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The Role of Decoupling Points in Value Chain
Management
Jan Olhager
Department of Management and Engineering, Linköping University, Linköping, Sweden,
jan.olhager@liu.se
Abstract All supply chains are not the same. A key factor that affects the design
and management of a value chain is the position of the customer order decoupling
point; some products are produced to order (e.g. configured to particular customer
needs) while others are produced to stock (typically standard products). The cus-
tomer order decoupling point (CODP) identifies the point in the material flow
where the product is linked to a specific customer. This paper discusses the impact
of having the decoupling point at different positions, and the distinguishing fea-
tures for value chain operations upstream the decoupling point (i.e. towards the
supplier) versus those downstream the decoupling point (i.e. towards the ultimate
customer). Based on these differences, we explore the implication of the CODP on
the modelling of value.
Keywords Decoupling point, Value, Value chain management
Author final version – published as:
Olhager J (2012). “The role of decoupling points in value chain
management”. In: Jodlbauer H, Olhager J, Schonberger R (Eds.),
Modelling Value, Physica Verlag, Heidelberg, pp. 37-47.
2
1 Introduction
In order to compete successfully, operations in any type of firm need to be strate-
gically aligned to the market requirements. This concerns all aspects and opera-
tions of the value chain. The customer order decoupling point (CODP) is gaining
attention as an important factor in the design and management of manufacturing
operations as well as supply chains. The CODP is the point in the material flow
where the product is tied to a specific customer order; the basic choices being
make-to-stock, assemble-to-order, make-to-order, and engineer-to-order. As a
rule, the CODP coincides with the most important stock point, from where the
customer order process starts. From the value chain perspective, there is typically
one dominant CODP along the material flow of the value chain. From a company
perspective, the CODP can be positioned inside their manufacturing operations or
it can be positioned at the suppliers (first tier or even further upstream in the value
chain), at the interface with the supplier (raw material inventory), at the border
towards the customers (at some finished goods inventory), or even further down-
stream in the supply chain.
This paper investigates the role of the CODP in value chain management. First,
the related literature is reviewed. Then, some distinguishing features are summa-
rized. These two sections serve to establish the fundamental differences between
upstream and downstream operations relative to the CODP. Finally, we explore
the implications of the CODP on the modeling of value.
2 Related Literature
2.1 The Customer Order Decoupling Point
The CODP is traditionally defined as the point in the value chain for a product,
where the product is linked to a specific customer order. Sometimes the CODP is
called the order penetration point; cf. Sharman (1984) and Olhager (2003). Differ-
ent manufacturing situations such as make-to-stock (MTS), assemble-to-order
(ATO), make-to-order (MTO) and engineer-to-order (ETO) all relate to different
positions of the CODP; cf. Figure 1. The CODP thus divides the operations stages
that are forecast-driven (upstream of the CODP) from those that are customer or-
der-driven (the CODP and downstream). The CODP is also the last point at which
inventory is held (Sharman, 1984). Thus, the inventory at the CODP is a strategic
stock-point since delivery promises are based on the stock availability at the
CODP and the lead times and capacity availability for the customer order-driven
activities downstream the CODP (Olhager, 2003).
3
Engineer Fabricate Assemble Deliver
Engineer-to-order
Make-to-order
Assemble-to-order
Make-to-stock
Customer order
decoupling points
CODP
CODP
CODP
CODP
Forecast-
driven
Customer
order-driven
Fig. 1 Different customer order decoupling points (based on Sharman, 1984).
The literature on CODP is growing (Olhager, 2010). There is a strong consensus
among the literature on CODP in that the operations upstream are significantly
different than those downstream, based on the fact that the upstream material flow
is forecast-driven, whereas real customer orders dominate downstream. This has
implications for many aspects of the manufacturing value chain. Areas that have
been treated in the literature include operations strategy (Olhager and Östlund,
1990; and Olhager, 2003), logistics systems (Hoekstra and Romme, 1992), manu-
facturing planning and production control (Giesberts and van der Tang, 1992; van
der Vlist et al.,1997; and Olhager and Wikner, 1998, 2000), manufacturing focus
(Hallgren and Olhager, 2006), and supply chain planning (Olhager, 2010). Other
papers have treated the CODP more generally for a certain area of application,
such as the Finnish paper and pulp industry (Lehtonen, 1999) and the Dutch food
industry (van Donk, 2001).
2.2 Make-to-Stock Versus Make-to-Order
From a material flow perspective, the four situations in Figure 1 can be reduced to
three, i.e. MTS, ATO, and MTO, since MTO fully includes ETO with respect to
the material flow. MTS includes all options regarding keeping inventory in the
distribution system; either at distributors, wholesalers or retailers. In all these en-
vironments, the product is produced to stock with respect to the form; however,
they may differ in terms of time and space relative the ultimate customer. An indi-
vidual plant may well have products in all categories. Different products being de-
livered in an ATO fashion do not necessarily have to have the CODP in the same
position. What they have in common is that they have an internal CODP, which
makes the internal value chain a mix of MTS and MTO; cf. Figure 2.
4
Make-to-order
Assemble-to-order
Make-to-stock MTS
MTOMTS
MTO
CODP
CODP
CODP
Fig. 2 The CODP partitions the process into MTS upstream and MTO downstream.
Thus, there are two fundamental sections in a material flow: MTS and MTO. The
choice of MTS versus MTO is typically a natural and clear-cut one in practice,
and the differences and consequences are usually well understood by manufactur-
ing and supply chain managers. For example, the specialty chemical firm Rohm
and Haas separated the products into MTS and MTO categories based on demand
volume and variability (D’Alessandro and Baveja, 2000).
The Berry and Hill (1992) model for linking manufacturing planning and con-
trol approaches to market and product characteristics explicitly uses MTS, ATO,
and MTO as choices for the master planning level. MTO should be selected for
special products with wide range and low individual product volume per period,
and MTS for standard products with predetermined and narrow range and high
volume per period (Berry and Hill, 1992). This framework has been tested empiri-
cally in Olhager and Selldin (2007), and product range was found to be a signifi-
cant driver of the positioning of the CODP, with a subsequent significant impact
on product mix flexibility performance.
The impact of e-business on manufacturing strategy decisions was explored by
Olhager and Rudberg (2003), in a study of seven Swedish manufacturing compa-
nies. The results showed that e-business interfaces with customers were beneficial
to MTO operations in terms of improved delivery lead time and cost performance.
However, it had little impact on MTS operations, since the product is already pro-
duced and is available for delivery to the customer.
2.3 Lean Versus Agile
One literature stream, initiated by research by the Cardiff group (e.g. Naylor et al.,
1999; Mason-Jones et al., 2000; and Aitken et al., 2002), distinguishes between
lean and agile supply chains using the CODP as the divider between lean and agile
operations in manufacturing or supply chains. A lean supply chain should be ap-
plied upstream the CODP, while an agile supply chain would be more suitable for
5
downstream operations. This is the core idea of the “leagility” approach. The dis-
tinction between lean and agile has been tested empirically concerning drivers and
performance outcomes (Hallgren and Olhager, 2009). They found that lean is as-
sociated with a cost leadership strategy and cost performance, while agile is asso-
ciated with a differentiation strategy and flexibility performance. Another aspect
of the ”leagile” approach is the recognition of an information decoupling point
(Mason-Jones and Towill, 1999). The underlying rationale is that the feedback of
market information does not necessarily have to stop at the (material flow related)
CODP, but can be forwarded further upstream to provide advance planning infor-
mation. Still, in practice, the information and material decoupling points most of-
ten coincide.
2.4 Related Models
The product-process matrix by Hayes and Wheelwright (1984) can be comple-
mented by the CODP. Low volume, low standardization, one-of-a-kind products
need to be produced in an ETO/MTO fashion focussing on flexibility and quality,
and the CODP position gradually shifts to the finished goods inventory (possibly
extended to include distribution inventories) for high-volume, high standardiza-
tion, commodity products focussing on dependability and cost at the other end of
the product characteristics continuum.
The product profiling concept developed by Hill (2000) can also be related to
CODP positions. According to the product profile table (Hill, 2000), standard
products with very narrow range win orders on price, wherefore the key manufac-
turing task is to provide low-cost production (i.e. applicable to MTS operations
and upstream a CODP), whereas special products in wide range win orders based
on delivery speed and unique design capability, wherefore manufacturing has to
meet specifications and delivery schedules, which requires high flexibility (i.e.
applicable to MTO operations and downstream a CODP).
The model by Fisher (1997) for choosing the right supply chain for products
includes a distinction between two product types and two supply chain types. He
made a distinction between functional and innovative products, and between phys-
ically efficient and market responsive supply chains. Functional products charac-
terized by e.g. a steady demand pattern and long product life cycles should be
managed in a physically efficient supply chain that focuses on cost minimization
and high utilization of resources, whereas innovative products with demand vola-
tility and short life cycles should be transformed through a market-responsive
supply chain that has extra capacity, capability of market demand information
processing, and that is more flexible. This model has been tested empirically
(Selldin and Olhager, 2007), finding some support for this model. It should be
noted that the products that are considered in this model are business-to-consumer
products that are made to stock. Still, the core ideas of this model can be related to
the CODP, such that the characteristics of the physically efficient supply chain can
6
be considered applicable to operations upstream the CODP, while the characteris-
tics of the market-responsive supply chain can be considered useful for down-
stream operations (Olhager et al., 2006).
Another related model is the supply chain operations reference (SCOR) model
(Supply Chain Council, 2008). The three basic processes – source, make, and de-
liver – in the SCOR model are differentiated for make-to-stock, make-to-order,
and engineer-to-order products. Thus, the SCOR model acknowledges that the po-
sition of the customer order decoupling point has an impact on the design of oper-
ations processes.
3. Distinguishing Features
Based on the review of the related literature we can conclude that there are indeed
substantial differences between operations and activities upstream the CODP and
those downstream the CODP. In Table 1, we summarize some key aspects of what
distinguishes the operations upstream the CODP from those downstream.
Table 1. Distinguishing features of operations and activities upstream versus downstream the
CODP (based on Hallgren and Olhager, 2006).
Features MTS and upstream the CODP MTO and downstream the CODP
Product characteristics Standard components, high
volumes, predictable demand
Customised, high variety, wide
range, unpredictable demand
Order winners Price Delivery speed, flexibility
Qualifiers Quality, delivery reliability Quality, delivery reliability
Supply chain design Physically efficient Market responsive
Lean versus agile Lean Agile
Manufacturing task Provide low cost manufacturing,
maintain high stock availability
at the CODP
Manufacture to customer specifica-
tion, achieve short and reliable lead
times
Key properties Productivity Flexibility
Improvement priorities Cost reduction Lead time reduction
7
4. Implications of the CODP on the Modeling of Value
4.1. Value Perceptions
In general, the customer value function is based on the perception of a variety of
criteria related to the competitive capabilities of the value offering firm. Many cri-
teria are manufacturing-based, but other criteria may be included.
Value = f(Q, D, P, F, X),
where Q = quality (conformance to specifications), D = delivery (speed and relia-
bility), P = price, F = flexibility (volume, product mix, and design – in support of
customization and product range), and X = other aspects. Other non-
manufacturing related aspects may include design, brand, image, etc.
In MTS environments, price is typically the dominant criteria and acts as a ma-
jor order winner. Quality and delivery are typical market qualifiers, while flexibil-
ity typically is not required at all. Using bold to denote order winner, and italics to
denote qualifiers, the value perception of MTS operations can be depicted as:
Value (MTS) = f(Q, D, P, F, X),
In MTO environments, the important competitive criteria are typically based on
quality, delivery and flexibility. The order winner is typically related to some as-
pect of flexibility, while quality and delivery are typical market qualifiers. Price
may be a qualifier, but for some products price is not really the issue. Delivery
speed may appear as part of the order winning criteria. Non-manufacturing related
aspects may also contribute to order winning or qualifying.
Value (MTO) = f(Q, D, P, F, X),
Thus, the perception of what creates value is very different for MTS and MTO
products in general.
4.2. Deployment of Perceived Value
The value perception differences between MTS and MTO products must be taken
into account when designing and managing value chains. In particular, the per-
ceived value is different on the two sides of the CODP. Consequently, the de-
ployment of the value perception in the market is only relevant to the CODP. Up-
8
stream the CODP, the value has to be related to MTS products, for which MTO-
based value perceptions are not valid. This is illustrated in Figure 3.
Make-to-order
Assemble-to-order
Make-to-stock MTS
MTOMTS
MTO
CODP
CODP
CODP
Perceived value in the market
Deployment of perceived value
Deployment of perceived value
Deployment of perceived value
Transform perceived value into
CODP/MTS-type values
Fig. 3 Deployment of perceived value with respect to the position of the CODP.
4.3. The Impact of Profit Margin
A key aspect of the value perception for the manufacturer is the profit margin of
the products sold to the market. A low margin corresponds to a competitive mar-
ket place with many competitors, which is common for mature products that typi-
cally are produced to stock. On the other hand, a high margin is more typical for
products that are customized or where the product range is wide, offering the cus-
tomer a wider choice. Figure 4 illustrates the common relationships between profit
margin and the CODP. Even though the figure depicts the relationships for end
products in MTS and MTO operations, the results can be translated into operations
upstream and downstream the CODP. Consequently, the profit margin of compo-
nents and items upstream the CODP is typically low (since these have sufficiently
high volumes to allow for being produced to stock), while parts and end products
downstream the CODP have higher profit margins (since these include some ele-
ment of customization).
9
Typical Difficult
position
Special
position Typical
Typical Difficult
position
Special
position Typical
MTS MTO
Decoupling point zone
Low
High
Profit
margin of
product
Fig. 4 Differences in profit margin with respect to the CODP.
Figure 4 includes two “untypical” positions that are possible in practice. In partic-
ular, the special position of high profit margin in MTS operations is possible for
products where value is built largely on product innovation, design or brand name.
Examples of such products are pharmaceuticals, fashion clothes, and some luxury
items. The last quadrant with low profit margin in MTO operations is a difficult
position. Since MTO operations often have some excess capacity to deal with un-
stable demand, the profit margin can easily be wiped out if demand is not suffi-
cient with respect to the capacity level. This may be case for some sub-contractors
that rely heavily on a steady stream of orders from their customers in order to stay
profitable.
The profit margin is indicative of the relationship between value (for the cus-
tomer), price and cost (for the manufacturer). For a competitive product the fol-
lowing relationship must hold:
Value > price > cost.
If price exceeds the value perceived by the customer, he or she will go elsewhere.
If cost exceeds the price, the manufacturer will most likely go out of business in
due course. In low-margin operations, the focus is to make sure that the margin
stays positive, and avoid unnecessary costs. In high-margin operations, the manu-
facturer continuously strives to keep the margin or improve it, by product innova-
tion, product design or building the brand name. Figure 5 illustrates these relation-
ships.
10
Value
Cost
Cost-conscious
Value/margin
-conscious
(void)
Fig. 5 Different types of focus with respect to the relationships among value, price and cost.
MTS operations are typically cost-conscious, having to focus on cost control and
measure cost performance to maintain the profit margin (small, but positive).
MTO operations have a wider scope of options in creating new complementary
value-cost relationships.
4.4. Some Implications of CODP on the Modelling of Value
Based on the exploratory discussion of the value concept in MTS versus MTO op-
erations it can be concluded that there are substantial differences. In Table 2, some
key aspects are summarized that distinguishes the operations upstream the CODP
from those downstream.
Table 2. Some value-related aspects relative to the CODP.
Aspect MTS and upstream the CODP MTO and downstream the CODP
Value added Low High
Profit focus Cost performance Margin / Value contribution
Profitability genera-
tion
Through cost reduction Through margins and sales
Pricing model “Cost plus” (restricted by market price)
Value-based
Operational problem
Cost control Market supply
6. Concluding Remarks
This paper investigated the role of the CODP for value chain management. The
CODP has a key role in developing and managing value chains in that value chain
operations upstream the CODP perceive value differently than those downstream
the CODP. As a consequence, the two parts around the CODP should be designed
11
and managed differently in order to support the value creation at each respective
stage.
These results are generally applicable to value chain operations. For firms
where there is only one type of decoupling situation, i.e. only MTO or only MTS,
the firm can apply a single approach for the value chain. However, most firms
tend to have a mix of MTO and MTS products, wherefore different approaches
have to be applied for different parts of the firm. Also, in ATO situations the two
types of approaches need to be applied to different parts of the value chain for a
single product line. The fact that the entire value chain is not aligned towards one
goal (i.e. the competitive priorities of the ultimate consumer) is not a dilemma per
se. The important issue is to fit the approach to the task of each respective material
flow – both upstream and downstream the CODP.
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