Postponement Strategy – Reducing Inventory In Automobile Industry

Published by MBA Skool Team, Published on June 26, 2013

In today’s customer friendly world, customer has plethora of options to choose his product from. The fierce competition demands industries to provide more customized products with competitive prices. But manufacturing customized products calls for additional cost and investment. When industries compromise on separate investments for each customized product, the customization gets converted into building of multiple finished goods inventory for the base product.

A good example can be from the Automobile industry. The dealers have to maintain inventory of cars of the same model with different colors. And this is mainly because car color is an important criterion for the customer while choosing the car of his choice. According to stats from automobile industry, the car distributor on an average maintains eight different color cars for the same base model.  This means that, for a single model, the car manufacturer has to build inventory to the order of 8 times, and this multiple inventory is maintained by all the players down the supply chain.



Step 1: Break the manufacturing process into two types: manufacturing base product and customizing base product.

  • Manufacturing base product – Make this as continuous process to achieve economies of scale.
  • Customizing base product –This process can be classified under job-shop, and can be carried out to add value to the customer.

Step 2: Use a postponement strategy, wherein you maintain inventory of only the base product at retailer/distributor. The product is further customized at retailer/distributor end based on the demand from the customer (pull strategy). By locating the customization process close to the customer, we can increase the responsiveness and at the same time can save the multiple inventory of the base product maintained in the entire supply chain.



Impact on automobile supply chain:

Applying above postponement strategy to the automotive industry, only the base models with protective coat will be manufactured at the manufacturing unit and shipped to the distributor. Hence, the multiple inventories of the order of 8 times at the dealers end can be reduced by maintaining the cars with only a protective coat at the dealers end. The final color coat will be applied as per the choice of customer on order confirmation. For this to work, the manufacturer has to keep his paint-shop at the dealer’s end which further helps in reducing the lead time after order is placed. Also, with this setup, the manufacturer now can offer more variety of colors to the customers as he need not manufacture and maintain inventory of the car with each color.

Implementation of postponement strategy will:

  • Reduce the multiple inventories in the entire supply chain
  • Provide the flexibility to the manufacturer to offer cars of different colors
  • Increase the service levels.

Challenge in implementation:

One of the challenges may be investment cost of setting up a paint shop at each of the dealer’s end. But dealer already maintains a workshop for minor repairs and servicing. Hence, setting up paint shop at dealer practically looks possible.  In future, if advancement in technologies allows building the paint shop with low fixed investment and also miniature capacities (cost per unit increase in capacity is minimal), we can implement postponement in Automobile Industry.

The article has been authored by Omkar Chodankar GMBA 2012 student, S P Jain School of Global management

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