Production Strategy

Introduction to Customer Order Decoupling Point

In this lecture, the concept of the Customer Order Decoupling Point (CODP) and its relationship to four production strategies will be discussed.

The Customer Order Decoupling Point

• The CODP is a strategic decision that determines where firms place the market penetration point.

• It separates order-driven activities from forecast-driven activities.

• The position of the CODP affects the production strategy adopted by a company.

Four Production Strategies

1. Engineer-to-Order (ETO)

• Products are designed after receiving an order from the customer.

• Minimal inventory is carried, mainly consisting of standard components.

2. Make-to-Order (MTO)

• Materials are stored as raw materials.

• Manufacturing and assembly start after receiving an order.

• The CODP is at the fabrication stage.

3. Assemble-to-Order (ATO)

• Products are assembled using pre-produced components based on customer specifications.

• Inventory consists of assembly-ready components.

• The CODP is at the final assembly stage.

4. Make-to-Stock (MTS)

• Finished goods are produced in advance and stored in inventory.

• Orders are fulfilled by picking from inventory and shipping to customers.

• The CODP is at the finished goods inventory stage.

Understanding Material Storage Options

This section explains how manufacturers decide where to store materials along an axis from raw materials to consumption.

Material Storage Options

• Manufacturers can choose to store materials:

• When they have an order

• As raw materials

• As components

• As finished goods

Impact on Operation System

• The storage decision has a significant impact on the operation system used by a manufacturer.

• Storing most products as finished goods follows a Make-to-Stock strategy.

• Storing products as assembly-ready components follows an Assembly-to-Order strategy.

• Storing materials as raw materials follows a Make-to-Order strategy.

• Designing the product after receiving an order is known as Engineer-to-Order.

Recap of Customer Order Decoupling Point and Production Strategies

This section recaps the concept of the CODP and how it relates to different production strategies.

Key Points

• Before the CODP, activities are driven by forecasts.

• After the CODP, activities are driven by customer orders.

• The four production strategies (ETO, MTO, ATO, MTS) can be derived from the position of the CODP.

• Most companies use a mix of these strategies based on their specific needs.

Examples of Production Strategies in Different Industries

This section provides examples of production strategies used in various industries.

Oil Platform Manufacturer

• An oil platform manufacturer typically follows an Engineer-to-Order strategy due to the high cost and customization involved in their products.

Aircraft Manufacturers (e.g., Airbus and Boeing)

• Aircraft manufacturers adopt a Make-to-Order strategy since each aircraft is customized according to customer requirements.

Computer Manufacturers (e.g., Dell)

• Dell follows an Assemble-to-Order strategy where pre-produced parts are assembled based on customer specifications. This approach is also known as mass customization.

Laptop Manufacturers (excluding Dell)

• Other laptop manufacturers may follow a Make-to-Stock strategy by producing standard computers for retail sale.

Consumer Products (e.g., Diapers)

• Consumer products like diapers are typically made using a Make-to-Stock strategy due to short lead times and high demand for immediate availability.

Importance of Forecasting in Make-to-Stock Strategy

This section emphasizes the significance of accurate forecasting in a Make-to-Stock strategy.

Key Points

• Most products consumed worldwide follow a Make-to-Stock strategy.

• Effective forecasting is crucial to ensure sufficient inventory levels.

• Companies must be skilled at forecasting to avoid stockouts or excess inventory.

Factors Influencing CODP Placement

This section discusses factors that influence the placement of the CODP.

Factors to Consider

• Long process lead times and poor process control may require placing the CODP closer to the customer.

• Customers generally expect shorter wait times and quality products.

• Storing finished goods creates a buffer for internal processes with long and variable lead times.

• Immediate or fast delivery requirements may necessitate moving the CODP downstream, closer to the customer.

Example: IKEA's Make-to-Stock Strategy

This section provides an example of a company using a Make-to-Stock strategy.

IKEA's Approach

• IKEA follows a typical Make-to-Stock strategy, ensuring they have products readily available for customers' immediate needs.

Challenges with Storing Finished Goods

This section highlights challenges associated with storing finished goods.

Irregular Demand and Customization

• Storing finished goods can be risky and expensive when demand is irregular or products are highly customized.

Conclusion

The lecture discussed the concept of Customer Order Decoupling Point (CODP) and its relationship with different production strategies. The placement of the CODP determines how companies handle order-driven activities versus forecast-driven activities. Four main production strategies were explained: Engineer-to-order (ETO), Make-to-order (MTO), Assemble-to-order (ATO), and Make-to-stock (MTS). Examples of these strategies were provided in various industries. The importance of accurate forecasting in a Make-to-Stock strategy was emphasized, along with factors influencing the placement of the CODP.

New Section

In this section, the concept of Customer Order Decoupling Point (CODP) and different production strategies are discussed.

CODP and Production Strategies

• The CODP can be moved upstream towards raw materials or downstream towards the customer.

• Moving the CODP upstream is known as Postponement strategy, where the company delays making decisions about materials until a customer order is received. This reduces inventory holding costs but increases lead times.

• Moving the CODP downstream is called Speculation strategy, where companies produce goods based on speculation of future demand. This strategy requires accurate forecasting and offers advantages like economy of scale and faster lead times.

• Advantages of Speculation strategy include economy of scale, faster lead times, and minimized risks of stock-out.

• Advantages of Postponement strategy include lower inventory holding costs, minimized risk of dead stock and obsolescence, but it leads to longer lead times.

New Section

The T-point concept and its relation to the Customer Order Decoupling Point (CODP) are explained in this section.

The T-point Concept

• The T-point refers to specific points in a production process where the number of product variants increases significantly.

• Examples:

• For customized t-shirt printing businesses like Spreadshirt, the T-point is in the printing process.

• For mass-customized office chairs assembly lines, the T-point would be in the assembly line.

• The T-point is often a suitable location for placing the Customer Order Decoupling Point (CODP).

New Section

This section provides a summary of key concepts covered in the lecture.

Summary

• Key concepts covered:

• Customer Order Decoupling Point (CODP)

• Four generic production strategies: Engineer-to-Order, Make-to-Order, Assemble-to-Order, and Make-to-Stock

• Speculation and Postponement strategies

• The T-point concept and its relation to the CODP

The summary is based on the provided transcript.