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Manufacturers: Use a warehouse for product customization

Leveraging warehouses for product customization, or late personalization, adds flexibility, shortens delivery lead time and helps better meet customer expectations.

A warehouse can be more than just a place to store products. Companies today are exploiting the warehouse as an...

extension of the factory to add flexibility, reduce lead time, lower inventory and meet a broader range of customer demand.

In the age of global competition and increased demand for customized products, many manufacturing companies are adopting late personalization -- also called mass customization or postponement -- strategies that lower the cost of small-quantity production. The approach is to create a basic product that can be configured or adapted to fit many different customer requests. The product customization could be as simple as packaging and labeling, or as complex as final assembly of major components or peripheral accessories.

For example, a company that makes a consumer good may ship products to distribution warehouses in bulk. The warehouses can stock the various packaging materials for each customer. Customer A might want bubble packs of six for shelf display; customer B might want the product in boxes of 12 each; customer C wants individual products, unpackaged, but labeled with a price sticker and bar code. As each order is received, the warehouse pulls the bulk product and the appropriate packaging materials, "finishes" the product, and ships it to the customer quickly.

In another example, Lindt Chocolates produces 17 varieties of truffles and moves them to a warehouse loose in bins. If Wal-Mart wants 12 packs of individual flavors, they are assembled into the appropriate size and color bags in the warehouse, loaded into shelf packs and then into shipping cartons or cases. The next order might be from Target for mixed-flavor bags of six truffles. Again, they are assembled-to-order, packed and shipped accordingly.

One model, multiple configurations

Lexmark makes a laser printer that it ships to its European distribution center in Orleans, France. When an order comes in from Germany, the printers are pulled from stock, then warehouse employees open a small "door" on the side of the carton and insert the appropriate power cord and documentation -- it's now a German printer. The next order might be from England. Those printers get British power cords and English documentation. The factory doesn't have to make, ship and store each individual variety of printer -- one basic model serves a number of different customer requirements through the "late personalization" and product customization that takes place in the warehouse in France. Undoubtedly, forecasts for overall printer demand for the continent are more accurate than forecasts would be for each country alone, and total inventory of printers to satisfy demand for the region is notably lower than it would be if each variety had to be stocked.

This late customization approach should not be a problem for most ERP software. If the warehouse is colocated with the factory, it can be structured as an additional work center, as well as scheduled and tracked just like "regular" production work centers. If the warehouse is remote or under separate management, it becomes a mini factory of its own, with scheduling and reporting appropriate to control, cost and manage.

Assemble-to-order can be done in the factory, and, perhaps, more efficiently. But putting that final assembly in the warehouse, close to the customer, means the product can be shipped directly to the customer and get there shortly after it was ordered, giving near-instant access to customized products on demand. This strategy is helpful, especially if the product customization can be localized, as in the Lexmark example. The inventory of power cords and documentation held in Orleans is specific to European customers. Conceivably, Lexmark -- or any other company -- could use the same approach in a warehouse in Singapore to serve Asian customers with the appropriate inventory of cords and documentation needed in that part of the world. On the software side, the warehouse is performing a final assembly task, to-order. The ERP system only needs to be able to handle assemble-to-order, with configuration capabilities in the customer order management application, with links to the production order release and control function.

Warehouse vs. factory

However, production-type activities in the warehouse might not be as efficient as they would be when done in the factory. The plant is already in the production or assembly business and probably benefits from economies of scale in having people and equipment readily available. A warehouse would need to add equipment and skilled or trained people to complete these production activities, probably in multiple warehouses. 

If the warehouse is operating out of a leased facility or through a third-party logistics provider (3PL), however, there may be additional costs and concerns about control, responsiveness and quality. In a company-owned facility, this shouldn't be as much of a concern.

Warehouses add value for manufacturers in their more routine activities as well. In addition to having the inventory closer to the customer for faster delivery, everyday activities -- including consolidation, break-bulk, pick-pack and labeling -- are all part of providing the customer with the right products, in the right form, at the right time, undamaged and properly documented. And don't forget that storage itself also can be a valuable activity -- think in terms of holding inventory in advance of high seasonal demand, or in anticipation of high demand from a new product introduction, or a marketing push that requires unusually large quantities are available at a certain point in time.

Although many companies choose to engage a third-party logistics provider to handle warehousing, that should not be a deterrent to seeking ways to leverage warehousing to expand product customization options, reduce lead time and otherwise add value for the customer, as well as reduce costs for the supplier.

Next Steps

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This was last published in September 2015

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