What is Postponing the Point of Differentiation?
Postponing the point of differentiation involves shifting the point of differentiation toward the end of the value-addition curve. This can be achieved in reality by deferring the operational (differentiation) process to a later stage in the supply chain. A differentiation process is an activity that results in producing differentiated products using the base products.
For example, suppose an organization manufactures potato chips in various flavors. The process of producing chips in different flavors remains the same till the flavoring agents and spices are added to produce chips. In this case, the usual process of chips manufacturing includes the following steps:
- I am collecting and cleaning the required quantity of potatoes
- Inspecting and making temperature checks
- Peeling the skin and cutting the potatoes
- Washing the starch
- Frying the chips
- Adding additives (spices and flavoring mixtures)
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The differentiation takes place in Step 6 where spices and flavoring mixtures are added. The advantage of postponing the point of differentiation is that it helps in reducing inventories. Additionally, the period for which an organization has to carry out forecasting at the variant level is also reduced.
These lead to improved customer service and reduced product obsolescence. The postponement of the point of differentiation can also help in reducing transportation costs. Let us now discuss how the postponement of the point of difference helps in reducing transportation costs.
Postponement for Reducing Transportation Cost
Usually, the differentiation process is postponed to producing customized products as per the requirements of customers. However, organizations may also use the postponement strategy for delaying the operational process to a later stage in the supply chain to reduce transportation costs.
Some organizations achieve this reduction in transportation cost by shifting the assembly of the final (bulky) finished products toward the customers’ end. This practice is generally followed in cases where the product can be transported as a kit consisting of various parts, which can be easily assembled by the customer after he/she purchases it.
In such a case, transportation costs are significantly reduced because transporting kits is easier and cheaper as compared to the transportation of a finished product.
Organizations that manufacture bicycles in India have been quite successful in implementing the postponement strategy. Bicycle manufacturers usually manufacture cycle frames, handles, and transmission parts in-house whereas all other parts such as tires, tubes, seats, brakes, etc. are sourced through their respective suppliers. Retail dealers of bicycles stock frames and other components separately.
When a customer arrives, he/she chooses a particular bicycle (from the catalog or display) and finalizes his/her order. After this, the dealer instructs his/her technician to assemble the demanded bicycle using the frame and other components. This assembly time takes about 15-30 minutes. After the completion of assembly, the bicycle is handed over to the customer.
The advantage to the bicycle manufacturer is that the kits are less prone to damage as compared to fully assembled bicycles. Also, kits require less space as compared to fully assembled bicycles; therefore, more kits can be transported in a transporting vehicle as compared to the number of fully assembled bicycles.
Bicycle manufacturers initially used this strategy to lower their costs. However, this strategy can also be used to offer several variants to customers, which is an added advantage for bicycle manufacturers. The bicycle industry can introduce mass customization by designing modular components and allowing customers to choose a combination of modules, which the dealer can assemble as per customers’ requirements.
Advantages of Postponing the Point of Differentiation
The postponement strategy is helpful in the following cases:
- Mass product customization
- Modular product designs
- Large fluctuations or variability in demand
- Large transportation lead time
- Small value addition during transportation
- Short lead time in postponed operation
- Significant value addition in the delayed operation
Disadvantages of Postponing the Point of Differentiation
As discussed above, the postponement strategy brings various advantages such as reduced inventory, warehousing, and transportation costs, and increased responsiveness to customers. However, there are some problems associated with the postponement strategy. These problems are as follows:
- Economies of scale are reduced due to mass customization
- Product quality may be affected (in certain cases) when a manufacturer shifts the final assembling processes to the dealers’ end
- Relationships with other members of the supply chain may get affected