Order to delivery step by step – Make to Order | Make To Stock | Engineer to Order
Order to delivery step by step
Most customers don’t think much about what happens between the time they place an order and when the product or service gets delivered, but for supply chain folks, what happens in the middle matters a lot. Collectively these processes make up the order-to-delivery cycle, and that cycle can be very different depending on the type of product or service that we’re talking about. So, let’s take a look at some of the high-level steps and the kinds of order-to-delivery cycles you’re likely to see.
First of all, there are three main approaches to order-to-delivery: make to stock, make to order, and engineer to order. Make to stock means that you forecast what you think your customers will want, and then you make it and store it in inventory hoping that they’ll buy it.
Make to order means that you wait until you’ve received an order to begin making a product. Customers might have to wait longer to get their product, but you don’t need as much inventory on hand.
The third order-to-delivery approach is engineer to order. That means you actually design each product to meet your customers’ exact needs. Engineer to order gives customers the most flexibility to customize a product, but it also take the most time, and with engineer to order, there’s generally a higher cost because of the engineering and design work required for each product.
So, when you’re designing the supply chain for a product, you have to make a decision about which order-to-delivery approach you want to use, and the two things that often end up being the most important are cost and lead time. Let’s say that it takes 30 days for you to order all of the parts and assemble your product. That means you have a 30-day lead time. What happens if your customers need to receive products within 10 days of placing an order? They need it faster than you can order the parts and make the products. In that case, you’ll need to use a make to stock approach, and that means you’ll need to spend money maintaining inventory in order to meet your customers’ needs. But if you’re customers can wait 30 days, then you can use make to order, and you don’t need to hold inventory.
Now, a clever way to reduce lead times is with a technique called postponement. That means, you start work on a product that has a long lead time but you wait until you have a customer order to do the final assembly. In other words, you have inventory of partially finished products that you can quickly finish up and deliver to a customer. So, postponement is basically a hybrid of the make to stock and the make to order approaches. When you look around at the products and services you buy everyday, you’ll start to see lots of examples of make to stock, make to order, and engineer to order. Understanding these different order-to-delivery approaches can help you incorporate your customers’ needs into your supply chain strategy, and that will help you maximize the value you create through effective supply chain management.