Strategic positioning of the order penetration point

Abstract

The order penetration point (OPP) defines the stage in the manufacturing value chain, where a particular product is linked to a specific customer order. Different manufacturing environments such as make-to-stock (MTS), assemble-to-order (ATO), make-to-order (MTO) and engineer-to-order all relate to different positions of the OPP. These may be considered as product delivery strategies, having different implications for manufacturing objectives such as customer service, manufacturing efficiency and inventory investment. Furthermore, the OPP may differ between products and over time for a particular manufacturing firm. In this paper, the positioning of the OPP is treated from a strategic perspective. Market, product, and production factors are identified that affect the OPP positioning and the shifting of the OPP upstream or downstream in the manufacturing value chain. The major factors are demand volume and volatility, and the relationship between delivery and production lead times. These factors are included in a model that allows the manufacturing firm to choose the right product delivery strategy. Different manufacturing strategies must be developed for pre-OPP operations (i.e. upstream; forecast-driven) vs. post-OPP operations (i.e. downstream, customer-order-driven), since these two stages are fundamentally different. As a consequence, a manufacturing firm that has an ATO product delivery strategy must differentiate between MTS operations (upstream the OPP) and MTO operations (downstream the OPP). For example, the competitive priorities differ: price for pre-OPP operations but delivery speed and flexibility for post-OPP operations. Therefore, decision categories, such as production planning and control, and performance measurement must be designed accordingly. Guidelines are provided for this strategic choice.