Order fulfillment
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Order fulfillment (in BE also: order fulfilment) is in the most general sense the complete process from point of sales inquiry to delivery of a product to the customer. Sometimes Order fulfillment is used to describe the more narrow act of distribution or the logistics function, however, in the broader sense however it refers to the way how firms respond to customer orders.
The first research towards defining order fulfiment strategies was published by Mather (1988) and his discussion of the P:D ratio, whereby P is defined as the production lead-time, i.e. how long it takes to manufacture a product, and D is the demand lead-time, i.e. how long customers are willing to wait for the order to be completed. Based on comparing P and D, a firm has several basic strategic order fulfilment options:[1]
- Engineer-to-Order (ETO) - (D>>P) Here, the product is designed and built to customer specifications; this approach is most common for large construction projects and one-off products, such as Formula 1 cars
- Build-to-Order (BTO); syn: Make-to-Order (MTO) - (D>P) Here, the product is based on a standard design, but component production and manufacture of the final product is linked to the order placed by the final customer's specifications; this strategy is typical for high-end motor vehicles and aircraft
- Assemble-to-Order (ATO) - (D<P) Here, the product is built to customer specifications from a stock of existing components. This assumes a modular product architecture that allows for the final product to be configured in this way; a typical example for this appraoch is Dell's approach to customising its computers.
- Make-to-Stock (MTS); syn: Build-to-Forecast (BTF) - (D=0) Here, the product is built against a sales forecast, and sold to the customer from finished goods stock; this approach is common in the grocery and retail sectors.
In its broadest definition the possible steps in the process are[citation needed]
- Product Inquiry - Initial inquiry about offerings, visit to the web-site, catalog request
- Sales Quote - Budgetary or availability quote
- Order Configuration - Where ordered items need selection of options or order lines need to be compatible with each other
- Order Booking - The formal order placement or closing of the deal (issuing by the customer of a Purchase Order)
- Order Acknowledgment / Confirmation - Confirmation that the order is booked and/or received
- Order Sourcing / Planning - Determining the source / location of item(s) to be shipped
- Order Changes - Changes to orders, if needed
- Shipment Release - Process step where the warehouse / inventory stocking point starts the shipping process. May comprise of picking, packing and staging for shipment.
- Shipment - The shipment and transportation of the goods
- Delivery - The delivery of the goods to the consignee / customer
- Invoicing / Billing - The presentment of the commercial invoice / bill to the customer
- Settlement - The payment of the charges for goods / services / delivery
- Returns - In case the goods are unacceptable / not required
The order fulfilment strategy also determines the de-coupling point in the supply chain (Olhager, 2003), which describes the point in the system where the "push" (or forecast-driven) and "pull" (or demand-driven) elements of the supply chain meet. The decoupling point always is an inventory buffer that is needed to cater for the discrepancy between the sales forecast and the actual demand (i.e. the forecast error).
The order fulfilment strategy has also strong implications on how firms customise their products and deal with product variety (Pil and Holweg, 2004). Strategies that can used to mitigate the impact of product variety include modularity, option bundling, late configuration, and build-to-order (BTO) strategies -- all of which are generally referred as as mass customization strategies.
References
- ^ Fogarty, Blackstone, Hoffman. Production & Inventory Management 2nd ed. South-Western Publishing Co. 1991 p.2-3 ISBN 0538074612
Mather, H. (1988), Competitive Manufacturing, Prentice Hall: Englewood Cliffs
Raturi, A.S., Meredith, J., McCutheon, D., Camm, J., (1990) "Coping with the build-to-forecast environment". Journal of Operations Management, 9: 230-249
Hoekstra, S., Romme, J., (1992) Integral Logistics Structures: Developing Customer-oriented Goods Flow. London: MacGraw-Hill
Holweg, Matthias, and Frits Pil. "Successful Build-to-Order Strategies Start With the Customer," MIT Sloan Management Review, Fall 2001, Vol. 43, No 1, pp. 74-83 ISSN 1532-9194
Olhager, J. (2003) "Strategic positioning of the order penetration point", International Journal of Production Economics, 85(3): 319-329.
Holweg, M. and Pil, F.K. (2004) The second century: reconnecting customer and value chain through build-to-order: moving beyond mass and lean production in the auto industry. Cambridge, Mass.: The MIT Press. [1]
Pil, F.K. and Holweg, M. (2004) "Linking product variety to order-fulfillment strategies." Interfaces, 34(5): 394-403