling. Also some related activities such as the billing of customers and installation of products were included as possible supplementary services of postponement operations.
The study itself consisted of two stages. First, companies active in international trade (industry and wholesale) and transport and logistics services providers were phoned to identify the proper respondent within the company and to ask for his or her cooperation. For companies in inter-national trade a size criterion was used as a selection criterion. Only companies with import and export of over 5 million Dutch guilders (2.6 million US dollars) in the same SIC code were in-cluded in a random selection. Next the survey was mailed (a ®rst mail wave and a follow-up wave after 6 weeks). The total number of companies responding was 782, a response rate of 68% of the population in the mailing and 53% of the total population, including those that did not agree to receive the survey during the initial by phone contact.
Following data entry, results were checked in two ways. First, in case of inconsistent response, companies were phoned back. Next, a comparison was made between survey responses and data about head-counts known to the CBS through other statistics. Based on phone backs 20 responses had to be corrected.
In the survey, respondents that applied postponement were asked to specify the number of employees/workload in FTEs for those postponement activities applied. Furthermore, to develop an empirical basis for projections of the future size of postponement applications, respondents were asked to give their expectation about the future (in three years) number of employees for those activities. This question was operationalized on a three point scale with the labels: decreased ()1), stable (0) and increased number of employees (+1).
4. Results
This section presents the results of the survey, starting with the applications found in the various sectors.
4.1. Current application of postponement
Table 1 lists total number of FTEs reported per activity by sector to assess the applications of postponement by sector. Figures at a two digit level are possible because companies can employ less than an FTEs, for example, a half time person 0.5 FTE. To test hypotheses 1 and 2, the absolute number of FTEs reported by the respondents were divided by the total number of FTEs in the companyÕs workforce, resulting in an average percentage of total workforce in the activities. These percentages are also presented in Table 1. This correction was included to avoid a bias towards larger or smaller sectors. For example, an average 4.9% of the workforce of responding manufacturers is active in assembly, whereas 2.49% and 0.98% of FTEs in wholesales and transport are active in assembly.
The ®nal column of Table 1 lists the signi®cance of dierences in employment for activities listed, between sectors, based on a onewayA N O V AA N O V A test. Furthermore, a Schee test was used to
further assess the dierences between each of the groups. Based on Table 1 hypothesis 1 can partially be con®rmed; 15 activities out of the 17 have signi®cantly dierent levels of application between sectors. Only reconditioning and packaging are not applied at statistical signi®cant levels. The Schee test con®rmed the statistical dierence between groups apart from the activities:
· labelling and order intake for which there is no signi®cant dierence between manufacturing
and transport/logistics services,
· storage for which there is no dierence between manufacturing and wholesales.
Two activities (billing of ®nal customers and storage) are applied at a signi®cantly higher level in the logistics serives sector than in the manufacturing and wholesale sector. Billing of ®nal customers is a supplementary distribution service and storage (logistics postponement) in itself is not a typical postponed manufacturing application. Wholesalers are more active in the installa-tion of products, inspecinstalla-tion of products before repair, and administrainstalla-tion of debtors; these are all customer service related activities. Manufacturing companies are more active in the postponed manufacturing activities of ®nal-assembly and the sizing of products to customer speci®cation. Thus, there are a number of services that are applied in the wholesale and logistics services sector at signi®cantly higher levels than in industry. For the true postponed manufacturing activities of assembly and sizing however, applications in manufacturing are at a signi®cantly higher level than those in the logistics services and wholesale sector. This relates to the second part of the main question (the extent to which postponement applications are outsourced to logistics service providers) and hypothesis 2, which we now turn to.
Table 1
Assembly 1211 4.95 1068.50 2.49 768.95 0.98 <0.01
Con®guration 127.05 0.62 222.64 0.83 150.26 0.38 <0.01
Adding manuals 103.30 0.69 169.47 0.37 240.60 0.52 <0.01 Repair of transport damage 55.59 0.49 162.00 0.92 104.68 0.43 <0.01 Installation at customer site 199.86 0.71 250.34 0.81 150.30 0.14 <0.01
Labelling 405.24 1.23 401.71 1.46 377.49 1.48 <0.01
Sizing 406.61 2.04 383.38 1.67 83.50 0.18 <0.01
Blending and mixing 141.00 0.80 413.60 1.34 242.20 0.82 <0.01 Adding product features 223.00 1.04 194.03 0.69 181.90 0.38 <0.01 Inspection for repair 116.43 0.77 179.15 0.96 110.75 0.25 <0.01 Storage 1727.21 7.06 5325.34 12.41 12,923.07 16.47 <0.01 Debtor administration 289.45 1.80 405.42 3.09 223.35 2.05 <0.01 Billing ®nal customers 188.10 1.44 424.44 2.91 387.46 4.64 <0.01
Reconditioning 48.15 0.37 137.15 0.65 264.30 0.56 )
Order intake/Registration 494.75 3.60 771.78 4.92 1203.45 5.49 <0.1
Testing 599.36 2.57 675.84 2.48 299.74 1.49 <0.01
Packaging 685.90 2.36 775.95 2.91 781.39 2.7 )
aOneway A N O V A
4.2. Sector dierences for speci®c ranges of activities
To test hypothesis 2, a factor analyses (principal component factor method followed by vari-max rotation) of activities was performed. Four factors were identi®ed with an eigen value >1. The ®rst factor contains transaction related activities: (1) debtor administration, (2) billing and (3) order intake/registration. These activities are not real postponed manufacturing activities but are services related to transactions and are ®ltered out into a separate factor. The second factor, storage and packaging, contains the items: (1) storage, (2) labelling, (3) blending and mixing, (4) reconditioning and (5) packaging of products. This factor contains storage and postponed ac-tivities that have been called value-adding services by van Hoek and Commandeur (1995). The third factor contains activities additional to shipment activities: (1) con®guration of products, (2) repair of transport damage, (3) installation at customer site and (4) inspection for repair, also referred to as value adding shipment activities by van Hoek and Commandeur (1995). The fourth factor contains the true postponed manufacturing activities: (1) assembly, (2) sizing and (3) adding product features (van Hoek and Commandeur, 1995).
Table 2 presents the ®ndings by factor. Table 2 also presents absolute number of FTEs per factor. Employment in each of the factors was found to dier per sector, using oneway A N O V AA N O V A
properties. The Schee test con®rmed these dierences apart from the dierence between man-ufacturing and wholesale for storage and packaging and postponed manman-ufacturing.
The ®rst factor was found to have higher employment rates in wholesale and logistics services sectors than in the manufacturing sector. At a high signi®cance level (1%), factor 3 has higher employment in wholesale than in manufacturing, but a lower employment in the transport logistics services sector than in manufacturing, which does not con®rm hypothesis 2b. Factor 4 has a higher employment in the manufacturing sector and in wholesale compared to the logistics services sector. The higher value-adding activities included in that factor are thus less of a mar-ket for logistics services companies than for manufacturers and wholesalers. This con®rms hypothesis 2a.
Transaction related services (factor 1) and lower value-adding activities (factor 3) are applied at signi®cantly higher levels in wholesale, consistent with the reasoning that simple customizing activities are the traditional role of wholesalers. Logistics services companies, however, do not apply value-adding shipment activities (factor 3) to a larger extent than manufacturers. Thus hypothesis 2b is con®rmed only regarding wholesalers, not regarding logistics services companies.
Table 2
Mean percentage of employment per factors, by sectora
Transaction services Storage and
Manufacturing 902.30 6.84% 3007.5 4.77% 498.93 2.59% 1840.61 8.04% Logistics services 1814.26 9.75% 14,588.5 5.57% 515.99 1.21% 1034.35 1.54% Wholesale 1601.64 10.92% 7053.75 6.37% 814.13 3.51% 1645.91 4.85% Sign. of dierences <0.01 <0.01 <0.01 <0.01
a
In addition, a dierence was found within industry for the application of postponed ®nal as-sembly, packaging and labelling. Postponed ®nal assembly is practiced to a larger extent by manufacturers in automotive, electronics, oce equipment and medical technology, whereas postponed packaging and labelling is practiced to a larger extent in fashion, chemicals and food. Table 3 details the application of postponement (in terms of average share of FTEs per activity) for dierent manufacturing sections. This not only provides more detail within the comparison of Table 2 it also does three other things. First, it indicates how within sectors (manufacturing in this table) signi®cant dierences can be found on top of those found between sectors in Table 2. Second, this can provide input for manufacturers in assessing existing practices within their sector in terms of scope (which activities) and size (share of FTEs) of postponement applications. For example, as mentioned, chemical and food manufacturers are focussed on postponing packaging and labelling. Finally, third parties may use these data in selecting target markets in the manu-facturing sector for postponement services. Electronics and automotive manufacturers, for ex-ample, are interesting prospects for ®nal assembly services, based on their existing application of this activity.
4.3. Future expectations of respondents
To test hypothesis three, a chi-square analysis was used to compare the predicted development of FTEs per activity between sectors. Based on Table 4, hypothesis three can neither be rejected nor con®rmed. The growth of employment in activities such as storage, labelling, repair of transport damage and reconditioning, is expected to be signi®cantly greater in the logistics ser-vices sector. These activities are among the traditional areas of expertise of these companies. Growth expectations for postponed manufacturing activities do not dier signi®cantly between sectors.
Table 3
Signi®cant variations in application of postponement between manufacturing sectorsa
Final assembly Labelling Packaging
Food/tabacco 0.00612 0.00739 0.02275
Textile/clothing/leather 0.02975 0.01343 0.01682
Wood/Paper 0.00909 0.00259 0.00591
Graphical industry 0.02760 0.01323 0.02022
Chemical industry 0.00119 0.00838 0.02354
Rubber/Glass 0.05824 0.00750 0.00434
Metal/Metal products 0.04672 0.00637 0.01502
Machines/Oce equipment/electronic equipment 0.10610 0.00486 0.00567
Medical equipment 0.34510 0.01311 0.00652
Automotive/Transport equipment 0.12150 0.00617 0.01131
Furniture/not elsewhere speci®ed 0.05375 0.00742 0.09251
Total 0.05087 0.01011 0.01650
Signi®cance F<0.01 F<0.01 F<0.05
a
Overall, a high share of respondents in all three sectors expects growth of postponement ap-plications. This suggests that postponed manufacturing can be expected to increase in business in the years to come.
5. Discussion of results
Results from this ®rst broad empirical assessment of postponed manufacturing applications indicate that the phenomenon is indeed applied to an increasing, yet varying, extent in manu-facturing, wholesales, transport and logistics services. Further, companies expect to increase the extent to which postponed manufacturing is applied. A wide range of postponement applications were found to be applied and growing. This implies an extension of the Lampel and Mintzberg (1996) categorization of supply chains. The original categorization only included design, manu-facturing, assembly and shipment as activities in the supply chain that can be customized or standardized. Activities such as packaging and labelling might be added to the categorization. Furthermore, the categorization does not recognize the possible role of wholesalers, transport and logistics service providers, in addition to manufacturers, in performing these activities.
Variations in the scope (activities) and size (FTEs) of postponement applications vary signif-icantly between sectors. Whereas postponed manufacturing is primarily a manufacturers' activity, logistics service companies are moving into services supplementary to their base market of transport and warehousing. Activities such as labelling, billing and packaging generate important percentages of employment in the logistics services sector. However, the logistics services sector is not yet leading the application in any of the four factors of applications found in this study. Apparently, manufacturers and wholesalers do not usually consider transport and logistics service providers a natural supplier of supplementary, postponed manufacturing services. The reason
Table 4
Percentage of companies expecting growth of employment per activity, by sectora
Activity Manufacturing Wholesale Transport Signi®cance
Assembly 18.7 14.0 18.4
Con®guration 14.8 14.0 15.4
Repair of transport damage 1.9 5.8 12.0 <0.01
Installation at customer site 7.7 9.9 10.2
Labelling 26.5 25.6 32.7 <0.05
Sizing 19.4 11.6 10.2
Blending and mixing 7.7 7.4 11.3
Adding product features 9.0 6.6 14.7
Inspection for repair 12.3 10.7 14.3
Storage 32.3 29.8 56.4 <0.01
Debtor administration 12.3 14.9 16.2
Billing ®nal customers 15.5 18.7 22.6
Reconditioning 4.5 6.1 13.9 <0.01
Order intake/registration 20.6 22.6 30.8
Packaging 29.7 28.4 36.5
a
may be that activities such as ®nal assembly are outside their primary core competencies. How-ever, activities such as packaging and labelling may be a viable and logical extension of service oerings because these activities are closer related to the warehousing and transport function. van Laarhoven and Sharman (1994) suggested that transport and logistics companies can move into the ®nal assembly and related activities for selected customers based on a long relationship in which trust is developed and mutual investments are realized. This long-term perspective seems logical from the point of view of the transport and logistics service providers too. Operating and building postponed manufacturing facilities may be capital intensive whereas ¯eets and ware-houses may constitute most of the capital basis of most transport companies. A critical dierence may also be that warehouses and ¯eets can often be used as generic capacity for various customers whereas postponed manufacturing facilities may be very speci®c for a particular ®nal manufac-turing process, for a particular product, from a particular customer.
The above suggests that logistics service companies considering postponement applications as an extension of their existing transport and warehousing services can choose between two mar-keting approaches. The ®rst is a broad approach and the second is a focussed approach. In the broad approach, directly related activities such as packaging and labelling are targeted for a large number of customers as a small extension of the existing services. The advantage of this approach is that it requires less (speci®c) investment outside warehousing and that these activities are easier to perform for transport and logistics companies, given their traditional experience. The disad-vantage in comparison with targeting more complex ®nal manufacturing activities is that they contribute less to the creation of added value and thus the possible margin charged for services. In the focussed marketing approach, more complex ®nal manufacturing activities are targeted for a small set of key-customers. This requires long-term trust between service supplier and customer as well as relation-speci®c investments in facilities and processes of the service supplier. The bene®ts are vertical integration into higher margin activities such as assembly as well as higher customer commitment and dependence on the service performance. Regardless of the speci®c approach, the extent of application in the transport and logistics sector, compared to that in other sectors, posses a general challenge to the marketing of services by logistics service companies and the development of innovative service portfolios.
6. Conclusions
service providers. This suggests to these service providers that a speci®c and tuned marketing approach is needed dependent on the type of supplementary services targeted. Regarding future applications of the activities in our survey, signi®cantly higher growth is expected by logistics service providers in transport and warehousing activities. Postponed manufacturing applications are expected to grow too, yet not at signi®cantly dierent levels between sectors. This suggests that even though postponed manufacturing is not a signi®cant supplementary service for logistics service providers today, the battle for the future application of postponed manufacturing how-ever, is still to be fought.
In future research, measures of postponed manufacturing need to be improved. Given the dierence in application between industries it may be desirable to expand the list of activities further. Also, some related concepts such as vendor-managed inventory may be included in the survey as these allow for the inclusion of a focus on a speci®c segment of the overall chain (in-bound versus out(in-bound ¯ow of goods). Finally, other countries may be studied as a next stage. The Netherlands is a country very active in international trade and distribution. It is interesting to assess to what extent this results in higher levels of application of postponement in comparison to less internationally-oriented countries.
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