How can you leverage decoupling point to drive supply chain flexibility?

Everyone wants flexibility. But faced with fluctuating customer demand, unpredictable market dynamics and soaring costs, supply chain leaders must tread a delicate line between efficiency and responsiveness.

Where you choose to hold inventory throughout your operation (and in what state) is therefore a very important decision. Get it right, and you will fulfil customer orders on time, in full and with confidence. Get it wrong however, and you could be punished with inventory imbalances that lock up your working capital and bite into your profitability.

Effective supply chain management is all about pulling levers to generate better business outcomes. In this article, we will explore how you can manipulate the decoupling point to manage risk and hit your service goals.

So how can you leverage the decoupling point throughout your supply chain to gain a competitive edge?

What are your supply chain objectives?

Your business may have several supply chain objectives and the priority of them may change constantly. For example, your focus may be to strike a balance between costs and service, maintain optimal inventory levels, or ensure you can supply your customers on time and with the agreed level of quality. However, there are multiple factors that must also be considered: volatility in demand, supplier delays and unforeseen events (eg the loss of a customer, machine failures or even natural disasters).
Determining at what point in our supply chain you hold inventory is therefore important for 2 reasons:

• To mitigate the impact of volatility
• To reduce delivery lead times to your customers

By optimising the position of the decoupling point, you can protect your operation from demand- and supply-side risk. For example, you can minimise the impact of upstream supplier lead times by holding inventory at strategic points throughout the purchasing and production process.

Depending on the point at which you position certain types of stock, you can mitigate the effect of uncertainty and improve your company’s performance. Optimising the inventory decoupling point is therefore a good tactic to improve efficiency, increase utilisation of resources and reduce the delivery lead time to customers, ultimately ensuring more efficient use of your inventory.

What is the decoupling point?

Before we delve into the detail, let’s outline a simple definition.

The decoupling point is the last point in the supply chain where inventory is held. This is the point where the forecast-based production or procurement process separates from the one based on confirmed customer orders.

When formulating your inventory decoupling strategy, you must answer 3 key questions:

• What level of customisation do you want to offer the customer?
• What volume do you want, or can you produce?
• How standardisable is your production process?

What factors determine the position of the decoupling point?

Where the decoupling point sits in the operation depends on your company’s objectives. After all, the objectives of a business ultimately determine which customers the business serves and how it goes about satisfying each customer’s needs. Take for instance, the supply chain of a major food retailer. This will look very different compared to a manufacturer of bespoke industrial components.

Let’s explore this further. Below, we will see how different production and fulfilment strategies impact the position of the decoupling point for finished goods, components and raw materials.

1. Engineer to Order

This strategy is often used where the order is custom-built to meet the specific requirements of the client. Usually, the customer is involved in the process from the inception of the concept through to the completion of the product. Therefore, it is necessary to define specifications and processes before buying and manufacturing. It is a project-based approach. Typical examples include the construction of an industrial plant or the manufacture of custom furniture.

2. Make to Order

This is a typical production strategy where the final products require a high degree of customisation and use a combination of standard components and customised components or finishes to meet customer requirements. In these cases, the raw material or components are kept in stock. The difference with the previous case is that the product and the manufacturing process are already defined. However, you wait for a confirmed order before the manufacturing process can begin. Examples of this include the production of luxury cars or special machinery.

3. Assemble to Order

This strategy is often associated with production environments where the final assembly of the product takes place after receiving the customer order. Due to the combination of standard components that can be assembled in a variety of different options, the final products offered to customers can be highly customisable. In this environment, the components used in the assembly or finishing process are the ones that are planned and kept in stock while we await the customer order.

4. Make to Stock

In this instance, items are manufactured before receipt of the customer order. The goal here is to supply customer orders from available inventory as the manufacturer replenishes that inventory. This strategy is appropriate for high-volume products where demand is seasonal and/or easily predictable.

The main advantage offered by this option is the possibility of delivering customer orders, while minimising the delivery time to the customer. Common examples include bookstores or supermarkets.

A summary of each strategy:

How can the decoupling point impact your supply chain actions?

As we have seen, the decoupling point determines whether the manufacturing or purchase process follows a push methodology (based on demand forecasts) or a pull methodology (based on already confirmed demand). Each comes with both its strengths and weaknesses:

Advantages of the push system

The push system allows us to manufacture on a larger scale. Producing in large quantities translates into lower production costs. It is also usually a faster and more flexible system since it requires planning of the demand to be satisfied from the stock we already have on hand. This allows it to adapt to possible variations in demand.

Disadvantages of the push system

The main disadvantage is that incorrect demand forecasts can cause us to suffer from stock shortages or excess, with the economic repercussions that this entails in terms of storage costs or loss of sales.

Advantages of the pull system

The greatest advantage of this system is that the risk of overproduction is avoided. This means that we have very limited excess, thus reducing storage costs.

Another advantage of this system is that it is not necessary to predict future demand as the purchase or production only begins when there is a confirmed demand. This system also allows us to adapt and personalise the products according to the client’s requirements.

Disadvantages of the pull system

We cannot ignore the risk of potential stock shortages and the turnover losses that can be caused by an unexpected growth in demand that we have not anticipated. Put simply, we are not able to absorb demand spikes as the production and/or the purchasing process does not start until there is firm demand from a customer. Consequently, the delivery time will always be longer than in a push system.

Where should you position the decoupling point to attain a competitive advantage?

Depending on your company’s strategy, the decoupling point will be defined at one point or another in the production chain or purchasing process.

If your products require a lot of customisation, or the speed of delivery is not a limiting requirement, the raw materials mark the decoupling point. This means the strategy will likely follow a pull methodology where the manufacturing process of the components and the final finish will be carried out based on confirmed demand (as with Engineer-To-Order and Make-To-Order Strategies).

If the objective is to ensure fast delivery to customers and to attain economies of scale through an efficient production process, the decoupling point will be in the final components or finished item level. In this environment, future demand must be predicted (as with Assembly-To-Order and Make-To-Stock strategies).

To sharpen your competitive edge, it may be necessary to tweak the decoupling point. Take, for example, the success of Dell.
In 1984, Dell disrupted the personal computer market by offering high quality, low-cost machines that were built to order and sold directly to customers. By shifting the decoupling point towards the customer and adopting an assemble-to-order strategy, Dell was able to offer customers a level of flexibility and a price point that its competitors could not match.

In more recent times, many companies in the fashion space have adopted more hybrid approaches by strategically positioning the decoupling point for different product lines. For certain products, these companies adopt a make-to-order (MTO) strategy which allows customers the freedom to personalise their order. Equally, by adopting a make-to-stock model for core product lines based on forecasted demand, these companies also reap the rewards of economies of scale.

How can you reposition the decoupling point?

Be warned, repositioning the decoupling point is a complex decision that requires a deep understanding of the supply chain dynamics as well as your own capabilities. Changing the decoupling point in a supply chain requires careful analysis and consideration.

To optimise the position of the decoupling point in a supply chain, you should first analyse the current decoupling point and evaluate its impact on lead times, inventory levels and customer satisfaction.

Key factors influencing the decoupling point, such as demand patterns, product characteristics and production capabilities, should also be reviewed. And potential alternatives should be explored through scenario and simulation, considering cost, lead times, flexibility and overall performance.