A reason to put things off

While product cycles are becoming shorter, customer demands for individual solutions are rising. This trend calls for strategies that enable production and logistics processes to be efficiently planned and arranged both in terms of uncertain forecasts about demand and customer orders. With contrasting strategies of postponement and speculation, the optimal order-penetration point can be selected - that is, the time when a product can be individualized for the end customer.

Order penetration point in the logistics channel

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	Order penetration point 5: Purchased parts The purchase of raw material begins only after the customer order arrives. No forecast-based activities are undertaken. This form of postponement is appropriate for companies with products that contain high-quality components and whose sales fluctuate very strongly, e.g., for special replacement parts that are not stored.
	Order penetration point 4: Pre-assembly Production starts only when a customer order is received. This form of delay is appropriate for companies that have an extensive number of product varieties. DELL employs this form of postponement strategy: The computer is assembled only after the customer order arrives.
	Order penetration point 3: Final assembly Activities up to final assembly rely on forecasts. Final assembly of a product is begun only after a customer order is received. This form of postponement is appropriate for products with a large amount of readily available materials and for companies with products that take up less space in their unassembled state.
	Order penetration point 2: Finished products in the central warehouse Production up until the central warehouse relies on forecasts. Only the delivery to a distribution warehouse is based on customer orders. Central warehousing up until the submission of a customer order is appropriate for companies with a large number of distribution warehouses, e.g., for producers of replacement parts used by the automotive industry or consumer electronics.
	Order penetration point 1: Distribution warehouse Production and delivery rely on forecasts. Only the activities of the distribution warehouse are based on customer orders. For instance, the packaging and labeling are done only after the customer order arrives. This form of postponement is appropriate for companies that sell a product under various brand names or in various packaging sizes. One example from the distribution warehouse is the packaging of finished products in various boxes, e.g., that use different languages.

Order penetration points in the logistics channel
Source: Logistikmanagement | Pfohl 2004

Fundamental decisions related to forecast and customer-order dependency

The rise of increasingly integrated economic regions is resulting in reduced time-related restrictions. At the same time, customers are increasingly requesting individual solutions to their problems. In addition, product life cycles tend to be shorter. For this reason, high inventories are not economically acceptable. Furthermore, fluctuations in demand are increasing in many markets, and these fluctuations will lead to high inventories in traditional production and logistics concepts.
As a result, a need has arisen for strategies that enable production and logistics processes to be efficiently planned and scheduled for both uncertain forecasts of demand and firm customer orders. The delay of a decision - or postponement - and a conjecture-based decision in the logistics channel Logistics channel - or speculation - are two strategies that can fulfill these requirements [1].

To postpone or speculate

The saying goes like this: “Never put off until tomorrow what you can do today.” Logistics has rewritten it: “Put off until tomorrow what you can - because you will have more information then.” This attitude forms the heart of the postponement strategy. In this strategy, a product located at the start of the logistics channel Logistics channel is held in a neutral state as long as possible without being assigned to a customer or submarket. The postponement of the decision helps create an improved information situation as a result of the shortened forecast period. Speculation, on the other hand, means that customer demand for a product is forecast and that the product will be delivered to the end of the logistics channel at an early point in time - e.g., distribution warehouse [1].

The optimal order-penetration point

The important interface of the postponement decision is between production based on forecasts and production based on customer orders. It is called the order-penetration point and freezing point. In the order-penetration point, the phase where numerous product varieties are created should overlap with the point where customer orders start to determine the logistics channel Logistics channel . At this point, the variations can then be assembled and distributed without any warehousing and obsolescence risk.
Until reaching the order-penetration point, the flow of goods is driven by forecasts - this is called the push principle Push principle . Starting at the order-penetration point, the flow of goods is activated by customer orders - this is called the pull principle Pull principle . In view of warehousing costs, the order-penetration point is located at a level with the lowest possible value added. In principle, there are various points where the order-penetration point can be set or a product can be individualized for the end customer [1].

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