Operations and Supply Chain Management The Core

168 OPERATIONS AND SUPPLY CHAIN MANAGEMENT
exhibit 6.1
Positioning Inventory in the Supply Chain
Long
Customer Lead Time
Short
Source Make Deliver
Make-to-Stock
Assemble-to-Order
Make-to-Order
Engineer-to-Order
Low
Inventory Investment
High
The inverted triangles represent customer order decoupling points.
Lead time
The time needed
to respond to a
customer order.
Customer order
decoupling point
Where inventory is
positioned in the
supply chain.
Make-to-stock
A production
environment where
the customer is
served “on-demand”
from finished goods
inventory.
organized to minimize cost while meeting the competitive priorities necessary to attract
customer orders. For example, in the case of consumer products such as candy or clothes,
customers normally want these products “on-demand” for quick delivery from a local
store. As a manufacturer of these products, we build them ahead of time in anticipation
of demand and ship them to the retail stores where they are carried in inventory until
they are sold. At the other end of the spectrum are custom products, such as military
airplanes, that are ordered with very specific uses in mind and that need to be designed
and then built to the design. In the case of an airplane, the time needed to respond to a
customer order, called the lead time, could easily be years, compared to only a few minutes
for the candy.
A key concept in production processes is the customer order decoupling point,
which determines where inventory is positioned to allow processes or entities in the
supply chain to operate independently. For example, if a product is stocked at a retailer,
the customer pulls the item from the shelf and the manufacturer never sees a customer
order. Inventory acts as a buffer to separate the customer from the manufacturing process.
Selection of decoupling points is a strategic decision that determines customer
lead times and can greatly impact inventory investment. The closer this point is to the
customer, the quicker the customer can be served. Typically, there is a trade-off where
quicker response to customer demand comes at the expense of greater inventory investment
because finished goods inventory is more expensive than raw material inventory.
An item in finished goods inventory typically contains all the raw materials needed to