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

4.4.3 Features in Reference to Logistics and Production Resources: Production Environment and Depth of the Product Structure in the Company

Intended learning outcomes: Present important features and their possible values in reference to logistics and production resources. Explain the production environment: make-to-stock, assemble-to-order, make-to-order, and engineer-to-order. Differentiate the depth of product structure in the company from the depth of the product structure within the total supply chain.

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Figure 4.4.3.1 shows the second group of features.

Fig. 4.4.3.1        Important features and their possible values in reference to logistics and production resources. 

Production environment or manufacturing environment refers to whether a company, plant, product, or service is organized to fulfill orders downstream from a specific (customer) order penetration point (OPP). The organization involves methods and techniques of planning & control of development, procurement, production, and delivery.

This feature is naturally closely connected with the (customer) order penetration point (OPP) and the stocking level (see Fig. 1.3.3.1):

  • Make-to-stock is a store at the level of the end product. Delivery takes place from the end products store according to customer order.
    An order picking store or a commission stock represent a status between actual stocking and use. Here all items or products are brought together that will be used for a certain production or sales order. They are stocked until final use in production or in the form of delivery to the customer. See Section 15.4.1.
  • Assemble-to-order, or finish-to-order, is stocking at the level of assemblies or single parts. Upon receipt of a customer’s order, a customized product is assembled using key components from the assemblies store or from the single parts store (that is, from the in-house parts store or purchased parts store).
    Package-to-order is a production environment in which a good can be packaged during the customer tolerance time. The item itself is the same for all customers. However, (only) packaging determines the end product.
  • Make-to-order involves stocking at the level of raw materials or direct purchasing of material from suppliers after receipt of a customer’s order. The final product is produced to meet the special needs of the customer using materials from the raw materials store or acquired through customer procurement orders. In both cases, the starting point is completed design and manufacturing process design. Thus, we can speak of stocking at the level of product and process design.
    Consigned stocks, or consignment inventory, or vendor-owned inventory (VOI) are inventories that legally still belong to the sup­plier, but have already been physically moved to the company. (A consignment is the process leading to consigned stock.)
  • Engineer-to-order involves no stocking at all, at least for parts of a customer order. These must be developed or engineered prior to procurement and production.

The depth of product structure in the company is defined as the number of structure levels within the company.

This feature describes the degree to which the company’s logistics resources must work toward the inside and toward the outside of the company. In regard to the supply chain within a company, the following is possible:

  • In a pure trading company the number of structure levels, and thus the depth of product structure, is zero. Note: A company is still a trading company if it administrates a supply chain but contracts the production processes to third parties. Actually, though, the under­lying basis is a one-level process plan with all external operations.
  • Pure assembling companies or producers of single parts generally have at least one-level production, with mainly outside suppliers.
  • A supplier may produce preassemblies or single parts or perform individual operations (such as surface treatments). Here, again, one-level production is the general rule. Suppliers are forced, however, to depend on producers further along the supply chain. Sometimes they function as system suppliers.
  • The greater the number of structure levels the company itself “ma­kes,” the fewer components it will purchase from outside sup­p­li­ers, and the greater the depth of product structure in the company.

This feature goes hand in hand with the feature depth of product structure within the total supply chain (Section 4.4.2). The less depth of product structure in a company as compared to that in the entire supply chain, the more strongly the company is bound to the transcorporate supply chain. In other words, with less depth of product structure, the greater the necessity for transcorporate cooperation. Experience has shown that deep product structure of the entire supply chain is also “wide,” in the sense that many components enter into each structure level. This extends the range of procurement tasks.

With great depth of production structure, a company may attempt to reduce the complexity of the network by turning over structure levels to third parties (buy decision). This reduces complexity within the company it­self, but complexity is not reduced within the total supply chain. Each com­pany should contribute toward mastering the total complexity. Out­sourcing must result in lower trans­action costs (see also Section 2.1.1). The general rule is that outsourcing replaces long push logistics with pull lo­gistics, through augmenting the number of independent partners and thus the number of process levels in the process model. In consequence, more per­sons become involved in planning & control. As they stand closer to their part of the entire process, the quality of planning & control can increase.

Continuation in next subsection (4.4.3b).

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Course section 4.4: Subsections and their intended learning outcomes

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