Order Fulfillment
Introduction
By definition, ‘order fulfillment’ is defined as all the activities needed to provide the customers with their goods and services, including the related customer services. For the front-office operations, they are the business processes that are visible to customers. As for the back-office operations, they are the activities that support fulfillment of orders.
Order Fulfillment Strategies
Order fulfillment can be classified into several strategies, like ‘Engineer-to-Order (ETO)’, ‘Build-to-Order (BTO)’/‘Make-to-Order (MTO)’, ‘Assemble-to-Order (ATO)’, ‘Make-to-Stock (MTS)’ / ‘Build-to-Forecast (BTF)’ and ‘Digital Copy (DC)’.
In the first place, ‘Engineer-to-Order (ETO)’ is designed and built by customer specifications which is common for one-off project, e.g. Built building. ETO products do not have any design before the orders. The firm will start to design when there is an order.
For ‘Build-to-Order (BTO)’/‘Make-to-Order (MTO)’, it is the strategy based on a standard design, with component production and manufacture of the final product according to customers’ specifications, e.g. aircraft. No finished products or even any component parts are prepared beforehand for BTO or MTO.
Regarding ‘Assemble-to-Order (ATO)’, it is similar tothe aforementioned BTO, which is built to customer specifications from a stock of existing components. Most of the ATO have modular product conformation, e.g. Golden computer Shopping Mall. An advantage of flexibility to use the components is proposed since the same components can be used for producing several products.
‘Make-to-Stock (MTS)’ / ‘Build-to-Forecast (BTF)’ is another strategy that built by a sales forecast. Once the company gets an order, the products can ship out immediately, e.g. clothing. For normal cases, the company will predict the number of unit so as to create as many products as possible. Those products are available for immediate shipment as well.
figure 1.1 Order Fulfillment process
Real Life Example
Take Dell as an example, followings are the order fulfillment processes in reference to the above figure 1.1 Order Fulfillment process:
i. Product inquiry
When surfing Dell’s website, customers can view for the products provided by Dell, such as laptops, desktops and monitors.
figure 1.2 Product Enquiry
ii. Sales Quote
As shown in figure 1.3 Sales Quote below, any prices, laptop screen size or usage are displayed on the website for the sales quotation for customers. Price comparison or specifications are clearly shown.
figure 1.3 Sales Quote
iii. Order Configuration
This is the process after sales quote, once the customers selected what he / she proposed to purchase, the quantity of products are freely adjusted or even cancelled during order configuration.
iv. Order Booking
This refers to the booking of products available on Dell’s website, such as the monitors, desktops, laptops, batteries or necessary accessories.
figure 1.4 Order Booking
v. Order Confirmation
After sales quote and order booking, here comes to the order confirmation process, which ensure the details of order such as prices and quantities are accurate and precise that made by customers.
figure 1.5 Order Confirmation
vi. Billing
Billing is the process that enables customers to pay for the products in their convenience. For Dell, customers can choose to pay by Visa, cheque, ATM, etc.
figure 1.6 Billing
vii. Order Planning
With the selection of delivery method, customers can choose the way and delivery address for order planning process as shown in figure 1.7 Order Planning.
figure 1.7 Order Planning
viii. Order Processing
After the confirmed order, Dell delivery the available products to the customer to ensure the right item in the right quantity at the right time at the right place for the right price in the right condition to the right customer.
ix. Shipment
In accordance to the customers’ requirements, the products will be delivered to the customers by means of express, Air-to-Sea initiative and so on.
x. Delivery
The products will be delivered to the customers on the assigned date and timeslot.
xi. Settlement
For settlement, it is the process for customers to settle all the remaining charges, like delivery costs or extra products’ care expenditure.
xii. Returns
When the customers received the products, if there are any technical or physical problems of products, Dell allow customers to return their products within 21 days.
Trends
There are several trends for the order fulfillment, like Warehousing and Inventory Management that make use of RFID to improve the management accuracy and Automation that focus on specific segments of the process. In addition, better Customer relationship management (CRM) is proposed for building long-term and sustainable customer relationships.
Push V.S. Pull system
The push and pull system are generated in logistic and supply chain management but can also use in marketing.While logistic chains or supply chains are now normally operating both in push- and pull-manner.
Push production is based on forecast demand of the producer and pull production is based on actual or consumed demand.
Push System
Push strategies create consumer demand. Manufacturer is the initiator of raising the needs of their product. When the manufacturer persuade the retailer to purchase their product or manufacturer directly transfer their product to the retail store, retailer will use the in-store promotion or train its sales person to pushes the message out to the target audience and the message – what it is, how it is seen, and when and where it is consumed, are controlled by the producer and the retailer. Push strategy is affected by the upstream information and can be defined as make-to-stock.
In the production aspect, push system of inventory control involves forecasting inventory needs to meet customer demand and companies must predict what kind of products customers will purchase and what is the quantity of goods that will be purchased. Therefore, the company will in turn produce enough products to meet the forecast demand and sell, or push, the goods to the consumer.
Disadvantages
´ Forecasts are often inaccurate as future sales are unpredictable and vary from one time to time.
´ Producer has to produce large lots of product ever time so as to avoid shortage situation When supply excess actual demand, too much product will be left in inventory and increase the company's costs for storing these goods.
´ There would be a poor communication between manufacturer, retailer and target customer as production will only base on producers’ preferences
Advantages
ü Assuring it will have enough products on hand to complete customer orders and preventing the inability to meet customer demand for the product.
ü Use less expenditure on advertising comparing with pull strategy as push strategy will not held lots of marketing campaign to arouse target customer needs at first.
Real Life Example - GIORDANO
Giordano has its own manufactory and the company will forecast future demand based on the previous sales record from different stores. When they have an expected demand, they will produce based on the forecast amount. During production, the company will also design the product in terms of size, cutting and pattern, etc. After the production process, they will held some in-store promotions and train their sales person to sell the product. They will push the message to the target customer and create the needs of purchase.
When to use Push-Pull System
Some companies have come up with a strategy they call the push-pull inventory control system, which combines the best of both the push and pull strategies, it’s also known as lean inventory strategy. While using the combined model, it demands a more accurate forecast of sales and adjusts inventory levels based upon actual sale of goods.
The goal is stabilization of the supply chain and the reduction of product shortages which can cause customers to go elsewhere to make their purchases. With the push-pull inventory control system, planners use sophisticated systems to develop guidelines for addressing short - and long-term production needs.
Product characteristics:
Assemble-to-Order (ATO) - Built to customer specific order
Inventory levels of individual components are determined by forecasting general demand
Final assembly is in response to a specific customer request
High value and highly changeable product- Luxury and specific product
Example - Rolls Royce:
Rolls Royce is a motor car company since 1904. The company sales their car at the beginning of the business and it is famous for its engines and internal luxury design. While being categorized as a luxury car, target customer will automatically crate their own interested in purchasing the cars as the status of successful. Rolls Royce Company will produce different component of the car in the manufactory in advance. While a potential customer aroused a need and the company will receive an order, the car company then allows the customer to customize the inside component of the car. For instance, the customer can order for a television inside their car. After the customer had designed their own dreamed care, Rolls Royce would then assemble the component and produce a specified car for the buyer.
Pull System
In contrast, pull inventory control system begins with customer's orders and pull it through the production sequence. Production and distribution in pull system are demand driven. The manufactuer start to produce based on actual customer demand, so it can be defined as make-to-order. Using pull systerm, the company need to motivate customers to seek out the brand in an active process using advertising, word of mouth referral, customer relationship management etc. If the promotional compaigns is successful, customer will actively ask their retailers for the product and retailers placing orders for stock due to direct consumer demand and manufacturer start to produce the product based on the real demand.
There are four main advantages of pull system. With this strategy, companies only make enough product to fulfill customer's orders. One advantage to the system is that there will be no excess of inventory that needs to be stored, thus reducing inventory levels and the holding cost. Also, since no overproduction occurs, it can reduce waste stock. As products are manufactured specifically to fulfill their requests such as customermazation accrodeing customer unique requirement, it increase customer satisfaction. Last but not least, this system can help to point out quality problems quickly since products are made in small quantities, quality issues will be identified faster than with a push system.
On the other hand, there are some disadvantages using pull system. It needs longer time between a retail customer orders and receiving the product, thus, it increase lead time. Also, it involves longer worker idle time when no order received. As mentioned before, it require high spending on advertising and customer promotion to buid up consumer demandfor a product. Moreover, company using this system hard to enjoy the benefit of economies of scale as the manufacture produce product in small quantity.
Real Life Example
Real Life Example
In order to avoid overproduction and reduce inventory holding cost, Toyota developed the pull producion. Toyota use Just-in-time system that produce automobiles when they receive the order. This method can significantly reduce the holding cost of raw materials since the raw materials are ordered when the production order is received. A tool Toyota uses to prevent overproduction is called kanban which manage the flow and peoduction of materials in a just-in-time system.
Choosing the Right System
Reverse Logistics
Introduction
"Reverse logistics" is defined as all the activities associated with a product/service after the point of sale, the optimal goal is to maximize or make more efficient aftermarket activity, thus saving money and environmental resources.
If no goods or materials are being sent ‘backward’, the activity probably cannot be regarded as a reverse logistics activity. Reverse logistics also includes processing returned merchandise due to damage, seasonal inventory, restock, salvage, recalls, and excess inventory. Moreover, recycling programs, hazardous material programs, obsolete equipment disposition, and asset recovery are the examples of reverse logistics.
figure 3.1process of Reverse Logistics
Real Life Example
figure 3.2logo of HP
Regarding the reverse logistics, take HP as an example, ‘BarControl’is chosen as the software and service provider for their new consolidated returns processing facility. Given a large and diverse product line and the volume of a major, the policy was large scale with joint development and heavy system integration requirements. Through this open and collaborative development effort, the resulting systems offered many innovations and efficiencies making for a world-class processing facility.
Reverse Logistics in HP is the process of all operations involved in moving products backward at least one step in the supply chain process. Instead of from manufacturer to distributor to store to customer as in normal supply chain flow, it can help HP to deal more with the reuse, recapture, remanufacturing or disposal of materials and the flow is reversed from customer to store to distributor to manufacturer, such as the computer hardware or printers.
Advantages
Given the use of reverse logistics, many benefits can be foundas follows:
Firstly, reverse logistics allows a trader to receive products back from the consumer or send unsold merchandise back to the manufacturer to be taken apart, sorted, reassembled or recycled; overall costs can be greatly reduced and minimized for an organization.
Moreover, customer satisfaction and loyalty are improved by paying more attention to faulty goods, and repairs of merchandise. Reverse logistics can include gaining feedback to make improvements and to improve the understanding of real reasons for product returns. Once the customers discovered there was the problem concerning the product, they would have the chance to express and communicate with the corresponding company, rather than just dispose the malfunctioned products.
Apart from cost minimization and loyalty improvement, reverse logistics can be valuable in increasing product lifecycles, supply chain complexity, maintainable practices and consumer preferences, which have to be improved on to maintain productivity and growth.Since the malfunctioned products are returned, greater improvement can be made on the upcoming products development.
In addition, increment of speed of production, reducing costs like transportation, administrative, and aftermarket maintenance, repair and replacement are also be attributed to reverse logistics, in hopes of retaining customers by improving service goals and meeting sustainability goals.
Disadvantages
However, some of the obstacles or disadvantages can be found from the implementation of reverse logistics. For instance, lack of trained personals is the biggest problem that the company might face while outsourcing logistics. With the lack of trained professionals no service provider is going to satisfy you with their services. Only trained professionals and seasoned managers will be able to provide the company with the latest and cutting edge technology.
Second, insufficient inventory information would be another problem, business may face a lack of key performance indicators that can cost the business big time in the future. Because performance indicators and alerts are the most important part of any supply chain management system, insufficient inventory information should be solved or minimized to enhance the efficiency and effectiveness of an organization.
Disintermediation
It is anything that removes the “middleman” (intermediary) in a supply chain. A disintermediary often allows the consumers to interact directly with the producing company. They are knowledgeable on the difference in pricing from various dealers are able to directly purchase from the supplier, cutting costs incurred in the tradition channel such as supplier, manufacturer, wholesaler, retailer and buyer. Normally, disintermediation is applied in B2B or B2C. This cuts service costs from purchases made at a retailer and increases market transparency with regards to manufacturers' prices.
Tradition Channel:
SupplieràManufactureràWholesaleràRetaileràBuyer
Disintermediation:
SupplieràManufactureràààààààààààBuyer
Advantages:
With regard to the manufacturer,
disintermediation allows to reduce the cost of servicing customers directly as the consumers are knowledgeable in terms of pricing. Therefore, high level of service is unnecessary for manufacturers to compete with others.
Besides, by disintermediation, manufacturers can increase the profit margin. It is because the middle-party is removed, and all the profit comes to manufacturer. Moreover, the lower cost of servicing help to boost the profit margin.
Finally, the manufacturers can response to the market more rapidly. Because of the removal of middle-man, the time and cost to communicate in the supply chain are reduced. Hence, the manufacturers can collect the information in a shorter period and to react more quickly.
About the buyer,
First, disintermediation leads to a market with higher transparency. The customersare able to get a clear picture about the prices between the providers. Thus, they are empowered with the information. With the less middle-man in the supply chain, less additional costs are along the chain. The price information is also less complex.
As mention in the last paragraph, customers are empowered with the information. Therefore, they are able to access to more product choices. The purchasing power of them is enhanced.
Disadvantages:
First of all, disintermediation remove the middle part and thus to reduce the demand of sales department. The salesmen are no longer required as the customers can reach the products from manufacturers directly.
Secondly, both manufacturers face the problems of information overload. For the manufacturers, as the retailers, wholesalers etc. are eliminated after intermediation, they have to collect the information from all the customers. This may increase the operational costs to deal with the data collected.
For the companies with low-technology, as they are running business in a traditional way, they are unable to fully utilize the Internet. As a result, their profit margin will be reduced and hence they will exit the market.
Real Life Example
Dell applied the ‘configure-to-order’ direct-to –consumer sales model in the PC industry. By this model, the distribution intermediaries are removed and the customers are enabled to circumvent retail outlets by ordering custom-build machines over the telephone or the Internet. Dell would manufacture only what was ordered, using the latest hardware, and never waste finances on owning depreciating inventory in retail outlets, a business model that lead to its huge growth in the 1990s and 2000s and to become the world’s largest PC manufacturer for several years.
Hence, the costs of depreciating inventory can be decreased. Besides, Dell can cut out banks and directly investing in the same money markets from the banks.
OEM (Original Equipment Manufacturing) VS OBM (Original Brand Manufacturing)
OEM is referring to a manufacturer of equipment that may be marketed by another manufacturer and viewed as a retailer under that purchasing company's brand name. While an OEM is similar to a value-added reseller, it refers specifically to the act of a company rebranding a product to its own name and offering its own warranty, support and licensing of the product. Also, they are the customizers of the product.
For example, if Apple purchases optical drives from Toshiba to put in its computers, Apple is the OEM, and Toshiba would classify the transaction as an "OEM sale".
The OEM version of the product is sold, without the retail packaging and extra benefits at a cheaper cost to OEM partners and system integrators. Usually the product is sold in a much larger volume than an individual consumer would purchase. The OEM may purchase OEM product in bulk for mass-production of pre-built systems. This OEM business model is used by systems integrators, an individual or company that specializes in building complete computer systems by putting together components from different vendors. In most cases, the systems integrator provides the warranty on the OEM product when sold to a customer.
OBM refers to the original own brand manufacturing. The original manufacturing not only design and manufacture their own products, but also at the same time to hang up their own trademark, including marketing and sales. This is usually a evolution of OEM factory own brand in transition considered as a good use of manufacturing technology and logistics resources, and that by learning to access and market experience of OEM customers in order to improve the company's profit.
For example, Samsung made the jump from OEM to OBM in 2004. It became more profitable and independent. Shifting from OEM to OBM is not as simple as proclaiming a strategy. It requires a substantial commitment of time and resources to establish channel relationships and share-of-mind in target markets.
The key success factors include: Change corporate thinking, Think long-term, Understanding branding and targeting and segmentation, etc.
The advantages of going from no name to brand name range from greater profitability to greater national visibility. Inevitably, more and more Asian OEMs will make the move, despite the difficulty, expense and risk.
Global Sourcing Network
Introduction
Global sourcing is the practice of sourcing from the global market for goods and services across geopolitical boundaries. Global sourcing entails identifying, evaluating, negotiating and configuring supply across multiple geographies to reduce costs, maximize performance and mitigate risks and it can achieves economic of scale through standardization and benchmarking.
There is no disputing that global sourcing is on the rise. The U.S. alone imported more than $1.3 trillion worth of goods and services in 2001 and most companies report a 10% to 35% cost savings by sourcing from low-cost-country suppliers.
Global sourcing factors that must be understood and balanced can be segmented into six categories:
l Material costs
l Transportation costs
l Inventory carrying costs
l Cross-border taxes, tariffs, and duty costs
l Supply and operational performance
l Supply and operational risks
Real life Example
It is a known fact that global retailers like Wal-Mart and Tesco always do global sourcing. At present, nearly 90 per cent of Wal-Mart's procurement is from China and Wal-Mart had recently come to India to shop for leather products and booked initial orders worth around $100 million with five Indian companies.
However, now it’s the turn of Indian retail chains, who’re exploring ways to step up global sourcing of merchandise for shoring up margins and offering the best price to consumers. These days, the likes of Big Bazaar, Ebony, Shoppers’ Stop, Westside or even Subhiksha are looking to source merchandise at the lowest rates globally.
Future Group’s Pantaloon Retail India has just set up global sourcing offices in Hong Kong and Mainland China – the first overseas sourcing operation by any domestic retail chain.
Advantages
Apart from low-cost, it is noticeable that there are still more advantages including learning how to do business in a potential market, developing alternate supplier or vendor sources to stimulate competition, and increasing total supply capacity.
Disadvantages
Some key drawbacks of global sourcing are seen which are hidden costs associated with different cultures and time zones, exposure to financial and political risks in countries with emerging economies, increased risk of the loss of intellectual property, and increased monitoring costs relative to domestic supply.
Electronic Data Interchange (EDI) system
Electronic data interchange (EDI) is a method for transferring data between different computer systems or computer network. It provides internal or external “conversation” between two entities. In the supply chain system, "EDI" help to constitute the entire electronic data interchange paradigm, including the transmission, message flow, document format, and software used to interpret the documents without human intervention. The sender and recipient can also decide the methodology use in EDI, including modem (asynchronous and synchronous), FTP, e-mail, HTTP, AS1, AS2.
While using EDI, company and the other entities can conserve or access external and internal information data freely. EDI is a platform for different parties to transfer data from one to another’s computer system or network.
In the reality, big companies usually use EDI for e-commerce purposes, such as sending orders to warehouses or tracking their order. The reason for those big companies to use EDI instead of traditional e-mail is because organizations could also replace bills of lading and even cheques with appropriate EDI messages.
Real Life Example:
In the early 1990s, TAL used EDI to process their trade documents with its customers through electronic documents instead of the traditional paper documents. While using the EDI system, TAL can share the trading information with its business partner and customers. TAL used EDI with its supplier which canmake speed up their business process. The major benefit is cycle time is hence reduced due to the use of EDI.
Advantages:
ü Replacing human interaction -- As EDI is electronic documents, some human interactions, likes paper documents, meeting or faxes, can be avoided so as to increase the efficiency of information flowing.
Bette data storing -- While the paper document can be replaced by the electronic one and avoid manual entry of data and parties do not have to find a specific place to store the physical document.
Reducing error -- As human entry have a higher chance of error, using an electronic storage can largely reduce the chance of error.
Reducing cycle time -- While EDI is electronic transfer of data, parties can access the information once they have a computer and the speed of data interchange is much faster than traditional paper documents.
Disadvantages:
´ High installation cost -- The set up cost of EDI is veryhigh and not much company can afford it. Other than the set-up cost, company also need to spend some time on training the employee to familiarize the system and the implementation is time-consuming.
´ Need of re-organizing the company -- Some existing paper document, information and business processes of the company may not be suitable for adopting EDI. The company may need to re-organize the company which is very risky for it.
Enterprise Resource Planning (ERP) system
Enterprise Resource Planning is a way to integrate the data and processes of a company's departments and functions into one single system. There are common functional areas covered in an ERP such as manufacturing, supply chain management, project management, customer relationship management, human resources, financial accounting etc. The major ERP vendors are SAP, Oracle, SSA Global and Microsoft. The major purpose is to provide one central system for all information that is shared by all the various departments in order to smooth the flow of information across the business functions and help organizations for decision making.
Benefit
Benefit
Enhanced Efficiency and Productivity. ERP systems improve the efficiency of the whole organization by smoothly integrating its different business funcion. ERP can lead to a unified working of different divisions of an organization, instead of every single system needed to be compatible with each other.
Less duplication and time wasting. This centralization of data in single system eliminates the problem of synchronizing the changes made by different departments and people which allow the different parts of an organization to become more cohesive. If data is entered in one aspect such as receiving, it automatically updates other related aspects such as accounts payable and inventory.Since, the data updated at real time, the likelihood of duplicate is minimized.
Less duplication and time wasting. This centralization of data in single system eliminates the problem of synchronizing the changes made by different departments and people which allow the different parts of an organization to become more cohesive. If data is entered in one aspect such as receiving, it automatically updates other related aspects such as accounts payable and inventory.Since, the data updated at real time, the likelihood of duplicate is minimized.
Enhanced strategic planning. Since ERP system intergrates data and process from different aspects of an organization, it enables proper business communication within a organization. As ERP provides support to upper level management with critical and real-time decision making information, it help managment make managerial choices with comprehensive enterprise view.
Real Life Example
Real Life Example
Implementing ERP system has allowed Double H Plastics to introduce automation into its shop floor processes and integrate relevant data in order to save approximately $100,000 per year by reducing employee labor time by 30 percent, increase warehouse efficiency in product movement by 20 percent, schedule and track production data in real time and eliminate duplicate pulls.
