Welcome to Process Orientation & Lead Time. Now, this video is gonna cover material from chapter 11, mostly from chapter 11, but also some from chapter seven. So in reading the book, items here could be found in either chapter. All right, let’s begin. The first thing we’re going to talk about is the Process and Firm Orientation. And a big part of this is where do you locate the Customer Order Decoupling Point? And this is where inventory is stored to allow organizations to operate independently. And it’s where the bulk of inventory store. You may have a little bit of inventory everywhere, but the bulk of inventory is going to be stored in different locations, depending on which orientation you use. This gets back to those strategic fit we’ve talked about previously. This Customer Ordered Decoupling point has to fit with your orientation, your overall firm strategy.
Here’s a graphic that shows the different orientations. You see, make to stock, assemble to order, make, to order, and engineered to order. And you see where your decoupling points are. These triangles right here are the Customer Order Decoupling Points. So you see that an engineered to order their inventory point is right up here, basically at the source. Nothing has made yet because everything’s still needs to be designed. The opposite end of the spectrum make to stock, everything’s made, it’s just waiting on delivery. So we’ll talk a little bit about the lead times involved here and the costs. In general, customer lead time is increasing as the inventory point goes to the left, but then the cost of inventory is increasing as you go to the right. And so the key is finding the right balance for your firm, and it needs to be, as I mentioned, the best strategic fit for your marketing and overall goals. Let’s look at the first one, Engineered to Order.
This is when you work with the customer to design and then make the product. And that’s the key aspect here, design. This is the only one of these that we’ll talk about design. So Engineered to Order is the only one where you design the product with the customer. They’ll place their order, and then you start doing the design. This is custom homes, ships setting up a factory, specialty tools. It has a very long lead time because the design time is part of this lead time. Picture you see here, beautiful mountain home custom-designed to fit into this landscape. So it took a long time to design this. Make to Order notice, notice now there’s no more design. The product is already designed, but with Make to Order, we’re gonna get some level of customization. I always feel the best example of this is an airplane.
Boeing, Airbus, any airplane manufacturer will let you customize what’s inside that plane, but the structure of the plane, the engines, how it flies that set, they spent billions 10, 15, $20 billion developing that airplane. Did he get approved for flight? They’ll adjust the paint. They’ll put different seats in. They’ll have all kinds of different interior options for you, but the exterior, the fuselage, the engines, how it flies, that’s all gonna stay the same. You can’t change it. The second picture, there is tract homes in a development where you have to pick one of maybe 10 designs. And so they’ll say, “Okay, you can’t change the design, but you can change the flooring, the paint colors, the countertops, the inside pieces, the colors, the things you touch and see that you can customize to what you need.” But the design of the house is going to stay the same.
Now the book goes into a lot of detail about fast food processes and how they relate to it. Most of these fast food processes relate to the late 90s. And this is when I was an undergrad, and I eat a lot of fast food then. So maybe they still resonate with me. But since they’re in the book, I keep discussing them to make sure we relate everything to these different orientations. So Wendy’s is a Make to Order process. This is a process where the raw materials are upfront. And then once the customer places an order, you cook the burger, then you symbol it, and then you deliver it. Now, I didn’t know this, but according to the book, if the burger patty stays on the grill too long, it’ll eventually go into the chili. And I’ve had Wendy’s Chili. It’s pretty good, but I never knew that’s where the meat came from.
Now Assemble to Order is a little bit different. Again, that’s further along the continuum. So the inventory is a little bit closer to the customer here. This is where you get a lot of preassembled modules. And so now the customer has a little bit less choice. They can only choose the final sort of customization. And that’s what we mean here when we say final assembly postponed until the customer orders. The best example of this is paint. If you go into a Lowe’s or Home Depot, you might only have five or six different types of paint, and it’s all white in the store. You have eggshell, flat, satin finish, but then you can choose any one of a million colors. So they take that can of eggshell paint, and they’ll put in two drops of this, four drops of that, one drop of this to create your custom color.
So the cans of paint are already made, but you can put any sort of dyes in to make it any color you want. And this is a great example of an Assemble to Order a product. On the fast-food front, that’s McDonald’s current process and Assembled to Order fast food. So, in this case, they have the raw materials. Then they cook the burgers upfront before anyone orders. They put those into this work in process buffer. So the burgers are waiting there and some type of warmer. And like the first bullet point says, they believe they can hold the hamburgers there for up to 30 minutes and keep them hot. Then once a customer places an order, the burger gets assembled and delivered to the customer. And again, McDonald’s is all about speed. So their goal is after order buns are toasted in 11 seconds and assembled and served in 15 seconds.
Now Make to Stock. This is serving customers from finished goods inventory. This is basically anything you can pick up in a store. Things you buy at Target, Walmart, the grocery store, things you go in and pick up and take home immediately. These would be make to stock items. Very short lead times because it’s just the time required to check out of the store. It’s yours. These items are made and held in inventory before a customer ever orders. So they’re doing all this to a forecast. That’s why we studied forecasting so early in this course. It’s very important to a lot of different things we’re gonna look at. And this was McDonald’s old process. Believe it or not, they have the raw material. They cooked the burgers. Then they assembled the burgers. And then the finished burgers sat in their wrappers in this buffer, waiting for someone to order. When they order, they’d hand them the burger, and they’d go off and be happy.
Now in today’s world, it seems a little gross being sarcastic here with my young. On the left in white, you see the hamburgers. On the right, in yellow, you see the cheeseburgers. Those were waiting there. If someone ordered one of the other, they would be handed to them. Now during lunchtime, this might be an okay process. Everything’s probably fairly fresh. However, if it was midday and that cheeseburger had been sitting in that wrapper for 30 minutes, it’s probably not something you or I would want to eat. This process is sort of gross, as it seems to you and I today is what made McDonald’s the powerhouse it was because all they offered was hamburgers and cheeseburgers, and they were super fast. And people really liked that option. But once they started getting a lot more options to order, things started to sit around longer.
This process sort of got worse and worse. And a lot of other restaurants came in with better processes that had the make to order assembled order ideas that produced better tasting food. Now a Hybrid Process is the book describes his Burger Kings. You’re going to have the raw material. The burgers are going to be cooked, and they’re going to use a broiler to do that. And then they’re gonna be stored again in a warming device to keep the burger patty hot. Now some of those are gonna wait. They’re gonna wait for customer order. The burger will be assembled and then delivered. There will be some that might get made ahead of time. So again, if you’re looking at the drive-through and you see there’s 10 cars there, you might say, you know what? We have a lot of burger patties here. I’m gonna go ahead and make three or four standard sandwiches putting this finished goods inventory because I’m forecasting that one of those cars is gonna order it, and we can hand it out. Now, another thing to note about Burger King is this idea of pacing. The broiler uses pacing to cook a burger evenly in 90 seconds. This is the same thing that assembly lines use. The assembly line keeps moving so that each station gets completed in 30 seconds, 60 seconds. In the case of the broiler, it’s a moving metal belt that takes exactly 90 seconds to go through the broiler oven. And when it comes out, the burger is cooked. And this is Hybrid: Make to Stock assembled order. A book defines a hybrid as those two combinations, but in truth, it could be any combination. Within an order to delivery lead time, there could be many different components, a design component, the actual ordering component, procurement production, and delivery. And depending on what orientation you are, will depend how many of those lead times apply to you.
So Engineered to Order is gonna have the most, Make the Stock is gonna have the least. Another point I wanna make, in general, Lead Time reductions are a good thing. If you can get something in one day, that’s typically better than two days. Or two days is better than four days. However, consistently times are generally more important to customers, especially business customers. Now for you and I, we probably don’t care if an Amazon delivery gets to our house a day early. However, if we schedule the cable delivery person to come on Monday afternoon, we really want them to come Monday afternoon. We don’t want them to come Sunday ’cause we might not be there.
And that’s the same idea with businesses. If you scheduled a large shipment of new inventory to arrive next week, you probably don’t want it to arrive this week. You might be planning a big sale this weekend, trying to clear out your inventory to make the space for this new delivery to arrive. If it arrives a week early, you might not have any space for it, and it might really disrupt your operations. So that’s why consistently times are especially important. And this is something I’ve seen in my industry experience. This is a graph that’s not in your book, but I really like how it illustrates these different lead times. So would you see up here, Make to Stock items that are stocked locally. This would be things at target or the grocery store where you’re gonna go in and get those items. The only lead time here is just the orderly time, which is essentially, in this case, the checkout process.
Now there could be Make the Stock items that are stocked more centrally. This would be Amazon. So they’re in a warehouse somewhere. You have the order time, the time to place the order, the time for it to come up on the Amazon screens. And then there’s also the delivery time. Typically two days in the case of Amazon. For Assemble to Order items, you’re gonna have the order lead time, the delivery time, but also the assembly will be included. Dell computers and burger King would be examples of this. Make to Order items that come from stock materials include the assembly and fabrication. So all of production lead time, custom jewelry. This could be the Wendy’s example we talked about. When the materials are not stock, and you have to purchase those materials, now you add in this procurement lead time, that could be your house or custom furniture. And finally, at the bottom Engineered to Order items, you’re gonna have to have the order time, the delivery time, the production time, the procurement time, and this design lead time. So that’s why the Engineer’s to Order items take a lot longer. Talking about a space shuttle or a custom home. Anything is custom designed for that customer. And that’s why ETO items have the longest lead time.