STRATEGIC VIEW OF POSTPONEMENT IN THE ELECTRONICS INDUSTRY IN THE

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1 STRATEGIC VIEW OF POSTPONEMENT IN THE ELECTRONICS INDUSTRY IN THE Cervi Roberto (Fac Bagozzi) Razzolini Edelvino filho (UFP) Marques Cicero Fernandes (UNICEMP) Rodriguez Carlos Manoel taboada (UFSC) This article aims to investigate the reflections of postponement strategies implementation, considering the consequences on product distribution do end consumers in the regions of Paraná and Santa Catarina in Brazil, and to identify the reaasons why companies analyze and adopt such strategies, the aspects that make its implementation easy or difficult, and evaluate to what extent postponement contributes to competitiveness growth. Event though the application of postponement strategy in the market is still timid, researches carried by University and Institutes about logistics give great emphasis on developing this strategy in order to obtain more competitiveness, favoring considerably the logistics chain as a whole, in addition to the end consumer. And to reach that, it is relevant to consider the studies made in Europe and in North America, where markets are highly competitive. Despite of the fact that no thorough studies have been carried out in organizations, the interest by executives is evident in acquiring better knowledge about new tools, concepts and techniques to enhance supply, production and distribution efficiency, as to increase productivity and to cut down on costs. Palavras-chaves: Strategic, Postponement, flexibility, customization

2 1. Introduction The focus of this study is the relation between electronics industry and retail, considering distribution logistic chain, in the states of Paraná and Santa Catarina in Brazil, with a view to evaluating the reflections of postponement strategy and the behavior observed in the retail stores supply. The choice of the electronics sector was because of a change from a traditional logistic view to a postponement strategic view, optimizing the production processes for meeting the consumer needs, which are at the moment adequate quantity and appropriate characteristics of products. The Postponement Strategy is a concept that has been playing an important role in the last few years. It is an operational strategy that aims to postpone the final configuration of products up to the moment of their delivery to consumers. For ZINN (1990), Postponement is the delay of assemblage and/or any other complement to the product until the moment there is a definite demand from consumers, or yet it means that product options are kept flexible and are finished as latest as possible in the supply chain, which reflects on the distribution chain, or more specifically on distribution networks. Production programs have been more flexible and dynamic based on market needs. The relation between demand and production will be determined more and more by the situation faced at a specific moment, forcing industries to have more flexible processes to real time. The new storage concept is being directed to a more dynamic reality, once inventory is inevitable in some cases due to market instability. No doubt, the adequacy of an efficient response from production systems to a market variable demand is an incontestable challenge. When studying the centralization and decentralization of distribution, purchasing and production departments, one observed that companies strongly tend to reduce the use of traditional distribution channels, which can create a possibility of deactivating regional distribution centers strategically chosen, enabling suppliers to demand products to an end utilization point, to a manufacturing site or directly to a store. 2. Justification To study a more efficient products distribution, searching for a better outcome for the electronics industry, creating an opportunity for retailers in general to take part in a more loyal competition, enabling them to have negotiation advantages through maximizing distribution activities and making resellers more competitive to hold a bigger market share. In the last years, a trading policy practiced by the industries in general, which offers advantages to superstores in detriment of small and medium sized retailers, made the industries themselves become dependent on these superstores. It occurred because the superstores know their negotiation power and impose conditions that most of the time makes any kind of win-win relationship unviable. 2

3 With a view to changing this situation to a more equal service to customers, independently on their purchase or negotiation power, postponement can be used as a great strategy, once everyone involved in the purchasing process can be benefited from products delivery postponement and consequently reduce inventory costs. 3. Theoretical Discussion The attempt was to give emphasis on the importance of the Electronics Industry product distribution activities to retailers, comparing the advantages and disadvantages of giving preference to big chains or superstores in relation to small and medium sized retail stores throughout the states of Paraná and Santa Catarina. For DORNIER (2000), every company should decide about the way how it will organize its production system (centralized versus decentralized), should choose appropriate distribution channels (retail, wholesale, discount stores, etc.) it will use to go to market, should decide about its inventory level and manage its inventory system, and decide on how to allocate the stock of the various items in the production line in the plant, in the region or in the warehouses. This reflects the level of difficulty found in the decision making process when choosing the most adequate channels. As for KOTLER (1996), the channel objectives vary according to the product specialties and to the strengths and weaknesses of the various kinds of possible middleman. It is tacit to assure that, for the study in question - the importance of the postponement strategy is more adequate to consider the reality of actual consumption. It is correct to assure that for this study, the importance of postponement strategy is directed to the current reality of consumption, as the highly technologically sophisticated products are dependent on distribution sites that also must be highly specialized and qualified, which does not mirror the segment here studied. The study was based on decentralized distribution costs and complexity, demonstrating itself to be vulnerable when reflecting the factors that make suppliers dependent on channels with more negotiation power. Physical distribution systems need to have a certain level of flexibility to meet the needs of different kinds of customers in an economical way (BALLOU, 1993). When a company control over the channel is limited, the middleman should be looked at in an isolated way, as in a specific market that has its own interests and objectives and normally acts according to customers demands, going against the policies adopted by the manufacturer. In extreme cases, the company cannot choose the channel to use, and the middleman can freely select its location, target market and even the range of products to offer (BALLOU, 1993). 4. Research Methodology 3

4 The study was developed base don Distribution Logistics bibliography, websites, articles and seminars. Initially a field research was carried out through questionnaires completed by companies from the Electronic Industry in the states of Paraná and Santa Catarina. The objectives of this study require an exploratory approach, whose main characteristics are: to comprehend the phenomenon studied, revealing relevant dimensions involved in it; the methodology is qualitative, flexible and versatile; the information searched is defined only superficially; the sample is small and in terms of statistics is not significant; the analysis and results are equally qualitative and can be seen as hypothesis to be tested in future conclusive project. The main methods of exploratory, qualitative or motivational research are interviews in depth, focus groups (more adequate for researches with consumers) and secondary data analysis (MALHOTRA, 1996). When collecting information from commercial managers of the electronic manufacturers researched, the method of qualitative research most recommended and widespread is the directed or deep interview, in which only a small sample of individuals are interviewed in an non structured session. 5. Postponement as a Strategy Postponement is not a strategy that can be used for any kind of company. There are some market and environment conditions, and operational pre requisites that are important for its choice of use. As main elements: market, product, process, supply chain, technology and organization culture involved. The organization must have a minimum of infrastructure conditions and a strong organizational interaction as important requirements for its implementation. Highly competitive markets are the most appropriate ones for using postponement strategies, such as North American and European countries. And this can be the reason why many companies have not yet opted for this system. The company ability to use the postponement approach depends on the modulation level of its products and processes, allowing an important step towards innovation and creativity, due to concentrated and specialized knowledge of each supplier about its acting area for making the end product. According to DORNIER (2000), modulation is a method of product designing which consists of assembling a product from a range of customized constituent units, and postponement or delaying is a process of adding value to a range of end products which maximizes common processing needs shared by these products. Dornier still emphasizes that the fundamental principle of these concepts is the same in its essence: getting two advantages together scale and scope working on product variety and on the product design. It is relevant to mention that more important than lowering costs and optimizing processes is strengthening the relationship between organizations to a collaborative point as a key for this tactic to be successful. 4

5 For CAVANHA (2001), the secret is the supply chain project according to the postponement principle, which consists of delaying the final configuration of products and/or services as much as possible, and in extreme cases even transferring manufacturing activities to the channel and/or to the end consumer. 6. Distribution Channels To reach the end customer, electronic products goes through distribution networks, which, from the manufacturers point of view, are sales channels, and from the retailers point of view form the supply chain. And for the industry understanding the retailers purchasing process is fundamental for defining strategies. Purchasing at a retailer s is very diversified, varying procedures according to the type of product bought and has been going through recent changes, mainly due to external influences, such as competitiveness growth, offer globalization, technology advances and consumers eating habit changes (STERN, EL- ANSARY E COUGHLAN, 1996). Supply is a strategic function for retailers and consequently a competitive factor for manufacturers in relation to their clients. According to STERN, EL-ANSARY & COUCHLAN (1996, p. 1), channels can be defined as a group of interdependent organizations involved in the process of making a product or service available for use or consumption. The distribution channel should be customer oriented and for that should have as a priority to readapt itself according to chronological, geographical or any other kind of demand variation. In addition to that, it should be considered not only as a means of product flow, but also as an articulation mechanism of other kinds of flows. It means that a channel is a lot more than just distribution channel structure, but a complex system that involves relationship between manufacturers, middlemen and end consumers. As for KOTLER (1996), the channel objectives vary according to the product specialties and to the strengths and weaknesses of the various kinds of possible middleman. STERN, EL-ANSARY & COUGHLAN (1996), assures that a distribution channel project cannot be developed unless the organization has a well defined market/product strategy. There must be a clear idea about the product and its target market and only then design a distribution system considered most adequate in this situation. Never will a channel be able to supplant the deficiencies of a product that has no value perceived by its target consumers for which is has been designed. And, with the view to meeting the needs of the target market, an adequate distribution program should include some key variables, such as: the lot size (the quantities of units that consumers will have at their disposal, in case a specific channel has been chosen); the length of time consumers will be willing to wait for the product or service wanted; how easy the product will be found by the consumer; the range of products and supporting extra services or factors, such as credit, delivery and facilities (KOTLER, 1996; STERN, EL-ANSARY E COUGHLAN, 1996). The choice of middlemen must be made cautiously and with criteria, once they will perform 5

6 roles aiming time and utility, and product flow for consumers. They act to facilitate the product flow as they transform quantity in variety. While manufacturer make a high quantity of only one or a few products, consumers need a great variety of products in small quantity. And this transposition is made by the system middlemen. The functions performed by the members of a distribution channel, such as: physical possession, promotion and propriety traditionally form a forward flow, that is, go from the manufacturer to the end consumer. Information and financing, risk and negotiation make a combined flow, and order and payments are grouped together forming a backward flow, going from the end consumer to the manufacturer. Some functions can be performed together with the manufacturer, or be performed solely by the manufacturer, or even be spread among the channel members. As an example of the last situation mentioned, there is the case when all the members of a channel are responsible for the product storage function. This duplication or redundancy of activities can be justified by the objective to better serve the end consumer, but it consequently increases costs. These functions should be synchronized. An example to be mentioned is the fact that the launching of a new product can fail if the functions of physical possession and promotion are not tuned. The coordination of these functions happens through a satisfactory information flow between the channel members. Functions are essential. Bearing in mind what STERN, EL-ANSARY & COUGHLAN (1996) says: there are three principles that must be considered and that are base don the existence and necessity of these functions performance by the distribution channel, which are: the functions can be eliminated or substituted, but not when the functions performers are eliminated. In this case, they should be performed by other companies that form the channel. Most of the times, the more intermediary units there are in the channel, the more difficult it becomes for the manufacturer to act over the channel and to get reliable information about end consumer of its products (BALLOU, 1993). However, the company can have more or less control over the channel according to the terms of the contracted signed by the channel members. This way, there are some channels that are controlled by the manufacturers, others by the wholesalers, others by the retailers, or even by the consumers. The level of market penetration shows how intensively a certain product is present in geographical segments of the country. It is important to mention that this concept is different from market occupation, once the latter refers not only to presence, but also to market share won by the manufacturer. Distribution can be made exclusively, where the middleman cannot with other competitors products or selectively, through resellers carefully chosen, or even intensively which means to distribute the product to the greatest number possible of establishments (BALLOU, 1993). KOTLER (2000), says that there are three types of buying situations for retailers: direct purchase (a purchase department buys again the product from a company); modified purchase (buyers wish to renegotiate the product or purchase specifications; and the new purchase 6

7 (purchase of products or services for the first time). The behavior of an organizational buyer (in the case of retailing) shows throughout a structured decision making process. As described by KOTLER (2000), the organizational purchase process is divided in eight stages: anticipation or knowledge of the problem in this stage the necessity to buy an item is perceived; determination of the characteristics and quantity of the necessary items when is necessary to know the products and check on the demand to know when one should buy, among other activities; description of characteristics and quantity of the necessary items better knowledge of the products to be bought, items that require more technical knowledge; search for suppliers and their qualification stage when potential suppliers that can influence on the buying process will be registered; reception and analysis of proposals the company has to send the order placement form and wait by the proposals from reliable and qualified suppliers; evaluation of proposals and selection of suppliers the proposals are analyzed by different criteria, such as product, delivery time, prices, among others; selection of a routine order phase of physical routines reception, delivery time, product flow from supplier to consumer, responsibilities, etc; and finally the performance evaluation and feedback the final stage serves to reassess the whole process in search for improvement or corrections. A supplier that has not met the selling contract terms can even be eliminated. COBRA (1992, pg. 504) assures that Retailers collect information about the market and purchase behavior and should inform their suppliers, manufacturers or wholesalers about the market tendencies related to most sold products and their most sought characteristics. They should also suggest new products or services. Even though, information is relevant, it is important to mention that the fewer distributors the greater the possibility to obtain responses tending to meet interests of minor parts involved, going against to what can be called a result with information quality. 7. The Nature of Physical Distribution Management Physical Distribution is mainly concerned about finished and half-finished goods, which means about goods that the manufacturer has ready for sale and that will not suffer further processing. From the moment goods are finished to the moment they get to consumers, they are under Logistics responsibility, which should keep them in the manufacturer s warehouse and transport to local warehouse or directly to customers. Normally, there are two kinds of market target. The first is the market of end users who use the product to meet their own needs or to create new products, like the industrial consumers. The end users can also be companies that sell products to their customers. The second market is the one made by middlemen that do not consume the goods, but offer them for reselling, in general to other middlemen or end consumers, e.g. distributors, retailers and end users. The primordial difference between these two categories of buyers is on the profile and volume of purchase. End consumers normally buy in small quantities but in great variety. Their purchase is more frequent then those made by middlemen. The latter and the end users like manufacturing companies, normally buy in big quantities. As a rule, there are fewer middlemen than end consumers. It is not rare companies having these two kinds of customers. Physical distribution systems need to have a certain level of flexibility to meet their various customers needs in an economical way (BALLOU, 1993). 7

8 This way, one can understand that physical distribution deals with handling, storage and the processing of end product orders of the company and with making the products required by the customers available at a low cost and in a convenient way. It is also necessary to have enough flexibility to serve various kinds of customers, with different needs, economically, and not always the handling of the product is finished when it is delivered to the customer, but many times customers can turn them back and this fact should be dealt by logistics, according to some basic forms of strategic distribution configuration: direct delivery from the factory stock, direct delivery from sellers or from the production line, delivery made by using a storage system and by postponement strategy, which is the focus of this study. Products distribution demands the following definitions: what kind of transport service will be used to handle the products, which controlling procedures will be used for inventory items, where warehouses will be located, how many warehouses there should be, what should be their sizes, how orders should be placed, what kind of service there should be for each kind of product and each kind of customer. All these decisions should be made in a coordinated way, taking into account all the interrelationships possible to obtain the lowest cost in the whole system. 8. Outcome analysis The manufacturers researched are from the electronics industry two from Paraná from now on called Company A and Company B, and one from Santa Catarina, from now on called Company C. The research aimed to investigate the companies demand characteristics, the impacts on distribution, and their interest and viability of applying postponement strategy The demand characteristics, such as viability, seasonality and stock turnover, have direct influence on some positioning decisions, mainly the ones related to stock allocation. Stock turnover is one of the most important indicators for an adequate inventory management. This indicator is obtained by dividing the number of days in a year (approximately 365 days) by the number of days of sales of the product in stock. The company C has a bigger stock turnover, up to each 5 days. In companies A and B, focused more on the electronics segment, the products are made after the companies receive the orders placed by their customers, and for this reason they do not have stocks, showing a possibility of implementing the postponement system. When dividing a product maximum monthly amount of sales by the minimum monthly amount of sales is possible to analyze the product seasonality. The research showed that all companies object of this study have a high seasonality tendency. It is relevant to mention that it may not represent the seasonality of the end consumption of the product, but the sales seasonality of the company to the next link of the supply chain. A company can have a better view of the business if it has access to sales information at least from its main customer. This information is of extreme importance to companies, allowing them a quicker reaction to market changes that can possibly happen. The situation 8

9 demonstrated is the existence of a better view of the most important products for the companies, which are the ones that result in more profit and sales potential. When questioning the companies about the implementation of the postponement strategy in the current structure, they demonstrated certain instability, as shown in graph 1, as follows: 100% 80% 70% 60% 55% 40% 40% 40% 35% 20% 15% 15% 20% 10% 0% Com pany A Com pany B Company C Studying the possibility Started im plementation Already applies postponement Graph 1: Postponement Strategy Application. As can be seen in the graph above, the companies are interested in applying postponement, however still there are some hurdles to be overcome in order to implement postponement independently on the region, what suggests the main product manufactured to be seasonal. However, it is possible to observe that there is a great expectation about the implementation once the stage of studies and projects show favorable percentage. Company B demonstrated that is policies have influenced on the strategy development, what is relevant once this company is ahead in the strategy implementation process. When questioned about investments on postponement strategy implementation, all the companies state that their logistic policies aim big contracts with resellers and members of the channel, searching for more effectiveness in the intended results. When questioned about the reason for a timid application of this system, they claim that the implementation costs are too high and it is too complex for them. After explaining the process for the member of the channel and the modification of the distribution system, all the companies were favorable, with some restrictions that can be observed in the table below: 9

10 Reasons Company Company Company A B C Operation complexity Instability of order placement Bad Sales controlling Unstable production Unstable economy Time length of negotiation Table 1: Reasons that make postponement strategy difficult to be applied The results shown in the above table indicate that the companies believe that the orders place by retailers imply waste of time with negotiation, increase of orders and production instability due to non periodical orders. In fact, when considering the application of postponement strategy, the companies believe they will suffer more production instability, but could reach more certainty if the distributors in general were prepared for this new concept, which certainly requires more commitment from everyone involved in the process. 9. Conclusions and Recommendations The 90 s brought many changes that impacted on the electronics industry, such as the economy opening for importation of goods, internal competition growth, and a greater competitiveness among companies. The importation of goods and consequent changes of concepts of more modern operations imposed the need of deep transformations for most companies. The economy stabilization plan has propelled the sector to search for more efficiency and more market participation. The demand restriction measures as purchase limitations, instability of production planning and the increase of overdue payments from customers, affected considerably the companies in different ways and brought up the quick response difficulties found by the sector, and to stand up to the new competitiveness standard, mainly related to putting the distribution systems in operation, emphasizing postponement strategies as approached in this study. After analyzing the interview answers, is possible to evaluate how the purchase relationship between the companies and their retailers is. The major worry in terms of negotiation nowadays is about the instability of the quantity of goods purchased, once it is the main criteria used by the companies to classify a customer as a good one, searching obviously for a higher profit margin. Though, they leave aside a market niche that is also profitable. The risk with big sized wholesalers and superstores is equally high, as in case of lack of payment the 10

11 loss can be a way higher than with retailers, including also the possibility of a profit decrease because of their negotiation power to reduce prices. A strategy application at the purchase moment is recommended, and it should be a gradual implementation of a corporative and modular strategy, where each member of the process can contribute with their knowledge acting in an integrated way, making the application of postponement strategy viable, bringing together a number of companies that can justify a more equitable production with the reality of manufacturer and resellers, creating a more secure environment for negotiation, and consequently more agility, flexibility, cost reduction, maximization of production and optimization of production processes. It is of fundamental importance that the members of the logistic chain emphasizing supply, production and distribution - be together aiming the same purpose, which is a better corporative outcome, where everyone can be benefited and enabled to transfer their better results on to the end consumer, as the consumer is the reason for all the efforts made in this study and for a proposal for continuous organizations improvement. Bibliography BALLOU, R. H. Management Logistic: transport, administration of material and distribuition. São Paulo: Atlas, CAVANHA Filho, Armando Oscar, Logistic, The new models. Rio de Janeiro: Qualitymark Ed., COBRA, Marcos. Marketing Administration. São Paulo Atlas, DORNIER, Philippe-Pierre...(et al.) Logístic and Global Operate: texto e casos. São Paulo: Atlas, KOTLER, P. Marketing Administration. São Paulo: Pearson Prentice Hall, KOTLER, P. Administração de marketing: implementation and control. São Paulo: Atlas, MALHOTRA, N. K. Marketing Research: An Applied Orientation. Englewood Cliffs, NJ: Prentice Hall, ROSENBERG, Larry J. Marketing Management. Englewood Cliffs, NJ: Prentice Hall, STERN, L. W.: EL-ANSARY, A. I.; COUGHLAN, A. T. Marketing Channels. 5. ed. New Jersey: Prentice Hall, 1996 ZINN, Walter. Logistic and the future, internet. Revista Tecnologística, São Paulo, no. 39, ano IV, p. 12 a 14, fev/99. 11