Production Strategy

Summary

This video explains the concept of the Customer Order Decoupling Point (CODP) and its relation to four key production strategies: Engineer-to-Order, Make-to-Order, Assemble-to-Order, and Make-to-Stock. It covers how businesses decide where to place their CODP, which separates order-driven activities from forecast-driven activities. The video also introduces the Speculation and Postponement strategies, along with the T-point, which marks the point where product variations explode. Real-world examples from industries like oil platform manufacturing, aircraft, and consumer products illustrate how companies apply these strategies to optimize efficiency and meet customer demands.

Takeaways

• 😀 The Customer Order Decoupling Point (CODP) separates order-driven activities from forecast-driven activities in production systems.
• 😀 The four main production strategies are Engineer-to-Order, Make-to-Order, Assemble-to-Order, and Make-to-Stock.
• 😀 The position of the CODP in the supply chain is crucial and determines how materials are stored and products are manufactured or assembled.
• 😀 A Make-to-Stock strategy places the CODP at the finished goods inventory, where products are manufactured in anticipation of customer demand.
• 😀 An Assemble-to-Order strategy stores products as components, with the CODP placed at the final assembly stage.
• 😀 A Make-to-Order strategy involves storing raw materials, with the CODP at the fabrication stage where manufacturing begins after receiving an order.
• 😀 An Engineer-to-Order strategy involves starting product design only after receiving an order, placing the CODP at the design stage.
• 😀 The decision of where to place the CODP significantly impacts a company's effectiveness and efficiency in fulfilling customer orders.
• 😀 Moving the CODP downstream (closer to the customer) is referred to as the Speculation strategy, which relies on forecasting and enjoys benefits like faster lead times and economies of scale.
• 😀 Moving the CODP upstream (closer to raw materials) is known as the Postponement strategy, which reduces inventory costs and risks of obsolescence but leads to longer lead times.
• 😀 The T-point marks the point in the production process where the number of product variants increases, and it often serves as a candidate for CODP placement.

Q & A

What is the Customer Order Decoupling Point (CODP)?

The Customer Order Decoupling Point is the point in a production process where order-driven activities (customer orders) begin, and forecast-driven activities (predicted demand) end. It separates production that is based on customer orders from production driven by forecasts.

What are the four distinct production strategies derived from the CODP?

The four production strategies are: Engineer-to-Order (ETO), Make-to-Order (MTO), Assemble-to-Order (ATO), and Make-to-Stock (MTS). Each strategy is based on where the Customer Order Decoupling Point is placed within the production process.

How does a Make-to-Stock (MTS) strategy work?

In a Make-to-Stock strategy, companies store finished goods in inventory and fulfill customer orders by picking items directly from that inventory. The CODP is at the finished goods inventory, and production is driven by forecasts rather than individual customer orders.

What is the difference between Assemble-to-Order (ATO) and Make-to-Order (MTO)?

Assemble-to-Order (ATO) involves storing components and assembling products only when a customer places an order. The CODP is at the final assembly stage. In contrast, Make-to-Order (MTO) involves starting production from raw materials after receiving an order, with the CODP at the fabrication stage.

What production strategy is used when the Customer Order Decoupling Point is at the design stage?

When the Customer Order Decoupling Point is at the design stage, the production strategy is Engineer-to-Order (ETO). This strategy is used for highly customized products that require designing and manufacturing from scratch after receiving a customer order.

Why is the placement of the CODP considered a strategic decision?

The placement of the CODP influences operational efficiency and effectiveness. It impacts lead times, inventory costs, production flexibility, and customer satisfaction. A firm must decide whether to store inventory upfront or wait until a customer order is received, based on product characteristics and market demands.

What is the difference between Speculation and Postponement strategies?

Speculation involves moving the CODP downstream, closer to the customer, and producing goods in anticipation of demand. It relies on accurate forecasting and offers benefits like economies of scale and faster lead times. Postponement, on the other hand, moves the CODP upstream, delaying final production until a customer order is received. It reduces inventory holding costs but results in longer lead times.

What kind of production strategy does IKEA follow, and why?

IKEA follows a Make-to-Stock strategy because it manufactures products in advance and stores them in inventory, ensuring they are available for immediate delivery to customers. This strategy suits their business model, where fast delivery and product availability are essential.

How do companies like Dell use the Assemble-to-Order (ATO) strategy?

Dell uses the Assemble-to-Order strategy by maintaining an inventory of components and assembling computers based on customer orders. This allows them to customize each order while reducing the need for holding large amounts of finished goods.

What is the T-point, and how is it related to the CODP?

The T-point is a production point where the number of product variants goes from few to many, marking a variation explosion. It often coincides with the Customer Order Decoupling Point, as this is where customization begins in the production process, such as in the assembly or final production stages.