Order penetration point

From Supply Chain Management Encyclopedia

Revision as of 11:58, 20 May 2011

The order penetration point refers to the stage in the production process where customer orders are accepted by the manufacturer. As seen in the Figure,^[1] when the order is accepted after final product assembly, then the order penetration point resides between the final assembly and shipment stage. This is refered to as a make-to-stock form postponement strategy and is highly reliant on production according to forecasts. An assemble-to-order form postponement strategy occurs when final assembly takes places after orders are received. A make-to-order strategy is characterized by production fabrication and manufacture after recepit of customer orders. Finally, an engineer-to-order form postponement strategy is characterized by the firm engineering the product after receipt of an order. Some examples will help illustrate the various strategies. Typical make-to-stock firms include large scale producers of beverages (e.g., beer, soft drinks), food products (e.g., canned soup, sugar, flour), and health and beauty aids. Partial form postponement of paint (i.e., mixing the color into the a white base product) reflects a partial assemble-to-order orientation. The delay of mixing the color takes advantage of the risk pooling, however, the white base paint is manufactured to stock according to forecast. Dell provides another example of an assemble-to-order system wherein component parts are manufactured to forecast, however, final assembly is delayed until after orders are received. That stage in the production process where the shift occurs from a make-to-stock to an assemble-to-order orientation is refered to as the push-pull boundary. Significant buffer stock may be required to at the push-pull boundary to ensure smooth transistion across orientations. The make-to-order reflects custom built products. Examples range from custom manufactured clothing (i.e., men's suits; wedding dresses) and jewelry. Producers of high cost products that require excessive inventory carrying cost of finished product may select a amke-to-order startegy. For example, Airbus and Boeing follow a make-to-order strategy. Minor engineering changes may be required for specific customers (e.g., air cargo carriers), however, production of component parts is delayed until after orders are received. The final strategy is engineer-to-order. Custom designed machinery may fall into this category. Fo excample, the machinery in a pulp and paper mill is often designed and then manufactured to the specifications of the buyer.

The greater the proportion of manufactured output that follows a make-to-order form postponment strategy, the greater the extent to which the firm engages customers and applies knowledge from customers into their own operations: e.g., use of information from customers on expected quality levels; joint co-design of products with cutomers. The latter assicytes with better market performance in terms of sales and market share growth. The same research showed that a just-in-time strategy associates with higher levels of supplier involvement, with no concomittant increase in market performance.^[2].

References

1. ↑ The Figure is adapted from: Olhager, J. (2003), "Strategic Positioning of the Order Penetration Point," International Journal of Production Economics," 85 (3), 319-329.
2. ↑ Christens, W.J., R. Germain and L. Bitou (2005), "Build-to-order and Just-in-time as Predictors of Applied Supply Chain Knowledge and Market Pwerformance," Journal of Operations Management, 23 (5),470-481.