Int J Adv Manuf Technol (2008) 39:367–387
DOI 10.1007/s00170-006-0679-z
ORIGINAL ARTICLE
Postponement strategies for re-engineering of automotive
manufacturing: knowledge-management implications
S. Wadhwa & Bibhushan & K. S. Bhoon & F. T. S. Chan
Received: 24 November 2005 / Accepted: 7 May 2006 / Published online: 1 December 2006
# Springer-Verlag London Limited 2006
Abstract Globally, automotive manufacturers are faced
with the challenges of expanding product variety and high
customer service provision. They increasingly face a
flexibility driven, time-based competition. This demands
effective knowledge management to develop more effective
processes. In other words, there is a need for knowledge-
driven innovations that can offer business process improve-
ments in the new business environment. One innovative
response to these challenges is postponement, also known
as “delayed differentiation”. Such a strategy calls for
redesigning products and re-engineering processes so that
the stages of the production process in which a common
process is used are prolonged. This product/process re-
engineering should allow a flexible option to defer the point
of differentiation. The manufacturing industry motivation to
focus in this direction can be encouraged through relevant
demonstrative models capturing their existing processes. In
this paper, we develop such a model that captures the costs
and benefits associated with postponement strategy that is
implemented through business process re-engineering. We
apply this model to analyze a real case in an automobile
S. Wadhwa (*) : Bibhushan
. Bibhushan : K. S. Bhoon
Department of Mechanical Engineering,
Indian Institute of Technology,
Delhi, India
e-mail: swadhwa@mech.iitd.ernet.in
.Bibhushan
Bibhushan
e-mail: bibhushan_iitd@rediffmail.com
K. S. Bhoon
e-mail: ksbhoon@mech.iitd.ernet.in
F. T. S. Chan
Department of Industrial and Manufacturing Systems Engineering,
The University of Hong Kong,
Hong Kong, People’s Republic of China
e-mail: ftschan@hkucc.hku.hk
manufacturing plant. Our findings are that there are
enormous opportunities for cost-effective postponement
strategies in automotive manufacturing sector through a
knowledge management (KM)-based process re-engineer-
ing. We also note that as the number of differentiated
models and variability in demand increase, the cost of
process re-engineering can be recovered through value of
postponement (VOP), in as short a time frame as 1 year. It
is also suggested that for practitioners and researchers
working in the KM context, the sharing of the tacit
knowledge amongst different professionals managing the
various processes must be continually emphasized. This is
increasingly important to deal with flexibility challenges.
Keywords Postponement strategies .
Business process reengineering (BPR) .
Value of postponement (VOP)
1 Introduction
Postponement, also known as “delayed differentiation”, is a
supply-chain strategy that delays product differentiation at a
point closer to the customer [34]. This involves designing
and developing standard or generic configurable products
that can be customized quickly and inexpensively once the
actual consumer demand is known. Postponement also
entails the implementation of specific inventory strategies
to deploy inventory farther away from the customer while
fulfilling service level objectives and reducing inventory
costs and minimizing risks, i.e., strategies for holding the
right inventory at the right place and in the right form. The
goal is to have a common component in the supply chain
for most of the push phase and move product differentiation
as close to the pull phase of supply chain as possible. In
368
addition to many ongoing programs, such as lead-time
reduction, redesigning products and processes, so as to
delay the point of product differentiation, is becoming an
emerging means to address these challenges (Fisher et al.
[16]; Lee and Billington [22]; Yeh and Yang [42]). In the
situations where lead-time cannot be reduced further,
postponement can offer many of the benefits achieved by
reduction in lead-times. Postponement also makes it
possible to use the information regarding aggregate fore-
casts more effectively.
The importance of postponement was recognized as long
as a decade ago by Kopcazk and Lee [21] when they
identified postponement as one of the seven supply-chain
strategies (regional approach, local approach, logistics
partnerships, vertical integration, development of the
distribution network, postponement, and establishment of
local factories) adopted by many companies in the Asia
Pacific Region in order to address global challenges like
product variability and logistic inefficiency. Sigronelli et al.
[32] (Benetton A) provides a celebrated example of using
postponement to cope with long production lead times and
fickle fashion trends, using un-dyed yarn to knit about half
of its clothing. Dying is thus postponed to a later stage,
when Benetton has a better idea of the popular colors for
the season. Thus, manufacturing operation of the company
is postponed till the supply-chain actually demands it.
Effective implementation of postponement requires flexi-
bility in the supply chain to accommodate a wide variety of
products. Recently, Wadhwa and Rao [37], proposed a
unified framework for manufacturing and supply-chain
flexibility to encourage the manufacturing management to
exploit inherent flexibility towards improved supply-chain
performance. Many of the realistic manufacturing and
supply-chain scenarios are relatively complex. Therefore,
there is a need for management to develop heuristic methods
in such scenarios. For instance, Chan et al. [5], show the use
of a heuristic methodology for order distribution in a
demand-driven collaborative supply chain. In automotive
supply chains, innovative postponement strategies can lead
to shortest process lead times and maximum flexibility. It
may be useful to develop knowledge on understanding the
mechanisms through which flexibility can help in perfor-
mance improvements [40]. Postponement can be viewed as a
choice (flexible option) that a flexible process offers to
postpone the product differentiation. Among the market
leaders, there is an increased emphasis on reduction of lead
times and higher service level. This, in turn, means that the
supply chain should work on the pull principle. BMW has
been gradually implementing its customer-orientated sales
and production process (COSP) since Van Hoek [35]. COSP
aims to decrease the time between an order is being placed
and delivery to the customer, to within ten working days.
The new production system at BMW follows the pull
Int J Adv Manuf Technol (2008) 39:367–387
principle, where individual customer orders control not only
the components supplied and the engine, but also the body
and paint production. But implementing postponement in
vehicle manufacture is not easy. The implementation of
postponement may require extensive (spatial) reconfigura-
tion of the supply chain.
In this paper, we examine the feasibility of postponement
in vehicle manufacturing through business process reengi-
neering (BPR) and knowledge management (KM). This
requires an in-depth knowledge of the present practices and
an innovation spirit to change the existing processes
towards higher value addition. This exercise of applying
knowledge and innovation is often helped by developing
demo models of old and new business processes [39].
Nowadays knowledge management (Lin and Tseng [24];
Davenport and Prusak [11]; Wadhwa et al. [40]) and
innovation (Drucker [12, 13]; Darroch [8]; Porter and Scott
[27]) are increasingly being discussed in the industrial
management contexts. In our opinion, knowledge and
innovation holds the key for potential business process
improvements, in a flexibility-driven time-based competi-
tion, faced by automotive industry.
The implementation of postponement requires very high
initial investments and a thorough reengineering of the
existing business processes. These reasons hinder the imple-
mentation of postponement in manufacturing systems. Hence,
it is pertinent that the effectiveness of such strategies be
demonstrated to decision-makers. The decision-makers also
need quite cost-benefit analysis to find out whether the
postponement strategies are indeed effective. Additionally,
the system flexibility is the existing manufacturing system
makes it very complex. This complexity hinders the imple-
mentation or even generation of innovative ideas. In such
situations, the simulation-based demonstration models can
effectively reveal the advantages achievable by postpone-
ment. This paper aims to enrich the work in this direction by
presenting the simulation-based demonstration to exhibit the
efficacy of postponement strategies.
The rest of the paper is structured as follows. Section 2
highlights the available postponement opportunities in the
automotive supply chain through a brief literature review.
Section 3 presents a real life case study from an Indian
automotive supply chain. Section 4 expounds an analytical
model for the case problem and Section 5 presents the
corresponding results. Managerial implications are dis-
cussed in Section 6. Finally, the conclusion and scope for
future work is cited in Section 7.
2 Postponement in automotive manufacturing
It is useful to briefly share the research and industry
motivation for postponement strategies. Postponement
Int J Adv Manuf Technol (2008) 39:367–387 369

strategies have been used in the PC industry or in clothing
companies like Benetton. Research on postponement
strategies in auto-manufacturing is still at a nascent stage.
In auto making, more stress has been on lean manufac-
turing philosophies, exemplified by Toyota Production
System (TPS). TPS rarely talks of postponement, al-
though Kanban is some sort of postponement. In this
paper, we have gone beyond the manufacturing plant to
explore postponement in the whole supply chain. In the
Indian auto-manufacturing scenario, there is little aware-
ness of postponement as a concept. This paper should
bring added benefits by opening another window of
opportunity through postponement. Rahman [29] dis-
cusses the technological advancement in business-to-
business supply-chain management in the changing
market place.
It is important to appreciate the postponement options
based on different manufacturing supply-chain scenarios
and topologies. Wadhwa and Rao [38] propose that
flexibility plays an important role in defining the business
process topologies (see Fig. 1). The increasing nature of
the dynamic demand in a variety environment impacts the
uncertainty in the customer-demand patterns for any given
product. The flexibility-driven time-based competition
demands effective knowledge and innovation manage-
ment in changing the supply-chain structures [39]. Thus
an innovative direction to explore is the structure of
postponement under alternative topologies, leading to
redesign of business processes. The automotive sector
can benefit immensely, by moving from make-to-stock, to
the assemble-to-order scenarios and exploit greater flex-
ibility to deploy a postponement strategy. There are
potential benefits for both product mix flexibility and
volume mix flexibility through postponement. In the
supply chains, this is often achieved by postponing the
final assembly to bring it closer to actual customer
demand. This means that the firm responsible for the
final assembly needs to collaborate with the manufacturer.
In the automotive sector in India, the final assembly is
often in the control of the automotive manufacturer. Thus

MARKET
DEMANDS STANDARD PRODUCTS CUSTOMIZED PRODUCTS

AVAILABLE NO
IN STOCK

CAN BE
ASSEMBLED NO
YES
FROM STOCK
HIGH
TECHNOLOGY
CAN BE
PRODUCED NO PRODUCTS /
YES
USING AVAILABLE SERVICES
DESIGN
ASSEMBLE-TO-ORDER

EXISTING NO
YES
MAKE-TO-ORDER

DESIGNS CAN BE
MAKE-TO-STOCK

MODIFIED
CAN BE
YES DESIGNED NO
USING AVAILABLE
COMPETENCE

ENGINEER-TO-ORDER INNOVATE-TO-ORDER
YES
1 2 3 4 5 6

DESIGN NEW PRODUCT / DEVELOPMENT OF

DELIVERY ASSEMBLY PRODUCTION MODIFICATIONS & SERVICE DESIGN NEW
VARIANTS USING AVAILABLE COMPETENCIES
COMPETENCIES

INCREASING RICHNESS IN FLEXIBILITY REQUIREMENTS

IINCREASING NEED FOR MANAGEMENT OF FLEXIBILITY

Fig. 1 Topology of postponement options in manufacturing (adapted from Wadhwa and Rao [38])
370
the decision-maker has higher flexibility to deploy the
postponement strategy. Using the concepts of unified
nature of manufacturing and supply-chain flexibility [37],
an integrated process can be developed by other manu-
facturers also. It will allow good postponement decisions
in manufacturing to offer improved supply-chain perfor-
mance. Though the knowledge of postponement exists, it
needs to be shared and adapted in different contexts. Thus
effective knowledge management (KM) can play an
important role in identifying valuable directions for
postponement-guided process changes.
Successful supply-chain management requires a change
from managing individual functions to integrating activities
in to the key supply-chain processes. Thus an important
research and industry motivation is to study the value of
postponement when there is a collaboration to integrate and
internal (mostly manufacturing processes) and external
supply chains (e.g., final assembly, distribution, etc.,
functions). In some industries where manufacturing and
assembly are in the same plant, one can enjoy greater
flexibility to deploy postponement strategies. For instance,
the postponement of product differentiation (i.e., flexibility)
is from the manufacturing to assembly areas. In this paper,
we suggest that even postponement within the manufactur-
ing process can result in significant benefits. From a
supply-chain perspective, it needs suitable collaboration
with the suppliers. Managing firms’ supply network is a
difficult task. The process is complex because it involves
many interrelated business decisions and a wide range of
companies at different levels. So far, little is available to
assist managers in analyzing and monitoring a supply-
network performance (Yee and Tan [41]). It is important to
facilitate managers to explore, connect, and visualize the
interaction of process network decisions in such a way that
it is easy to understand and communicate, that engage more
people within an organization, and that unlock the creativity
of participants. In our context, it is useful to motivate
knowledge innovation process, which can take account of
the knowledge of existing internal and external supply-
chain processes, collaboration and postponement strategies
in the context of the available flexibility. The innovation on
the existing manufacturing process (an internal chain)
knowledge is applied first at a conceptual level and then a
simulation study on value of postponement is conducted.
The aim is to motivate the automotive industry to help
innovate greater avenues for postponement strategies and
explore a potential area for improvement. Implementation
of such ventures requires a reengineering of the existing
processes or BPR. In our opinion, the sharing of the tacit
knowledge amongst different professionals managing the
various processes must be continually emphasized in
flexible systems. This is so because such automotive
manufacturing represents larger complex systems where
Int J Adv Manuf Technol (2008) 39:367–387
tacit knowledge about various processes is very dispersed
in nature. KM can facilitate such knowledge sharing easily.
2.1 Need of business process reengineering
in postponement
A drastic innovative measure like postponement requires a
thorough analysis and improvement of all the existing
processes. A reengineering terms process is defined as “a
structured, measured set of activities designed to produce a
specified output for a particular customer or market”. It
implies a strong emphasis on “how work is done within an
organization” [9]. In their view, processes have two
important characteristics:
(i) They have customers (internal or external),
(ii) They cross organizational boundaries, i.e., they occur
across or between organizational subunits.
According to Davenport and Short [10], Processes may
be defined based on three dimensions:
– Entities: Processes take place between organizational
entities. They could be interorganizational (e.g., EDI,
i.e., electronic data interchange), interfunctional or
interpersonal (e.g., CSCW, i.e., computer supported
cooperative work).
– Objects: Processes result in manipulation of objects
(physical or informational).
– Activities: Processes could involve two types of
activities: managerial (e.g., develop a budget) and
operational (e.g., fill a customer order).
When the processes are related to the business
outcome, they are referred to as business processes.
Thus, according to Davenport and Short [10] business
process is “a set of logically related tasks performed to
achieve a defined business outcome”. Business processes
are simply a set of activities that transform a set of inputs
into a set of outputs (goods or services) for another person
or process using people and tools [30]. Re-engineering is
the radical re-design of an organization’s processes,
especially its business processes [1]. Rather than organiz-
ing a firm into functional specialties (like production,
accounting, marketing, etc.) and looking at the tasks that
each function performs, we should, according to the
reengineering theory, be looking at complete processes
from materials acquisition, to production, to marketing
and distribution. The firm should be re-engineered into a
series of processes. The concepts of reengineering were
proposed in a series of books and articles [4, 17–19].
The purpose of reengineering is to “make all your
processes the best-in-class”. Frederick Taylor suggested in
the 1880s that managers could discover the best processes
for performing work and reengineer them to optimize
Int J Adv Manuf Technol (2008) 39:367–387
productivity. BPR echoes the classical belief that there is
one best way to conduct tasks [30]. Re-engineering is the
basis for many recent developments in management [31].
The cross-functional team, for example, has become
popular because of the desire to re-engineer separate
functional tasks into complete cross-functional processes.
Also, many recent management information systems devel-
opments aim to integrate a wide number of business
functions. Enterprise resource planning, supply-chain man-
agement, knowledge-management systems, groupware and
collaborative systems, human resource management sys-
tems and customer relationship management systems all
owe a debt to re-engineering theory [3].
BPR relies on a different school of thought than
continuous process improvement [30]. In the extreme,
re-engineering assumes the current process is irrelevant -
it doesn’t work, it’s broke, forget it. Start over. Such a
clean-slate perspective enables the designers of business
processes to disassociate themselves from today’s process
and focus on a new process. In a manner of speaking, it is
like projecting yourself into the future and asking yourself:
what should the process look like? What do my customers
want it to look like? What do other employees want it to
look like? How do best-in-class companies do it? What
might we be able to do with new technology? According to
Davenport and Short [10], BPR is “the analysis and design
of workflows and processes within and between organiza-
tions”. BPR has three key target categories [2]:
– Customer friendliness
– Effectiveness
– Efficiency
BPR is essential in the case of the automotive industry
because the existing processes are very outdated and they
have been followed for decades without any sort of critical
analysis. Implementing postponement in automotive sector
also means restructuring the whole manufacturing process.
Since this may involve huge costs, and BPR team to
effectively manage the change process would be beneficial.
Additionally, the BPR team would also be helpful in
justifying the postponement and facilitating the change
within the organization or the supply chain.
2.2 Role of knowledge management in automotive
manufacturing
Knowledge as a concept is not new. However, there is renewed
emphasis on understanding knowledge and its management as
it is being seen as one possible antecedent of creativity and
innovation in developing products [25]. Knowledge manage-
ment is defined as, “management of organizational knowl-
edge for, creating business value, growth and generating a
competitive advantage” [33]. It consists of the processes that
371
facilitate generating, sharing, using, and storing knowledge.
Quintas et al. [28] perceive knowledge management as a
process of continually managing knowledge of all kinds to
meet existing and emerging needs, to identify and exploit
existing and acquired knowledge assets, and to develop new
opportunities. It requires a company-wide strategy that
comprises policy, implementation, monitoring and evalua-
tion. Such a policy should ensure that knowledge is available
when and where needed and can be acquired from external as
well an internal sources. Knowledge management comprises
information, communication, human resources, intellectual
capital, brands, etc. Zack [43] propounds that knowledge is
the fundamental basis of competition and companies having
superior knowledge are better equipped to coordinate and
combine their resources and capabilities in creative and
unique ways to provide higher value to their customers.
Knowledge management is the mantra for growth for most
companies, for CEOs, and IT and R&D heads, for functions
of planning, purchasing, manufacturing and marketing all
over the world. Knowledge management is the buzzword for
meeting the fast-changing environment and challenging the
global competition. Knowledge and innovation needs new
mindsets [36] to deal with flexibility and agility-driven
dynamic and competitive industrial management challenges.
Hou et al. [20] have developed a KM model for intelligent
and automatic management for the manufacturing intellectual
properties (IPs) of the automobile industry. So KM con-
tributions to advance manufacturing domain are growing.
The present study will address knowledge management
in the corporate world by looking at the relationship of
knowledge, enterprise system, business processes and
increasing value-based competitiveness in the industrial
management of the automotive sector. In this paper, an
attempt will be made to innovatively apply the knowledge
of postponement strategies through business process rede-
sign. We present a case study experience of industrial
management practices, aiming at a KM-motivated material
flow process of existing manufacturing supply chains. In
our opinion, the main benefit of KM is to facilitate sharing
of the tacit knowledge about the entity flow processes, so
that postponement strategy can help develop re-engineered
processes.
2.3 Postponement opportunities in automotive
manufacturing
In automotive manufacturing, different components and
assemblies undergo progressive product differentiation
through several stages. A component may be used to
produce several different subassemblies and assemblies.
For example, the same water pump may be fitted in
different models of engines and one model of engine may
be used to assemble different models of trucks, which differ
372
in frame, or other assemblies like the steering gear. This
complex process involving several permutations and com-
binations results in hundreds of vehicles and is depicted as
a schematic in Fig. 2.
At every stage, value is added and the component/
assemblies acquire distinctive characteristics due to which
production flexibility is progressively reduced. Moreover,
automotive manufacturers are increasingly resorting to
outsourcing due to which lead-time and information lag
between stages tends to increase. On the other hand,
product variety is increasing by the day and product life
cycle is shrinking. Since forecasting is needed at every
stage, cumulative forecasting errors contribute towards
bloated inventory. Although a number of lean manufactur-
ing best practices like JIT and Kanban have helped control
inventory, overall levels are still very high compared to
other industries like computers. Average inventory holdings
of automotive manufacturers in India are in the region of
45 days. While postponement strategy has been adopted to
by industries like garments (Benetton) and computers
(Hewlett-Packard, Feitzinger and Lee [15], such strategies
in the automotive manufacturing sector are yet to take root.
A fallout of the changed process will be that slits will be on
JIT to the FSM press. A new process will also increase
process flexibility, as it will be possible to cut slits on real-
time basis, as per the changing customer requirement.
Whole process now comes under the control of truck
manufacturer, thus being increasingly responsive to cus-
tomer requirement.
Fig. 2 A typical automotive
Components Sub-
supply-chain network
Assemblies
Increasing Level of Assembly
Increasing commitment for product /customer variety – Select Postponement
Int J Adv Manuf Technol (2008) 39:367–387
In a study by Oracle Corporation and Cap Gemini Ernst
& Young in August [26], over 75% of respondents
implementing postponement derived significant benefits
and considered their implementation a success; and 91%
of respondents noted significant improvements in customer
satisfaction and inventory costs. A large majority of
respondents agreed that their customers are seeing signif-
icantly improved order fill rates with decreased lead times.
The primary reason companies have not considered
postponement strategy is due to general lack of understand-
ing of postponement. The study also notes that increased
difficulty to forecast demand and customers demanding
higher levels of customization are the primary drivers for
implementing postponement. Motivated by the previous
efforts we present a knowledge management driven case
study in the automotive sector. It demanded management of
process knowledge and an innovative mindset.
2.4 Need of a framework for implementing postponement
strategies in manufacturing
Postponement could be applied at various stages in
automotive manufacturing. In automotive manufacturing,
the final products consist of many assemblies and sub-
assemblies. Moreover, since the number of components used
in the automobile manufacturing is exorbitant, the compo-
nents need to be designed in such a manner that they can be
used in more than one vehicle model. The dynamically
changing customer requirements add to the problems of the
Assemblies Different Truck
Models
Int J Adv Manuf Technol (2008) 39:367–387
manufacturers. Since the customer requirements are not very
precisely known, the manufacturers keep lot of inventory and
thus incur lot of cost on holding that inventory. Sometimes,
the inventory could not be used up to its shelf life and they
have to reject the component as scrap.
This requires that the product differentiation be postponed
to a point in manufacturing where the actual customer
requirements are precisely known. This could be achieved by
making modular product designs whereby the same compo-
nent could be used in more than one product. Such drastic
measures require the reengineering of the existing processes
at various stages. Additionally, the existing products need to
be rationalized in terms of the existing customer require-
ments. Since this whole process can become very complex,
the decision-makers need a framework to guide them while
implementing postponement through reengineering. In this
paper we have proposed a reengineering-based framework of
implementing postponement strategies at various stages of
manufacturing.
3 Postponement through business process reengineering
(BPR) - a case study
In the automotive sector, any major initiative of postpone-
ment strategies must first address the question of vehicle
design itself. While the increase in variety as a result of
change in customer requirements is a fact of life, a number
of design strategies like mass customization by modular-
ization, standard basic design, etc., will help in managing
variety and also lead to better and effective postponement
strategies (Lee and Billington [22]; Earnst and Kamrad
[14]). The auto industry is an important sector because
automobile production is a large and varied industry. First-
tier suppliers are essential enablers in the success of the
factor. Childerhouse et al. [6] identifies, present practices
concerning information flow as perceived by typical first
tier supplier. Observations are made via ‘top pain analysis’
facing an individual supplier and ‘quick scan analysis’ on a
range of automotive value streams. In the postponement
study, knowledge-based innovation is multi-functional, a
sign that the industry is moving from one-dimensional,
stand-alone systems to subsystems that handles several
related functions. In a similar manner, innovation can be
explored in three directions to achieve postponement
through business process re-engineering:
– Incremental innovation - These give small improve-
ments in products or processes.
– Step-change innovation - These create processes that
give significant competitive advantage.
– Transformation innovation - These create new systems
(with new products/processes).
373
In this paper we focus on incremental and step-change
innovations for applying postponement more effectively at
the process change level. It will take a while before Indian
auto manufacturers redesign vehicles for postponement.
Therefore, there is a need to examine if postponement
strategies, through modification of business processes
involving no change in vehicle design are feasible and
profitable. In this paper, we present a case study of just one
component in truck manufacture, i.e., “frame side member”
(basic chassis) in which postponement strategy is feasible
and profitable. Frame side member (FSM) is manufactured
from “steel slits” procured from steel plants. The process is
shown in Fig. 3.
More than 80 differentiated slits of varying sizes are
ordinarily required in the instant case. Total lead-time for
slits, steel mill is six weeks, because of many constraints
such as location of auto plant vis-à-vis steel mill. Forming
and drilling operations are performed on a special purpose
machine in the auto assembly plant, which is a constrained
workstation having high set up time. Due to this, the
manufacturer is forced to increase the batch size, leading to
work in progress inventory of differentiated slits. Many of
these slits become dead stock or move too slowly. At the
time of this study, the manufacturer was saddled with a
dead stock of 8,000 slits costing Rs. 10 million (1 USD=43
Rs.). In addition, out of 6,000 slits in stock, only 2,000
could be consumed in the whole month and balance
requirement of 4,000 had to be manufactured afresh. Apart
from dead/slow-moving inventory, a constrained worksta-
tion gets overloaded further because it continues to process
slits into frame side members that no one seems to need
next month.
4 An evaluation model through value of postponement
(VOP)
Postponement strategy in this case would imply postponing
slitting of hot-rolled (HR) coil as close to the forming
machine operation as possible, which itself needs to be
close to the truck assembly. This would mean postpone-
ment period of 2 to 6 months. However, this is possible
Steel Slits FSM Frame Side Members
Forming
and
Drilling
Fig. 3 The process of manufacturing of frame side members (FSM)
for a truck
374 Int J Adv Manuf Technol (2008) 39:367–387

Fig. 4 Re-engineering of the

FSM process showing
postponement

only if the entire operation of slitting and cambering is then shipped to the truck manufacturer’s factory, located at
dovetailed with forming and drilling at the vehicle a distance of 3,000 km.
manufacturing plant. New business process, which basical- In stage 2, slits are stored in the truck manufacturing
ly means creation of a new facility for slitting and factory and converted to frame side members (channels)
cambering, is estimated to cost Rs. 50 million. Management in a forming and drilling machine as per the actual
would consider the proposal, provided cost-benefit analysis requirement in the chassis assembly. Here, product
of fresh investment vis-à-vis value of postponement (VOP) differentiation occurs to a lesser degree because of
proves to be beneficial. An innovative re-designed process different holes. But this differentiation is very close to
for FSM is shown in Fig. 4. truck assembly as the FSM shop directly feeds the frames
to the assembly line. Real delay is between stage 1 and 2.
4.1 Manufacturing stages If we can delay stage 1 and bring it close to stage 2,
postponement would occur [23].
Manufacturing is divided into two stages. Stage 1 of the
operation takes place in a steel mill. Hot-rolled (HR) coil is 4.2 The analytical model
produced from steel billets at the mill. It is a long roll coiled
like a ribbon. The HR coil is then unrolled in a slitting and We now present an analytical model to determine whether it
cambering machine. Here, the coil is cut to the desired is beneficial to redesign the business process. The following
length and width. Normally, three pieces are produced data has been used in this study:
widthwise. Length-wise pieces will depend on the length of
the slit, which depends on the truck length. This is the only
dimension that varies from model to model. Width and Yearly demand of HR coils 16,000 tons
Desired cycle service level 0.95
thickness are constant for all models. Thus the model of the
Cost of HR coils Rs. 25/- per kg
truck (differentiated product) gets decided in stage 1 itself Scrap value of a slit Rs. 2/- per kg
in pre-postponement scenario. The cambering process Coefficient of variation 0.1 to 0.20
removes the bend in the slit. Slits of different lengths are

Table 1 Variation of VOP with changes in COV (n=2, μ=8000, CSL=0.95)

COV Without postponement With postponement VOP

(Rs. thousands)
∑ O os Total cost of σp Op osp Total cost of
overstocking overstocking
(Rs. Thousands) (Rs. thousands)

0.02 160.00 8,263 267 12,260 226.27 16,372 377 8,669 3,591
0.04 320.00 8,526 533 24,520 452.55 16,744 754 17,338 7,182
0.06 480.00 8,790 800 36,780 678.82 17,117 1,131 26,007 10,773
0.08 640.00 9,053 1,066 49,040 905.10 17,489 1,508 34,676 14,363
0.10 800.00 9,316 1,333 61,299 1,131.37 17,861 1,885 43,345 17,954
0.12 960.00 9,579 1,599 73,559 1,357.65 18,233 2,261 52,014 21,545
0.14 1,120.00 9,842 1,866 85,819 1,583.92 18,605 2,638 60,683 25,136
0.16 1,280.00 10,105 2,132 98,079 1,810.19 18,978 3,015 69,352 28,727
0.18 1,440.00 10,369 2,399 110,339 2,036.47 19,350 3,392 78,021 32,318
0.20 1,600.00 10,632 2,665 122,599 2,262.74 19,722 3,769 86,691 35,908
Int J Adv Manuf Technol (2008) 39:367–387 375

Table 2 Variation of VOP with changes in COV (n=4, μ=4000, CSL=0.95)

COV Without postponement With postponement VOP

(Rs. thousands)
∑ O os Total cost of overstocking σp Op osp Total cost of overstocking
(Rs. thousands) (Rs. thousands)

0.02 80.00 4,132 133 12,260 160.00 16,263 267 6,130 6,130
0.04 160.00 4,263 267 24,520 320.00 16,526 533 12,260 12,260
0.06 240.00 4,395 400 36,780 480.00 16,790 800 18,390 18,390
0.08 320.00 4,526 533 49,040 640.00 17,053 1,066 24,520 24,520
0.10 400.00 4,658 666 61,299 800.00 17,316 1,333 30,650 30,650
0.12 480.00 4,790 800 73,559 960.00 17,579 1,599 36,780 36,780
0.14 560.00 4,921 933 85,819 1,120.00 17,842 1,866 42,910 42,910
0.16 640.00 5,053 1,066 98,079 1,280.00 18,105 2,132 49,040 49,040
0.18 720.00 5,184 1,199 110,339 1,440.00 18,369 2,399 55,170 55,170
0.20 800.00 5,316 1,333 122,599 1,600.00 18,632 2,665 61,299 61,299

Note: The manufacturer has a requirement of approxi- Assuming demand to be normally distributed (even if the
mately 80 different types of slits. COV for different models demand is not normally distributed for any model,
varies widely. Therefore, for the purpose of analysis, we aggregated demand on postponement, will be normally
have assumed uniform COV starting at 1% and going up to distributed due to Central Limit Theorem), optimal order
20%. Later we also establish that different COV does not size (O), overstock (os) and under stock (us) are given by
change the overall findings. the following formula [7]
The notations used in the model as given below:
c Purchase price O ¼ F 1 ðCSL; μ; σÞ
s Salvage value


Oμ Oμ
Co Cost of overstocking by one unit=c-s os ¼ ðO  μÞFs þ σfs
σ σ
CSL Optimal cycle service level
O Corresponding optimal order size Cos ¼ Co  os
n Number of models where,
μ Mean demand in tons
σ Standard deviation in tons FS Standard normal cumulative distribution function
os Expected over stock fS Standard normal density function
Cos Total overstock cost σfS is the product of σ and fs
us Expected under stock All these variables are also present in the scenario with
postponement. Therefore, to distinguish the two scenarios,

Table 3 Variation of VOP with changes in COV (n=8, μ=2000, CSL=0.95)

COV Without postponement With postponement VOP

(Rs. thousands)
σ O os Total cost of overstocking σp Op osp Total cost of overstocking
(Rs. thousands) (Rs. thousands)

0.02 40.00 2,066 67 12,260 113.14 16,186 188 4,335 7,925

0.04 80.00 2,132 133 24,520 226.27 16,372 377 8,669 15,851
0.06 120.00 2,197 200 36,780 339.41 16,558 565 13,004 23,776
0.08 160.00 2,263 267 49,040 452.55 16,744 754 17,338 31,701
0.10 200.00 2,329 333 61,299 565.69 16,930 942 21,673 39,627
0.12 240.00 2,395 400 73,559 678.82 17,117 1,131 26,007 47,552
0.14 280.00 2,461 466 85,819 791.96 17,303 1,319 30,342 55,478
0.16 320.00 2,526 533 98,079 905.10 17,489 1,508 34,676 63,403
0.18 360.00 2,592 600 110,339 1,018.23 17,675 1,696 39,011 71,328
0.20 400.00 2,658 666 122,599 1,131.37 17,861 1,885 43,345 79,254
376 Int J Adv Manuf Technol (2008) 39:367–387

Table 4 Variation of VOP with changes in COV (n=16, μ=1000, CSL=0.95)

COV Without postponement With postponement VOP

(Rs. thousands)
σ O os Total cost of overstocking σp Op osp Total cost of overstocking
(Rs. Thousands) (Rs. thousands)

0.02 20.00 1,033 33 12,260 80.00 16,132 133 3,065 9,195

0.04 40.00 1,066 67 24,520 160.00 16,263 267 6,130 18,390
0.06 60.00 1,099 100 36,780 240.00 16,395 400 9,195 27,585
0.08 80.00 1,132 133 49,040 320.00 16,526 533 12,260 36,780
0.10 100.00 1,164 167 61,299 400.00 16,658 666 15,325 45,975
0.12 120.00 1,197 200 73,559 480.00 16,790 800 18,390 55,170
0.14 140.00 1,230 233 85,819 560.00 16,921 933 21,455 64,364
0.16 160.00 1,263 267 98,079 640.00 17,053 1,066 24,520 73,559
0.18 180.00 1,296 300 110,339 720.00 17,184 1,199 27,585 82,754
0.20 200.00 1,329 333 122,599 800.00 17,316 1,333 30,650 91,949

the variables under postponement will be superscripted by
the letter “p”. For instance, the standard deviation under
postponement will be denoted by σ p.
4.3 Model variables
The variables used in the model are briefly discussed
below:
– Number of models: Actual number of models in the
supply chain is over 80. We have, however, varied this
number from 2 to 128.
– Mean demand for each model: Total average demand
of all the products is assumed to be 16,000 units. Total
average demand in a year has been distributed over
different models uniformly. The mean demand of each
model is calculated by dividing this total demand by
the number of models.
– Standard deviation (σ): Standard deviation is related to
coefficient of variation (COV) and mean demand (μ)
by the relation:
σ ¼ COV  μ
In our model, COV is varied from 0 to 0.20. To study the
variation of COV with VOP, the mean demand is kept
constant. Similarly, to study the effect of the number of
models on VOP, COV is kept constant.
– Cycle service level (CSL): For studying the impact of
COV and number of models, CSL is assumed to be
0.95. For studying the impact of CSL on VOP, CSL is
varied from 0.55 to 0.99.
– O, os, us: Calculated using formulae given above
– Overstock cost: Since calculations cover a period of 1
year, it can be assumed that over stock will result in

Table 5 Variation of VOP with changes in COV (n=32, μ=500, CSL=0.95)

COV Without postponement With postponement VOP

(Rs. thousands)
σ O os Total cost of overstocking σp Op osp Total cost of overstocking
(Rs. thousands) (Rs. thousands)

0.02 10.00 516 17 12,260 56.57 16,093 94 2,167 10,093

0.04 20.00 533 33 24,520 113.14 16,186 188 4,335 20,185
0.06 30.00 549 50 36,780 169.71 16,279 283 6,502 30,278
0.08 40.00 566 67 49,040 226.27 16,372 377 8,669 40,371
0.10 50.00 582 83 61,299 282.84 16,465 471 10,836 50,463
0.12 60.00 599 100 73,559 339.41 16,558 565 13,004 60,556
0.14 70.00 615 117 85,819 395.98 16,651 660 15,171 70,648
0.16 80.00 632 133 98,079 452.55 16,744 754 17,338 80,741
0.18 90.00 648 150 110,339 509.12 16,837 848 19,505 90,834
0.20 100.00 664 167 122,599 565.69 16,930 942 21,673 100,926
Int J Adv Manuf Technol (2008) 39:367–387 377

Table 6 Variation of VOP with changes in COV (n=64, μ=250, CSL=0.95)

COV Without postponement With postponement VOP

(Rs. thousands)
σ O os Total cost of overstocking σp Op osp Total cost of overstocking
(Rs. thousands) (Rs. thousands)

0.02 5.00 258 8 12,260 40.00 16,066 67 1,532 10,727

0.04 10.00 266 17 24,520 80.00 16,132 133 3,065 21,455
0.06 15.00 275 25 36,780 120.00 16,197 200 4,597 32,182
0.08 20.00 283 33 49,040 160.00 16,263 267 6,130 42,910
0.10 25.00 291 42 61,299 200.00 16,329 333 7,662 53,637
0.12 30.00 299 50 73,559 240.00 16,395 400 9,195 64,364
0.14 35.00 308 58 85,819 280.00 16,461 466 10,727 75,092
0.16 40.00 316 67 98,079 320.00 16,526 533 12,260 85,819
0.18 45.00 324 75 110,339 360.00 16,592 600 13,792 96,547
0.20 50.00 332 83 122,599 400.00 16,658 666 15,325 107,274

scrap. Past experience has confirmed this. Therefore,
overstocking cost is equal to the value of HR coil (Rs.
25 per kg) minus scrap value at Rs. 2 per kg.
– Under stock: Although postponement will result in
lower under stock, we have ignored this cost in both
cases, for want of a reliable yardstick. In the postponed
scenario, production flexibility will ensure larger
overall benefit. Therefore, ignoring this cost, adds to
the robustness of this strategy.
4.4 Calculations under postponement
On postponement, all HR coils are treated as one product.
Thus, mean demand is the algebraic sum of the individual
demands (which is equal to the total demand). Standard
deviation is calculated by Little’s formula, i.e., aggregated
σ is equal to square root of number of models multiplied by
individual σ. i.e., standard deviation under postponement is
given by:
pffiffiffi
σp ¼ n  σ
Moreover, when the product differentiation is postponed,
the average demand (μ) becomes equal to the total demand.
All other calculations remain the same as in the scenario
without postponement.
4.5 Changeover costs
The changeover cost could be broken down into two
components: initial cost and the recurring cost. An estimate
of these costs is given.
– Initial cost: Cost of slitting and cambering machine
including installation is estimated to be Rs. 49 million
(Rs. 43=$1). An additional cost of Rs. 1 million is

Table 7 Variation of VOP with changes in COV (n=128, μ=125, CSL=0.95)

COV Without postponement With postponement VOP

(Rs. thousands)
σ O os Total cost of overstocking σp Op osp Total cost of overstocking
(Rs. thousands) (Rs. thousands)

0.02 2.50 129 4 12,260 28.28 16,047 47 1,084 11,176

0.04 5.00 133 8 24,520 56.57 16,093 94 2,167 22,353
0.06 7.50 137 12 36,780 84.85 16,140 141 3,251 33,529
0.08 10.00 141 17 49,040 113.14 16,186 188 4,335 44,705
0.10 12.50 146 21 61,299 141.42 16,233 236 5,418 55,881
0.12 15.00 150 25 73,559 169.71 16,279 283 6,502 67,058
0.14 17.50 154 29 85,819 197.99 16,326 330 7,585 78,234
0.16 20.00 158 33 98,079 226.27 16,372 377 8,669 89,410
0.18 22.50 162 37 110,339 254.56 16,419 424 9,753 100,586
0.20 25.00 166 42 122,599 282.84 16,465 471 10,836 111,763
378 Int J Adv Manuf Technol (2008) 39:367–387

Fig. 5 Impact of coefficient of Variation of VOP with COV

variation (COV) on value of
postponement (VOP) (n = Number of Models)
120000

100000
n=2

VOP (Rs. Thousands)

80000 n=4
n=8
60000 n=16
n=32
40000 n=64
n=128
20000

0
0.00 0.05 0.10 0.15 0.20 0.25
COV

expected to incur on trial, evaluation, process re-
engineering, modification to ERP, training, etc. This
makes the total initial cost to be Rs. 50 million.
– Recurring cost: Recurring cost is ignored, as it is
assumed to be the same as the current process.
5 Results and discussions
When manufacturing is postponed to a point nearer its use,
the overstocks decline significantly. The difference in
overstock value, with and without postponement, leads to
the value of postponement (VOP). The effect of COV, n
and CSL on VOP was investigated in this study.
5.1 Impact of coefficient of variation (COV) on VOP
To investigate the impact of COV on VOP, the CSL was
assumed to be constant at 0.95. The total demand was taken
as 16,000 units. The demand for each model was assumed
to be uniformly distributed. Therefore, the average demand
for each model was found by dividing the total demand by
the number of models (n). The COV was varied uniformly
from 0.02 to 0.20. Tables 1, 2, 3, 4, 5, 6, 7 show the
relevant calculation for different values of n.
The VOP evaluated in the Tables 1, 2, 3, 4, 5, 6, 7 for
different values of n has been plotted in Fig. 5. Following
inferences could be drawn from this figure.
– There is a linear increase in the VOP with COV. This is
expected due to COV and mean demand being
uniformly distributed. The calculation of standard

Table 8 Variation of VOP with changes in n (number of products) (COV=0.04, CSL=0.95)

n Without postponement With postponement VOP

(Rs. thousands)
μ σ O os Total cost of μp σp Op osp Total cost of
overstocking overstocking
(Rs. thousands) (Rs. thousands)

2 8,000 320.00 8,526 533 24,520 16,000 452.55 16,744 754 17,338 7,182
4 4,000 160.00 4,263 267 24,520 16,000 320.00 16,526 533 12,260 12,260
8 2,000 80.00 2,132 133 24,520 16,000 226.27 16,372 377 8,669 15,851
16 1,000 40.00 1,066 67 24,520 16,000 160.00 16,263 267 6,130 18,390
32 500 20.00 533 33 24,520 16,000 113.14 16,186 188 4,335 20,185
64 250 10.00 266 17 24,520 16,000 80.00 16,132 133 3,065 21,455
128 125 5.00 133 8 24,520 16,000 56.57 16,093 94 2,167 22,353
Int J Adv Manuf Technol (2008) 39:367–387 379

Table 9 Variation of VOP with changes in n (COV=0.08, CSL=0.95)

N Without postponement With postponement VOP

(Rs. thousands)
μ σ O os Total cost of μp σp Op osp Total cost of
overstocking overstocking
(Rs. thousands) (Rs. thousands)

2 8,000 640.00 9,053 1,066 49,040 16,000 905.10 17,489 1,508 34,676 14,363
4 4,000 320.00 4,526 533 49,040 16,000 640.00 17,053 1,066 24,520 24,520
8 2,000 160.00 2,263 267 49,040 16,000 452.55 16,744 754 17,338 31,701
16 1,000 80.00 1,132 133 49,040 16,000 320.00 16,526 533 12,260 36,780
32 500 40.00 566 67 49,040 16,000 226.27 16,372 377 8,669 40,371
64 250 20.00 283 33 49,040 16,000 160.00 16,263 267 6,130 42,910
128 125 10.00 141 17 49,040 16,000 113.14 16,186 188 4,335 44,705

deviation (SD) from these two leads SD to be
uniformly distributed. VOP will thus have a linear
relationship with change in COV or mean demand for a
given number of models (n).
– Value of postponement increases sharply as the number
of models goes up from 2 to 8. However, as the
number of models is increased further towards 80,
relative increase is much lower. This leads us to an
interesting observation - postponement strategies yield
comparatively high value of postponement when the
number of products to be differentiated is small. As the
number of models is increased, the marginal benefit is
not as high.
– As already mentioned, change in business process to
effect postponement will cost the company approxi-
mately Rs. 50 million. Assuming COV to be a
moderate 10%, we get a VOP of Rs. 54.6 million for
80 models. This yields a payback period of less than 1
year. Postponement is thus a win-win strategy. In actual
measurement, COV was found to be close to 15%,
indicating a savings of Rs. 80 million for 80 models.
However, 6 months of data shows that the number of
active models is approximately 30. Even if only 20
models are taken, VOP still turns out to be more than
Rs.70 million.
5.2 Impact of number of models (n) on VOP
To investigate the impact the impact of the number of
models (n), n was varied from 2 to 128. The total demand
was again assumed to be constant at 16,000 units. CSL was
taken as 0.95 as in the previous case. The mean demand per
product was variable, depending on the number of models.
In addition to this, the COV was varied from 0.04 to 0.20.
These calculations are shown in Tables 8, 9, 10, 11, 12.
The results from the above calculation were plotted in
Fig. 6. Following inferences could be drawn from the results:
– The VOP initially increases sharply with increasing
number of number of models. But as the value of n
increases, the marginal increase in the VOP diminishes.
This again confirms that postponement is a profitable
strategy for a limited number of models. The profit-
ability achieved by a comparatively larger number of
models is relatively less.

Table 10 Variation of VOP with changes in n (COV=0.12, CSL=0.95)

N Without postponement With postponement VOP

(Rs. thousands)
μ σ O os Total cost of μp σp Op osp Total cost of
overstocking overstocking
(Rs. thousands) (Rs. thousands)

2 8,000 960.00 9,579 1,599 73,559 16,000 1,357.65 18,233 2,261 52,014 21,545
4 4,000 480.00 4,790 800 73,559 16,000 960.00 17,579 1,599 36,780 36,780
8 2,000 240.00 2,395 400 73,559 16,000 678.82 17,117 1,131 26,007 47,552
16 1,000 120.00 1,197 200 73,559 16,000 480.00 16,790 800 18,390 55,170
32 500 60.00 599 100 73,559 16,000 339.41 16,558 565 13,004 60,556
64 250 30.00 299 50 73,559 16,000 240.00 16,395 400 9,195 64,364
128 125 15.00 150 25 73,559 16,000 169.71 16,279 283 6,502 67,058
380 Int J Adv Manuf Technol (2008) 39:367–387

Table 11 Variation of VOP with changes in n (COV=0.16, CSL=0.95)

N Without postponement With postponement VOP

(Rs. thousands)
μ σ O os Total cost of μp σp Op osp Total cost of
overstocking overstocking
(Rs. thousands) (Rs. thousands)

2 8,000 1,280.00 10,105 2,132 98,079 16,000 1,810.19 18,978 3,015 69,352 28,727
4 4,000 640.00 5,053 1,066 98,079 16,000 1,280.00 18,105 2,132 49,040 49,040
8 2,000 320.00 2,526 533 98,079 16,000 905.10 17,489 1,508 34,676 63,403
16 1,000 160.00 1,263 267 98,079 16,000 640.00 17,053 1,066 24,520 73,559
32 500 80.00 632 133 98,079 16,000 452.55 16,744 754 17,338 80,741
64 250 40.00 316 67 98,079 16,000 320.00 16,526 533 12,260 85,819
128 125 20.00 158 33 98,079 16,000 226.27 16,372 377 8,669 89,410

– VOP increases as the COV increases. This confirms the
results obtained from the previous study. The equal
separation between the points with same value of n, but
different COV indicates that COV is linearly related to
VOP.
5.3 Impact of cycle service level (CSL) on value
of postponement
So far we have been working with a CSL of 0.95. We will
now examine how a lower CSL will impact VOP. To study
this impact, the value of n was assumed to be constant at
64. The value of COV was varied from 0.04 to 0.20. CSL
was varied from 0.55 to 0.99. Tables 13, 14, 15, 16, 17
show the calculations for finding the VOP for different
values of CSL.
The VOP obtained from Tables 13, 14, 15, 16, 17 was
plotted against the CSL. The resulting graph is shown in
Fig. 7. We found that lower CSL tend to lower the VOP.
We also concluded that higher CSL levels yield steeper
gains in VOP. In the present case, the manufacturer desires
a very high service level for uninterrupted production.
Therefore higher VOP is ensured.
The higher gain in VOP for higher values of CSL should
not prompt the management to opt for higher CSL because
the costs of manufacturing also rise very steeply for higher
values of CSL. This is depicted in Fig. 8 where the total
overstocking costs are plotted against CSL for different
values of CSL. It could be observed that costs rise very
steeply between the CSL values of 0.95 and 0.99. A proper
tradeoff between costs and CSL is therefore necessary in
such situations.
5.4 Impact of postponement on system flexibility
Flexibility is defined as the system’s ability to cope with
the change in customer expectations. In the case problem,
flexibility meant providing more number of models at the
same cost. In other words, we had to determine that how
many more models could be handled by the system with the
same working capital. In the analytical model discussed in
Section 5 we found that if all other system variables were
held constant, the only difference among the scenarios with
and without postponement was due to the use of Little’s

Table 12 Variation of VOP with changes in n (COV=0.20, CSL=0.95)

N Without postponement With postponement VOP

(Rs. Thousands)
μ σ O os Total cost of μp σp Op osp Total cost of
overstocking overstocking
(Rs. thousands) (Rs. thousands)

2 8,000 1,600.00 10,632 2,665 122,599 16,000 2,262.74 19,722 3,769 86,691 35,908
4 4,000 800.00 5,316 1,333 122,599 16,000 1,600.00 18,632 2,665 61,299 61,299
8 2,000 400.00 2,658 666 122,599 16,000 1,131.37 17,861 1,885 43,345 79,254
16 1,000 200.00 1,329 333 122,599 16,000 800.00 17,316 1,333 30,650 91,949
32 500 100.00 664 167 122,599 16,000 565.69 16,930 942 21,673 100,926
64 250 50.00 332 83 122,599 16,000 400.00 16,658 666 15,325 107,274
128 125 25.00 166 42 122,599 16,000 282.84 16,465 471 10,836 111,763
Int J Adv Manuf Technol (2008) 39:367–387 381

Fig. 6 Impact of number of Variation of VOP with Number of Models

models (n) on VOP
120000

100000
COV=0.04

VOP (Rs. Thousands)

80000 COV=0.08
COV=0.12
60000 COV=0.16
COV=0.20
40000

20000

0
0 20 40 60 80 100 120 140
Number of Models

formula for finding the variance. Hence, if we had the same
working capital (total overstocking cost), theoretically n2
models could have been handled. This is a very important
finding. Similar results were obtained by simulation experi-
ments with COV of 0.14 and 0.16 as shown in Table 18. It
shows that system flexibility could be increased approxi-
mately to square of the existing flexibility just by
postponing the product differentiation.
6 Managerial implications
A company with a perfect crystal ball would always
manage to have the right parts and product inventory
available at just the right time to satisfy total demand.
Unfortunately, in a dog-eat-dog, morphing-customer world,
this is not how it works. Low forecast accuracy is and will
remain a fact of life. Automotive manufacturers have been
concentrating their energy on lean manufacturing, which
has given them rich dividends. If everything could be
manufactured exactly when it is needed, postponement
would be redundant. However, this is not how it works. In
lean and JIT, inventories are largely shifting from the OEM
to the suppliers. Therefore the best alternative is to delay
the differentiation of products for as long as possible, so
that we roll with the punches when customers change their
minds. There are several methods of achieving the same,
including simplifying the product, standardizing the com-
ponents, and eliminating options that customers don’t care
about in the first place. A key global market exemplifying

Table 13 Variation of VOP with changes in CSL (n=64, COV=0.04, Total demand=16,000)

CSL Without postponement With postponement VOP

(Rs. Thousands)
μ σ O os Total cost of μp σp Op osp Total cost of
overstocking overstocking
(Rs. thousands) (Rs. thousands)

0.55 250 10.00 251 5 6,844 16,000 80.00 16,010 37 855 5,988
0.60 250 10.00 253 5 7,925 16,000 80.00 16,020 43 991 6,934
0.65 250 10.00 254 6 9,139 16,000 80.00 16,031 50 1,142 7,997
0.70 250 10.00 255 7 10,521 16,000 80.00 16,042 57 1,315 9,206
0.75 250 10.00 257 8 12,124 16,000 80.00 16,054 66 1,516 10,609
0.80 250 10.00 258 10 14,032 16,000 80.00 16,067 76 1,754 12,278
0.85 250 10.00 260 11 16,400 16,000 80.00 16,083 89 2,050 14,350
0.90 250 10.00 263 13 19,561 16,000 80.00 16,103 106 2,445 17,116
0.95 250 10.00 266 17 24,520 16,000 80.00 16,132 133 3,065 21,455
0.99 250 10.00 273 23 34,294 16,000 80.00 16,186 186 4,287 30,007
382 Int J Adv Manuf Technol (2008) 39:367–387

Table 14 Variation of VOP with changes in CSL (n=64, COV=0.08, Total demand=16,000)

CSL Without postponement With postponement VOP

(Rs. Thousands)
μ σ O os Total cost of μp σp Op osp Total cost of
overstocking overstocking
(Rs. thousands) (Rs. thousands)

0.55 250 20.00 253 9 13,687 16,000 160.00 16,020 74 1,711 11,976
0.60 250 20.00 255 11 15,849 16,000 160.00 16,041 86 1,981 13,868
0.65 250 20.00 258 12 18,278 16,000 160.00 16,062 99 2,285 15,993
0.70 250 20.00 260 14 21,043 16,000 160.00 16,084 114 2,630 18,413
0.75 250 20.00 263 16 24,248 16,000 160.00 16,108 132 3,031 21,217
0.80 250 20.00 267 19 28,064 16,000 160.00 16,135 153 3,508 24,556
0.85 250 20.00 271 22 32,800 16,000 160.00 16,166 178 4,100 28,700
0.90 250 20.00 276 27 39,123 16,000 160.00 16,205 213 4,890 34,232
0.95 250 20.00 283 33 49,040 16,000 160.00 16,263 267 6,130 42,910
0.99 250 20.00 297 47 68,587 16,000 160.00 16,372 373 8,573 60,014

the ascendancy of flexibility over forecasting is the
semiconductor industry. It is yet to seep into the manufac-
turing of trucks in many manufacturing units. In this paper
we have demonstrated that the concept of postponement
can be applied to both internal and external supply chains.
A collaborative strategy is needed between the two chains
to achieve success.
Business strategy in auto manufacturing usually revolves
around capturing as much market share as possible by
fielding models to satisfy segmented demand. Product
development strategy is similarly focused. Manufacturing
strategy invariably focuses on production processes to meet
delivery schedules. This leads to proliferation of models
with the following consequences:
– Many models differ only marginally from the base
model but complicate manufacturing and supply chain,
as per Pareto’s law.
– Some of the assemblies (modules) differ only margin-
ally, mostly only in fitment interfaces. Since designers
are not supply-chain sensitive, they rarely consider
supply-chain complexity as a serious issue. Design
for manufacture needs to be emphasized for design
engineers.
– Time-to-market pressure leads to non-standardized
components in design, thus reducing commonality.
– Postponement as a strategy needs to be incorporated at
the design stage itself. This is yet to take root in
product development.
– Some of the companies in India were incorporated in
the days of shortages. Though market dynamics have
changed vastly, product design has not undergone
comparable changes because “it works”.

Table 15 Variation of VOP with changes in CSL (n=64, COV=0.12, Total demand=16000)

CSL Without postponement With postponement VOP

(Rs. thousands)
μ σ O os Total cost of μp σp Op osp Total cost of
overstocking overstocking
(Rs. thousands) (Rs. thousands)

0.55 250 30.00 254 14 20,531 16,000 240.00 16,030 112 2,566 17,964
0.60 250 30.00 258 16 23,774 16,000 240.00 16,061 129 2,972 20,802
0.65 250 30.00 262 19 27,417 16,000 240.00 16,092 149 3,427 23,990
0.70 250 30.00 266 21 31,564 16,000 240.00 16,126 172 3,946 27,619
0.75 250 30.00 270 25 36,372 16,000 240.00 16,162 198 4,547 31,826
0.80 250 30.00 275 29 42,096 16,000 240.00 16,202 229 5,262 36,834
0.85 250 30.00 281 33 49,200 16,000 240.00 16,249 267 6,150 43,050
0.90 250 30.00 288 40 58,684 16,000 240.00 16,308 319 7,336 51,349
0.95 250 30.00 299 50 73,559 16,000 240.00 16,395 400 9,195 64,364
0.99 250 30.00 320 70 102,881 16,000 240.00 16,558 559 12,860 90,021
Int J Adv Manuf Technol (2008) 39:367–387 383

Table 16 Variation of VOP with changes in CSL (n=64, COV=0.16, Total demand=16,000)

CSL Without postponement With postponement VOP

(Rs. thousands)
μ σ O os Total cost of μp σp Op osp Total cost of
overstocking overstocking
(Rs. thousands) (Rs. thousands)

0.55 250 40.00 255 19 27,374 16,000 320.00 16,040 149 3,422 23,953
0.60 250 40.00 260 22 31,698 16,000 320.00 16,081 172 3,962 27,736
0.65 250 40.00 265 25 36,556 16,000 320.00 16,123 199 4,570 31,987
0.70 250 40.00 271 29 42,086 16,000 320.00 16,168 229 5,261 36,825
0.75 250 40.00 277 33 48,496 16,000 320.00 16,216 264 6,062 42,434
0.80 250 40.00 284 38 56,128 16,000 320.00 16,269 305 7,016 49,112
0.85 250 40.00 291 45 65,600 16,000 320.00 16,332 357 8,200 57,400
0.90 250 40.00 301 53 78,245 16,000 320.00 16,410 425 9,781 68,465
0.95 250 40.00 316 67 98,079 16,000 320.00 16,526 533 12,260 85,819
0.99 250 40.00 343 93 137,175 16,000 320.00 16,744 746 17,147 120,028

We therefore propose the following framework for
achieving a strategic fit among different strategies, includ-
ing postponement in auto manufacturing (Fig. 9).
Modules refer to the assemblies that go into the making
of the truck. Thus, we will have engine modules, gear box
modules etc. The models refer to the final product i.e., the
truck. By mixing and matching different modules, we can
make different models of the truck. Thus two engine
modules and two gear box modules actually give four
models of the truck. This reduces supply-chain complexity
with increased variety.
The study focuses on the automobile sector and
postponement strategy. The study provides insight in terms
of “what to do” (the extent and nature) and “how to do” (the
approach to be taken) in relation to knowledge manage-
ment, at the enterprise level covering the role of postpone-
ment strategy in the management of systems. Lin and Tseng
[24] proposed a fully holistic framework of the “knowledge
and innovation gap” to demonstrate the management gaps
that might occur when implementing the knowledge
innovation system. This study identifies reasons for
knowledge gaps and demonstrates several fundamental
approaches to avoid them. Furthermore, corrective actions
are proposed to enhance the success of the implementation
of the knowledge innovation systems. Based on this study
and supportive results, we can clearly say that the
knowledge management is the essential part of the process
redesign.
Due to globalization and consequent competition, auto-
manufacturers are under pressure to cut manufacturing
and supply-chain costs. Most of the costs in this sector get
incurred either at the design stage or in the inbound
supply chain. This paper leads management thought the
process of cost cutting into a fresh domain, i.e., reducing

Table 17 Variation of VOP with changes in CSL (n=64, COV=0.20, Total demand=16000)

CSL Without postponement With postponement VOP

(Rs. thousands)
μ σ O os Total cost of μp σp Op osp Total cost of
overstocking overstocking
(Rs. thousands) (Rs. thousands)

0.55 250 50.00 256 23 34,218 16,000 400.00 16,050 186 4,277 29,941
0.60 250 50.00 263 27 39,623 16,000 400.00 16,101 215 4,953 34,670
0.65 250 50.00 269 31 45,695 16,000 400.00 16,154 248 5,712 39,983
0.70 250 50.00 276 36 52,607 16,000 400.00 16,210 286 6,576 46,031
0.75 250 50.00 284 41 60,620 16,000 400.00 16,270 329 7,578 53,043
0.80 250 50.00 292 48 70,160 16,000 400.00 16,337 381 8,770 61,390
0.85 250 50.00 302 56 82,000 16,000 400.00 16,415 446 10,250 71,750
0.90 250 50.00 314 66 97,807 16,000 400.00 16,513 532 12,226 85,581
0.95 250 50.00 332 83 122,599 16,000 400.00 16,658 666 15,325 107,274
0.99 250 50.00 366 116 171,469 16,000 400.00 16,931 932 21,434 150,035
384 Int J Adv Manuf Technol (2008) 39:367–387

Fig. 7 Impact of CSL on VOP Variation of VOP with Service Level for 64 Models
1600.00

1400.00

1200.00

VOP (Rs Thousands)

COV=0.04
1000.00
COV=0.08
800.00 COV=0.12
COV=0.16
600.00
COV=0.20

400.00

200.00

0.00
0.50 0.60 0.70 0.80 0.90 1.00
Cycle Service Level (CSL)

costs in the in-bound supply chain through postponement
strategies.
7 Conclusions
The paper attempted to highlight the motivation and need
for explicitly modeling the impact of postponement and
business process redesign in automotive companies. This
requires knowledge of the existing processes and an
innovative mindset to improve upon them. Postponement
strategy offers a good platform to benefit from such
knowledge innovation efforts. This strategy can also be
widely used for supply-chain performance improvement.
The study showed that the value of postponement (VOP)
benefits in this case are higher at higher cycle service levels
(CSL). Further, the lower cycle service levels tend to lower
the VOP. In the present case the manufacturer desired a
high service level for uninterrupted production. Therefore
higher VOP is also ensured. We also conclude that higher
CSL levels yield steeper gains in VOP. Flexibility is used to
enhance postponement topologies. Hence, it is also impor-
tant to exploit flexibility to achieve desired postponement
objectives. Cost-benefit analysis significantly shows the
impact of postponement to industry, i.e., value of post-
ponement increases steadily with increase in coefficient of
variation. This is a useful result as the automotive industry
aims to work at higher service levels as the competition
increases. The result can be intuitively understood to be
because of greater aggregation. Further we find that the
value of postponement increases sharply as the number of
models goes up from 2 to 8. However, as the number of
models is increased further towards 128, relative increase is
much lower. This leads us to an interesting observation

Fig. 8 Impact of CSL on cost Variation of Cost with CSL for 64 Models
25000
Cost (Rs Thousands)

20000
COV=0.04
15000 COV=0.08
COV=0.12
10000 COV=0.16
COV=0.20
5000

0
0.50 0.60 0.70 0.80 0.90 1.00
Cycle Service Level (CSL)
Int J Adv Manuf Technol (2008) 39:367–387 385

Table 18 Impact of postponement on system flexibility In this paper we have shown that immense benefits are
p feasible at every stage of manufacture of a vehicle by
COV Total overstock cost n n
(Rs. thousands) adopting a carefully worked out postponement strategy.
Modularization, as adopted by electronics industry, is the
0.14 98,079 2 4 key to large-scale postponement. But in auto manufactur-
98,079 4 16 ing, it is not easy to change basic designs. So we need not
98,079 8 64
wait for that to happen. There are enough opportunities to
98,079 16 256
implement cost-effective postponement strategies, by busi-
98,079 32 1,024
98,079 64 4,096 ness process redesign as demonstrated by a knowledge
98,079 128 16,384 innovation driven case in this paper. On a larger canvas, we
0.16 85,819 2 4 recommend a suitable framework to achieve a strategic fit
85,819 4 16 among different strategies including postponement. This is
85,819 8 64 possible only by using knowledge management in an
85,819 16 256 adequate direction because the business process redesign
85,819 32 1,024
requires extensive process knowledge and an innovative
85,819 64 4,096
85,819 128 16,384
mindset to make changes in the business processes and
development of postponement options.

which explicitly says that the postponement strategies yield

7.1 Future research directions
comparatively high value of postponement when number of
products to be differentiated is small (use judicious level of
No study is ever complete in itself. This study also suffers
product flexibility). Our research efforts indicate that such
from many limitations that we look forward to reduce in
flexibility needs to be carefully decided and implemented
future. Some of the expected research directions are
as sometimes these may become counter productive due to
discussed below:
the supply-chain dynamics. This can be well managed by
the suggested knowledge and innovative approach based on – We have demonstrated the benefit of postponement in
system models and simulation to capture key logical automotive industry with the help of a case study. It is
interactions. It is also suggested that for practitioners and prudent to validate the concept of postponement
researchers working in the KM context, the sharing of the through collaboration by taking some truck assemblies.
tacit knowledge amongst different professionals managing For example, many assemblies have similar parts but
the various processes must be continually emphasized.

Fig. 9 Re-engineering-based
framework for various strategies
in the automotive sector
386
differ to the extent of 30%. Thus benefit of aggregation
is lost when these are received as assembled units. In
some cases, it may be possible to delay the final
assembly in the truck manufacturing plant. This could
be studied further.
– We have used one approach to VOP, i.e., creation of
over-stock. Another approach could be based on the
holding cost of inventories. It would be worthwhile
comparing the results of these two approaches as future
research.
– Further it is important to study the impact of flexibility
on VOP under various scenarios. It appears that a
judicious level of flexibility needs to be identified for
various systems. In our case study, use of eight models
gave better results than fewer or more models. Future
research may benefit from the supply-chain flexibility
studies referred in this paper.
– It is important to highlight that the automotive sector is
a slow-changing sector compared to the electronics
sector. Hence managerial mindsets need to be evolved
towards acquisition of more system knowledge and
using innovations to continually identify areas of
supply-chain process improvements. Future research
is in progress to study the impact of knowledge
management and innovation on improving the various
processes.
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