Placing the order decoupling point.
Being flexible and agile does not mean ‘free for all’. There must be control at that point which separates satisfying customer orders from planning operations. This is where customer orders are accepted and reserved; final product specifications are defined and the last point from which inventory is released.
The objective is to provide flexibility for the downstream process and products to meet market demands, but also provide some upstream stability for planning and cost effective supply chains. Articles have called the point the Order Penetration Point (OPP), Demand Penetration Point and Decoupling Point (and there are most likely others). Discussions have argued that, depending on how customer’s needs are met, different approaches to Logistics planning and operations are required.
The consensus of articles since the early 1980’s, place the four main operational processes (but also applicable for services) as:
- Engineer to Order (ETO): ‘one-off’ designs based on customer specification
- Make to Order (MTO): low volume, high variety. Adaptation of pre-designed products – provide a design service for options to the base products
- Assemble to order (ATO): high volume, low variety or low volume, high variety: Assemble or mix final products to order, based on specific orders from either customers or sales for defined catalogue or recipe products. Make or buy materials, components, sub-assemblies and options to:
- Immediately assemble into finished goods and deliver, using ‘just in time’/lean/flow manufacturing processes
- Assemble stocked items or mix and stir ingredients and deliver. This is an example of ‘postponement’ or delayed configuration
- Make to stock (MTS): high volume standard products. Sell from finished goods inventory:
- Produce finished goods from sub-assemblies, components and items, then hold in inventory
- Produce finished goods from ingredient materials that are processed into end products, co-products or by-products, then hold in inventory
- Make and distribute ‘short shelf life’ (perishable) products, such as wheat products, dairy products and fresh seafood
- Import finished products and hold in inventory
For ETO and MTO, the focus is on the upstream process; customers and products compete for the available resources. The majority of planning is driven by the orders received, therefore delivery lead times tend to be long. For ATO and MTS, the workforce and equipment are organised around the product. Planning is driven mainly by forecasts, therefore delivery lead times are short.
The factors influencing the OPP are demand volume and volatility and the total of distribution and production lead times. The optimum configuration is therefore a balance between competitive pressure, product and process complexity and cost.
Actions in Logistics to achieve flexibility
For organisations in the MTS configuration, there is a choice concerning operational stability and inventory:
- Level policy assumes that output will be held relatively constant, allowing inventory to build in the slow selling periods
- Chase policy assumes that output will follow demand without any additions to inventory
Although additional flexibility in operations may incur costs, the more traditional ‘economies of scale’ economic model has become less applicable. This is due to the cost of holding inventory generated from long production runs and changing customer demand patterns for smaller volumes of more products (called ‘line extensions’).
Competitive pressure can, whenever possible, push MTS companies towards adopting a chase policy. This lends itself to an ATO configuration, accommodating an increased product range. Some of the factors to be considered with greater flexibility are:
- An enterprise that has an ATO configuration must decide whether operations upstream from the OPP should be MTS (for lowest cost) or MTO (for flexibility)
- In an MTO or ATO configuration, product variations must be created, completed and distributed without storage or out of season (fashion) risks
- As organisations become more capital intensive, changeover times for dedicated equipment can increase, affecting flexibility
- Flexibility must increase the closer to customers. Packaging machines should therefore be purchased for their flexibility rather than output speed
Flexibility through the chase policy requires a more flexible workforce, which is employed dependent on the skill levels and training required to safely undertake the job roles. The range of employment can be on a:
- full time basis and re-allocated within the organisation depending on product demand
- annual hours (salary) contract, requiring employees to work variable hours per week, but only paid overtime rates after the completion of the annual hours
- Through a labour hire contractor or direct
- flexible hours (casual or part time) per day or week
- ‘hire and fire’ basis
Moving from a MTS to an ATO or MTO configuration leads to a ‘postponement’ inventory approach. This ‘delayed configuration’ is based on the principle of products made from standard parts, components or ingredients, but with the final configuration delayed until a firm order is received. The benefits are that:
- the total value of inventory is reduced
- inventory held at a generic level can be more easily balanced for actual orders and
- forecasting at a generic level is more accurate than at the SKU level
The move to an ATO or MTO configuration can affect the organisation’s ‘cost to serve’:
- The extent of engagement with customers e.g. improved product and process quality or co-design of products.
- The extent of supplier involvement and supplier rationalisation
- Incorporating into the business the knowledge acquired from customers and suppliers
- Utilise upstream production and downstream distribution or expand outsourcing
- Flexibility requires quick decisions. Review organisation layers and span of control for managers and supervisors
- IT applications designed for an ATO and MTO configuration. The deeper into the operations process that order information can be input (penetration), the more able are operations to align with market demands
Changing the OPP to enable greater flexibility requires a broad range of policy decisions that will influence the structure of supply chains and management of Logistics. Logisticians must be aware of how changes in the OPP for their organisation can affect operations and therefore develop a business case for managing change.