Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

1.3.3 Customer Order Penetration Point (OPP), or Customer Order Decoupling Point (CODP), and Approaches such as Modular Product Concept, (Late) Customization, Postponement

Intended learning outcomes: Explain the determination of the (customer) order penetration point, or customer order decoupling point, and the stocking level. Describe the modular product concept, the concepts of customization and late customization as well as the postponement approach.

Resolving the problem of the conflicting objectives of “high fill rate” versus “low costs for inventory on stock and in process” is one of the main tasks of logistics, operations, and supply chain management. This problem is equivalent to the basic problem of temporal synchronization between supply and demand described in Section 1.1.6.

The (customer) order penetration point (OPP) is a key variable in a logistics configuration; it is the point in time at which a product becomes earmarked for a particular customer. Downstream from this point, the system is driven by customer orders; upstream processes are driven by forecasts and plans ([APIC16]).

Figure shows the situation applied to the process plan of Figure, reduced to the product structure in the time axis. The issue here is the relation of customer tolerance time, which is a result of the market situation, to cumulative lead time.

Fig.        The (customer) order penetration point.

If the customer tolerance time is at least as long as the cumulative lead time, the product can be engineered, procured, produced, or delivered when actual demand in the form of a customer order is placed. Other­wise, all goods (such as semifinished goods, single parts, raw materials, and information) from which the end product cannot be manufactured and delivered within the customer tolerance time must be ordered on the basis of forecast. If the customer toleran­ce time is zero, even the end product must be ordered and, if need be, stocked before demand is known. The OPP corresponds to the level in the product structure where a buffer of inventory should be located.

The stocking level defines that level in the bill of material above which a product can be engineered, procured, produced, or delivered within the customer tolerance time. For goods below and at the stocking level, no exact demand is known. Demand forecast is required.

Therefore, the OPP entails decoupling points, each with its decoupling inventory. In general, decoupling points in the product structure are items downstream from or at the OPP with at least one direct component upstream from the OPP. In the example in Figure, item A is the only decoupling point. It is downstream from the OPP, whereas its direct components C, D, and E are upstream from the OPP. The necessary inventory at the stocking level (in the example, of item A) is determined by estimation of the opportunity costs according to the required fill rate.

In general, the customer order decoupling point (CODP) is defined synonymously to the OPP.

However, as each decoupling point is linked with an inventory (see the definition in Section 1.1.6), it is identical to the stocking level. An equalization of the CODP with the OPP only applies if the stocking level is located exactly at the OPP.

Figure already points in the direction of supply chain initiatives (SCI). Many SCIs require close coordination with product and process design. Here some examples:

  • Reduction of cumulative lead time at all levels, particularly at the assembly stage. In this way, the stocking level can be set lower and thus carry­ing cost reduced. Short lead times are a topic in lean-/just-in-time concepts (lean/JIT), which are covered in Chapter 6.
  • modular product concept is based on standardizing the compo­nents and operati­ons and on commonality and building product families. Product variants are decided on the basis of a concept already defined in marketing and product design.
  • Customization is a concept in product design that produces products tailored to customer requirements. In late customization, product modules are characterized by commonality up to high level of product structure, so that the many variants can be produced as much as possible within the customer tolerance time. This reduces the supply chain risks of too high inventory and shelf warmers upstream from or at the (customer) OPP. Here, the number of significantly different process variants should be kept small. On customization, see the variant-oriented concept in Chapter 7.
  • Postponement is an approach in product design. It shifts product differentiation closer to the customer by postponing identity changes, such as assem­b­ly (finish-to-order) or packaging (package to order), to the last possible supply chain position ([APIC16]). Post­po­ne­ment makes sense, if, for example, longer transport distances from the producer to the customer can be resolved through lower-value semifinished items. Efficient postponement can also support the ability for late customization. See here also [SwLe03]. For postponement in pharmaceutical supply chains, see [Verh12].

Quiz on Chapter 1.3.1.-1.3.3: not yet available

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Course section 1.3: Subsections and their intended learning outcomes