Abstract Number: Positioning of the Order Penetration Point (OPP): a supply chain view

Transcription

1 Abstract Number: Positioning of the Order Penetration Point (OPP): a supply chain view Luiz Felipe Scavarda, Industrial Engineering Department, Pontifícia Universidade Católica do Rio de Janeiro, Rua Marquês de São Vicente, 225 sala: 950L , Gávea, Rio de Janeiro, Brazil, lf.scavarda@pucrio.br / Phone: Katja Klingebiel, Technical University of Dortmund / Fraunhofer IML, LeonhardEulerStr Dortmund, Germany, katja.klingebiel@tudortmund.de Annibal Scavarda, School of Business and Management, American University of Sharjah, P.O.Box 26666, Sharjah, UAE, annibal@esp.pucrio.br / Tel: +(971) Augusto da Cunha Reis, Industrial Engineering Department, Pontifícia Universidade Católica do Rio de Janeiro, Centro Federal de Educação Tecnológica Celso Suckow da Fonseca (CEFET/RJ) Rua Marquês de São Vicente, 225 sala: 950L , Gávea, Rio de Janeiro, Brazil, augusto.reis@cefetrj.br / Phone: POMS 22nd Annual Conference Reno, Nevada, U.S.A. April 29 to May 2, 2011

2 Introduction The order penetration point (OPP) is not a new subject and has already been a topic of interest since the 80 s (Bowersox and Morash, 1989), when Sharman (1984) defined it as the point at which a product becomes earmarked for a particular customer, where product specifications get frozen, and is considered the last point at which inventory is held. However, the positioning of the OPP is successively becoming a topic of strategic interest (Olhager, 2003). With the proliferation of the number of varieties of a product (e.g. different colors, flavors, sizes, materials, characteristics, etc) among different industries (Pil and Holweg, 2004; Brun, et al., 2008; Vaagen and Wallace, 2008), the correct positioning of the OPP becomes more important. The goal of this paper is to analyze the product variety management offered by a vehicle manufacturer to the Brazilian automotive market. The findings obtained in the Brazilian market are compared with the ones obtained in the European market and the resulting different OPP are discussed and analyzed. The paper is structured as follows. Firstly, the existing literature on OPP is reviewed. Subsequently, the findings are presented, first on a factory fitted option level (exfactory), next on a dealer fitted option level (late configuration / postponement). The last section offers the authors final remarks. Literature Background The OPP defines the stage in the manufacturing value chain, where a particular product is linked to a specific customer order (Olhager, 2003). Also view as the point at which real demand penetrates upstream in a supply chain and termed as decoupling point, it should

3 dictate the form in which inventory is held (Christopher, 2000). Downstream of this order penetration point, customer orders drive the systems that control materials flow and upstream forecasts and plans do the driving (Sharman, 1984). When the OPP is located closer to the end of the line, customer demand is fulfilled from inventory. Inventory replenishment and production planning are based on forecasts of demand during lead time. The safety stocks are high because they are proportional to uncertainty about customer demand and production lead times. When the OPP is moved to the beginning of the line, production is on order. Inventory of finished goods is low (or nonexistent) but customer service is critical (Andries and Gelders, 1995). Figure 1 illustrates this, where in the uppermost example, demand penetrates right to the point of manufacture and inventory is probably held in the form of components or materials, and in the lower example, demand is only visible at the end of the chain. Hence inventory will be in the form of finished product (Christopher and Towill, 2000). Figure 1: Material flow decoupling points and strategic inventory Source: Hoekstra and Romme, apud Christopher and Towill (2000)

4 Different manufacturing situations such as MaketoStock (MTS), AssembletoOrder (ATO), MaketoOrder (MTO) and EngineertoOrder (ETO) all relate to different positions of the OPP (Olhager, 2003). Bozarth and Chapman (1996) provide a brief review of them. MTS: products have a standard design and large enough volume to keep a finished goods inventory which customers buy directly off the shelf ; ATO: products have standard major options, but the existence and mix of these options on the final product are determined by specific customer orders and in general, the final configuration is determined only at the final assembly stage; MTO: products tend to use standard components, but the final configuration of those components is customerspecific; ETO: products are specially designed from engineering specifications, while the products might use some standard components, at least some of the components or arrangements of components have been specifically designed by the customer or the customer working with the producer. Figure 2 presents these main product delivery strategies. For instance, manufacturers who ATO typically have their OPP situated somewhere in the middle of the supply chain (Andries and Gelders, 1995). The dotted lines on Figure 2 depict the production activities that are forecastdriven, whereas the straight lines depict customerorderdriven activities. Figure 2: Different product delivery strategies relate to different order penetration points. Source: Olhager (2003)

5 Postponement can be applied to move the OPP downstream closer to the consumer, increasing supply chain efficiency and effectiveness (Naylor et al., 1999). In applying postponement, firms can customize and localize products according to customer demand and local market circumstances from a vantage point close to the market. This is consistent with the example of HP which finalizes the DeskJet printers according to the customer specification in the local warehouses (Feitzinger and Lee, 1997). Postponement can occur along the entire supply chain, from sourcing to final distribution (van Hoek, 2001). There are many advantages of the strategy of postponement. Firstly, inventory can be held at a generic level so that there will be fewer stockkeeping variants and hence less inventory in total. Secondly, because the inventory is generic, its flexibility is greater, meaning that the same components, modules or platforms can be embodied in a variety of end products. Thirdly, forecasting is easier at the generic level than at the level of the finished item. This latter point is particularly relevant in global markets where local forecasts will be less accurate than a forecast for worldwide volume. Furthermore, the ability to customize products locally means that a higher level of variety may be offered at lower total cost, enabling strategies of masscustomization to be pursued (Christopher, 2000; Christopher and Towill, 2000). Yang et al. (2004) propose a framework covering facets of postponement that should motivate academics and practitioners to further explore the subject, particularly concentrating their analysis on how to better understand the challenges that exist in implementing postponement strategies. They have extended the work on modular design for postponement by taking it a step further and suggesting that companies may need to incorporate the appropriate organizational changes with the development of postponement strategies. This may corroborate the idea that postponement is not every company's best strategy, since existing organization

6 structure and culture of some companies may not fit the business opportunities inherent in postponement. Figure 3 presents postponement and different supply chain strategies and is an adaptation from Yang and Burns (2003), whose work investigates how postponement could help locate the OPP from the information and material flows perspectives. The vertical axes varies from a pure postponement strategy to a pure speculation, while the horizontal axes encompasses the possibilities from a make to forecast strategy, where standardization, lean and globalization are main characteristics, to ETO, where customization, agile and localization play important roles. In the middle, strategies as ATO and packaging / labeling to order are illustrated and mass customization and leagile are representative. Figure 3: Postponement and different supply chain strategies Source: Yang et al. (2004)

7 Case Study The authors conducted first an exploratory study including an empirical comparison considering two significant passenger car models from a Vehicle Manufacturer in relevant automotive markets. The OEM s worldwide websites contain complete information regarding the product variety available for many different countries, what makes a multimarket comparison feasible. The information regarding the models variants and the dealersfittedoptions were collected in the OEM global websites. The product variants classifications were the same defined in Pil and Holweg (2004): body styles, power trains, painttrim combinations, and factoryfitted options. In terms of mathematical calculation for possible product variant combinations, the methodology used in Pil and Holweg was adopted. Table 1 presents the number of possible combinations for two vehicle models from the analyzed OEM offered at the plan level (exfactory) to some significant markets. Table 1: Number of factory fitted options MARKET Brazil Argentina Chile Mexico U.S.A. Germany U.K. France Portugal Russia Turkey Japan China India Malaysia Middle East Australia Philippines South Africa Hatchback E+11 45,594,912 68,022,528 1,143, ,432 14, , FIESTA Sedan Total , E E E E E+12 4, , Hatchback E E E E E+12 2, , FOCUS Sedan Wagon ,504 62, E E E E E E E E E E+12 1, , Total E E E E E+12 4, ,

8 These findings show that there are significant differences between the analyzed markets and indicate that in Europe the total number of variants for the models exceeds the one offered in the other regions by far, mainly if Germany is highlighted. For example, the Focus Sedan model is offered in Germany with almost 10 million times the number variants offered in USA and with almost 10 billion times the one offered in China or in Brazil. The next step was going downstream the supply chain, beyond the plant level, incorporating the variety / customization done at dealers. Table 2 presents the results the product variety for the dealerfittedoptions category for two models (just their hatchback body style) in some significant auto markets. Table 2: Number of dealerfittedoptions offered for two models Focus Hatch Fiesta Hatch MARKET Combinations Combinations Brazil 1,088,640 33,634,123,776 U.S.A. 27,869,184 U.K. 3, ,752 Spain 73,728 6,144 Japan 0 Malaysia 32 Australia 18,874, ,557,760 Philippines 512 South Africa 786, ,144 The next step was the conduction of interviews with managers at the OEM plant, sales office and dealers in Brazil to understand the reason for the low variety offered to the Brazilian market under a plant level and a high variety offered at dealers. During these interviews it transpired that investigating only the ex factory product variety in Latin America neglects a key dimension in the overall product variety management process: late configuration. For instance, at the time the research was conducted, the OEM was offering 23 accessories for the European Fiesta that could be retrofitted by its dealers in the UK, while 46 accessories were available in Brazil. Furthermore, the general manager of the dealership group claimed that 95%

9 of all Fiesta cars were late configured at the point of sale (this excluded adding floor mats, as this was generally done for all cars). While most of the late configuration activities led to very peripheral changes in the product, such as adding a radio and speakers, more sophisticated variant drivers like air conditioning and leather seats were also added by dealers, and the extent of late configuration was mainly restricted by technical feasibility and product safety. According to our interviews dealers pursued four aims when late configuring vehicles: Firstly, to circumvent the restrictions imposed by the option bundles available ex factory. Secondly, dealers are aiming to expand their offering beyond the product variety available ex factory to provide a competitive offer. The third reason for late configuration was that dealers wanted to postpone decisions about the final specification of a car until they had a specific customer order for it. The final reason for late configuring cars was that thirdparty options yield higher margins, and thus are a more attractive proposition for the dealer. Final Remarks The European supply chain for the vehicle manufacturer models analyzed in the paper follow mostly the Yang et al. (2004) framework, mainly with the MTF and MTO strategies. The Brazilian supply chain for the analyzed OEM represented one additional step to this framework for most cases, as most of the final customization is postponed to the points of sales (the dealers) and less than 1% of the produced models are MTO. It seems that with this late configuration there is a good balance between cost and product variety. There is not a high variety level offered at the plant level in Brazil, what makes the variant driven complexity cost low, but this variety level is increased at the dealers in a way to fulfill additional customer requirements within a low cost perspective.

10 Acknowledgments The Authors gratefully acknowledge the Brazilian and German research agencies CAPES & DFG (BRAGECRIM project 10/09) and MCT/CNPq (project /20081) and for their support and the OEM and dealers respondents for the precocious time and attention during the interviews and in loco visits. References Andries, B.; Gelders, L Timebased manufacturing logistics. Logistics Information Management, 8 (6), pp Bowersox, D.J.; Morash, E.A The Integration of Marketing Flows in Channels of Distribution. European Journal of Marketing 23 (2) pp Bozarth, C.; Chapman, S A contingency view of timebased competition for manufacturers. International Journal of Operations & Production Management. 16 (6), pp Brun, A.; Caniato, F.; Caridi, M.; Castelli, C.; Miragliota, G.; Ronchi, S.; Sianesi, A.; Spina, G., Logistics and Supply Chain Management in Luxury Fashion Retail: Empirical Investigation of Italian Firms, International Journal of Production Economics, 114 (2), pp Christopher, M The agile supply chain: competing in volatile markets. Industrial Marketing Management 29, pp Christopher, M.; Towill, D.R Supply chain migration from lean and functional to agile and customized. Supply Chain Management: An International Journal 5 (4), pp

11 Feitzinger, E.; Lee, H Mass customization at HewlettPackard: The power of postponement. Harvard Business Review 75 (1), pp Naylor, J.B.; Naim, M.M.; Berry, D Leagility: integrating the lean and agile manufacturing paradigms in the total supply chain. International Journal of Production Economics 62 (1/2), pp Olhager, J Strategic positioning of order penetration point. International Journal of Production Economics 85, pp Pil, F., Holweg, M., 2004, Linking Product Variety to OrderFulfillment Strategies. Interfaces, 34 (5), pp Sharman, G The rediscovery of logistics. Harvard Business Review 62 (5), pp. Vaagen, H.; Wallace, S., 2008, Product Variety Arising from Hedging in the Fashion Supply Chains. International Journal Production Economics, 114, pp Van Hoek, R.R The rediscovery of postponement a literature review and direction for research. Journal of Operations Management.19 (2), pp Yang, B.; Burns, N.D.; Backhouse, C.J Postponement: a review and an integrated framework. International Journal of Operations & Production Management 24 (5), pp Yang, B.; Burns, N.D Implications of postponement for the supply chain. International Journal of Production Research 41 (9), pp