This section provides further discussion of the variables that are assumed to influence the degree of formalization of the ordering process. We first elaborate the characteristics of demand in Section 4.3.1 and then discuss the characteristics of the production system in Section 4.3.2. In Section 4.3.3 we address other influencing variables.
4.3.1 Demand characteristics
Demand characteristics that may influence the complexity of the ordering process are predictability, heterogeneity, and degree of customization.
Predictability of demand
Predictability of demand is defined as the feasibility of forecasting future demand (Slack, Chambers, and Johnston 2004). With regard to the ordering process in manufacturing companies, predictability of demand is associated with an indication of incoming orders, meaning that forecasting future demand must provide the company with information about expected orders. Manufacturing companies base their
predictions on their history, understanding of the market, and experience. In practice, actual demand often does not match expectations, resulting in, for example, out-of-stock situations or situations with unbalanced capacities (Slack, Chambers, and Johnston 2004).
Predictability of demand is linked to the type of relationships companies have with their customers (Bertrand, Wortmann, and Wijngaard 1998). Uncertainty is lower in companies with regular customers than it is in companies with incidental (once-only) customers. With regular customers, it is also possible for companies to define long-term contracts, which allow the future demands of these customers to be predicted to some extent. Long-term contracts often take the form of blanket orders. A blanket order is defined as an agreement between a customer and a supplier that specifies e.g. price, minimum quantity, and maximum quantity ordered over a defined period of time (Hill 2003). The specific quantity and due dates are defined as “advance orders” that are placed against the blanket order (Striekwold, Van Leeuwenstijn, and Tolk 1989). Heterogeneity of demand
When demand is heterogeneous, every single order may be different from another with respect to any combination of product specifications, volume, and timing of the order. Heterogeneity of demand can be associated with variety in product range, number and heterogeneity of customers, and the heterogeneity of multiple order lines within a single order (Bertrand, Wortmann, and Wijngaard 1990; Brevé 1988).
The variety of the product range a company offers is the first indicator of heterogeneity of demand. When there is little variety in product range, a company often offers a fixed range of products and the production system can be structured along this fixed range. For the ordering process, this means that customer orders are more or less regular with respect to the products ordered. It may therefore be easier to set up long- term contracts with customers, as discussed above. When a company offers a broad product range, however, the heterogeneity of demand is by definition much larger. The most likely result is a complex ordering process, as every order can differ with regard to product specifications, volume, or the timing of the order. It is difficult to anticipate such variety with standardized rules for order processing.
The number of customers is associated with the heterogeneity of demand, as many different customers can result in many different ways of ordering. The heterogeneity of customers refers especially to their relative importance to the company (Bertrand, Wortmann, and Wijngaard 1998; Konijnendijk 1992; Brevé 1988). The importance of customers is often related to the value they attach to the company, as measured by the volume of sales realized and the potential for future sales. If customers are not equally important to a company, this may influence the order processing, as customers may be treated differentially. As a result, the complexity of the ordering process is likely to increase.
Heterogeneity within orders refers to the situation in which one order contains multiple, dissimilar order lines. With regard to the ordering process, it is common to see combinations of standard and customer-specific products ordered at the same time by one customer. Standard products can generally be treated according to standardized rules and procedures, while customer-specific products often require non-standard sets of logistical decisions to be made. A combination of dissimilar order lines is likely to increase the complexity of the ordering process.
Customization of demand
Customization of demand is a characteristic that can be divided into four categories (Ruffini 1999).
1) Standard products: product specifications are known in advance, and customers can order from a catalogue.
2) Standard products with customer-specific variation: standard products with one variable component or element (e.g., a non-standard size or color).
3) Customer-specific variants: products composed for the customer of standard components or sub-assemblies.
4) Customer-specific products: products made completely according to the needs or wishes of the customer. (It should be noted that a customer-specific product might also contain some standard components or modules.)
When demand is more customer-specific, customers have a stronger influence on production, and the ordering process will therefore be more complex.
Table 4.1 presents an overview of the operationalizations of demand characteristics.
Table 4.1 Operationalizations of demand characteristics
Demand
characteristics Operationalizations
Predictability
Use of forecasts: yes/no only for some products or some customers Horizon within forecasts: year, month, week, day
Proportion regular/incidental customers
Proportion blanket orders, repeat orders, incidental orders
Heterogeneity
Variety of product range: number of PMC’s or product groups Number of customers
Proportion regular/incidental customers
Customer homogeneity: classification of customers Average number of order lines per order
Customization Proportion standard – customer-specific
4.3.2 Characteristics of the production system
Characteristics of the production system that are assumed to influence the complexity of the ordering process include the multiplicity, uncertainty, and flexibility of the production system.
Multiplicity of the production system
Multiplicity of the production system refers to the variety of routings, intensity of operations, composition of the product, and interchangeability of production lines (Ruffini 1999; Bertrand, Wortmann, and Wijngaard 1998).
The first indicator used to define the multiplicity of the production system is the variety of routings, ranging from fixed to highly variable (Bertrand, Wortmann, and Wijngaard 1998). When the routings are highly variable, the scheduling of orders will be much more complex than when routings are fixed.
Intensity of operations refers to how much effort is needed to produce a product with respect to number of operations and operating time needed. When many operations are necessary to produce a product, and when much operating time is needed, the scheduling of orders will be more complex than when few operations and little operating time is needed.
Another indicator of the multiplicity of the production system is the composition (or complexity) of the product, as operationalized by the number of components necessary for the end product: the more complex the product, the more components are needed (Ruffini 1999).
The last indicator of the multiplicity of a production system is the interchangeability of production lines. Interchangeability is especially interesting with regard to the number of options available for producing the products that have been ordered. When various production lines can be used to produce a product, the scheduling of orders for these products often requires more complex planning rules. At the same time, it provides a certain degree of flexibility in scheduling.
Uncertainty of the production system
The uncertainty of the production system is closely related to the predictability of the availability of resources (machines and men) and the availability of materials. With respect to the ordering process, it is important to ensure that the resources and materials needed to deliver a product that has been ordered or to produce the order are available at the right time to deliver within the required delivery time.
The availability of resources can be uncertain due to unforeseen problems caused by machine breakdowns, constraints on the employee availability (e.g., illness or vacation), or other disturbances. The availability of materials is further influenced by the reliability of delivery times for materials and components and the reliability of the quality of materials and components (Shtub 1999; Bertrand, Wortmann, and Wijngaard 1990).
Flexibility of the production system
According to Upton (1998), flexibility is “the ability of a process to change or react with little penalty in time, cost or effort of performance” (p.17). When a production system is flexible, there are more production options with which to address uncertain demand or uncertainties within the production system. Production system flexibility is operationalized as the multifunctionality of employees, ease of machine changeover (short set-up times), interchangeability of production lines, commonality of components, short lead times for materials and components, over-capacity, and varying capacity (as through overtime and outsourcing, for example) (Bertrand, Wortmann, and Wijngaard 1998).
Flexibility should be used effectively. According to Bertrand et al. (1990), the use of flexibility requires adequate information processing and an adequate decision-making process. On the one hand, flexibility should be used at the operational level where the disruptions occur, but coordination must also be more central when decisions concern various products and resources. The ordering process requires that the actors involved in accepting orders and promising delivery times have insight into the flexibility available within the production system in order to be able to use it effectively.
Table 4.2 presents an overview of the operationalizations for characteristics of the production system.
Table 4.2 Operationalizations for characteristics of the production system
Characteristics
production Operationalizations
Multiplicity
Variety of routings: fixed – highly variable
Intensity of operations: number of operations required for each product / operating time / batch sizes
Product composition: simple – complex
Interchangeability of production lines: yes/no/depends
Uncertainty
Availability of machines: number of machine breakdowns Availability of materials:
- delivery times for materials
- reliability of suppliers (timing and quality) - single sourcing – multiple sourcing
Flexibility
Proportion of multi-functional employees Length of set-up times: minutes or hours Commonality of materials: low – high Lead time for materials: days /weeks Over capacity (utilization rate)
Use of outsourcing: yes/ no/ incidental (when necessary) Working overtime: yes/ no/ how often/ when
4.3.3 Other influencing variables
Besides the characteristics of demand and the production system there may be other variables influencing the formalization of the ordering process. In this section, we address one factor that we assume to be of importance in analyzing formalization of the ordering process, namely the availability of an order processing information system.
In Chapter 1, we argued that the use of IT applications changes the way in which orders are processed through a company and, as a result, also influences the structuring of the ordering process. In general, the use of IT increases the speed with which information can be processed and improves its accessibility (Shtub 1999; Davenport and Short 1990). More specifically, the use of an automated order processing system often requires information about orders to be processed in a prescribed manner. The information system prescribes the order in which information must be entered to process the order further, and it often also prescribes the sequence in which information- processing activities are to be performed. Many manufacturing companies currently use some kind of Enterprise Resource Planning (ERP) system to improve the integration of processes related to order processing. This integration primarily concerns the availability of information necessary to support decisions within the ordering process. As a result, rules for possible product configurations (as specified in bills of material), rules on routings, maximum capacity availability, stock levels, and planning must be defined in order for the ERP system to work as an integrated system. The use of an ERP system is also likely to improve the availability of information necessary to process orders at the points in the ordering process where the information is needed. There is less need for spur-of-the-moment information exchange and coordination (Megens 1999). The availability of order processing information systems is therefore relevant for this study.
As mentioned, there may be other variables that influence the formalization of the ordering process. When such variables come up during the data gathering and analysis, they will be discussed in the within-case analysis in Chapter 7.
4.4
Complexity of the ordering process
This study examines the complexity of the ordering process in relation to formalization of the ordering process. In Chapter 1, we introduced interdependency and ambiguity as characteristics of complexity in the ordering process. In Chapter 3, we identified task routinization as a relevant characteristic related to the levels of complexity and formalization of the ordering process. For this reason, we characterize the complexity of the ordering process on the basis of task routinization, interdependency among tasks, and ambiguity (Albino, Pontrandolfo, and Scozzi 2002; Tushman and Nadler 1978; Galbraith 1973; Thompson 1967).
Task routinization
Task characteristics that are relevant to defining the complexity of the ordering process involve the extent to which tasks are routinized. The basic characteristics are task variety and task analyzability (Daft 1998). Task variety refers to the frequency of unexpected and new events that occur in the process. Task analyzability refers to the degree to which the work can be reduced to standard steps. When task analyzability is high, problem solution may involve the use of standard procedures or formalized technical knowledge. Work that cannot be analyzed is characterized by problem solutions based on accumulated experience, intuition, and judgment (Daft 1998). Routine tasks are low in variety and high in analyzability, while non-routine tasks are high in variety and low in analyzability. Routine tasks are not complex and can be planned in advance. Because of the high analyzability of the tasks, they can be described in advance by detailed rules and procedures (Megens 1999). Non-routine tasks, in contrast, cannot be preplanned and are associated with greater uncertainty (Tushman and Nadler 1978).
Interdependency
Interdependency can be defined as the degree to which a department, subunit, or actor is dependent on other departments, subunits, or actors in order to perform its task effectively (Tushman and Nadler 1978). With respect to the ordering process, we consider Sales, Planning and Production as subunits. Thompson (Thompson 1967) identifies different degrees of task interdependence: pooled, sequential, and reciprocal interdependence. Pooled interdependence is the least complex form and refers to different units in the same organization, each of which makes a discrete contribution to the whole organization, with each unit supported by the whole organization. In sequential interdependence, the output of one unit becomes the input for another unit. The second unit cannot complete its task without input from the first unit. The third and highest degree of interdependence is reciprocal interdependence, in which two units are mutually dependent on each other, as neither unit can complete its task without input from the other. The interdependency between the tasks in the ordering process will be fairly high in situations with many different orders that call for different trade-offs in coordinating demand and production.
According to Tushman and Nadler (1978), “(…) theory and research suggest that the more complex the inter-unit task interdependence, the greater the task associated uncertainty which must be dealt with by respective units” (p. 616). As reciprocal interdependence is the most complex form, task uncertainty will be highest in these situations.
Ambiguity
Ambiguity is a form of uncertainty and refers to the existence of several perceptions of a situation (De Leeuw 2000). According to Albino et al. (2002), ambiguity refers to the
existence of multiple and conflicting interpretations of task-related information. According to De Leeuw (2000), ambiguity is associated with situations in which actors experience:
- conflicting intentions: goals are unclear and often related to different interests of the various actors involved
- ambiguous relationships between measures or regulations and effects
- lack of clarity about the system of actors: who is actually involved (De Leeuw 2000, p.194).
Ambiguity leads to confusion and lack of understanding (Albino, Pontrandolfo, and Scozzi 2002). In ambiguous situations, it is difficult to make predictions, as it is not possible to make consistent or stable models (De Leeuw 2000). Galbraith (Galbraith 1973) points to the difficulty of formalizing ambiguous information and activities. “To the extent that activities are ambiguous and require qualitative rather than quantitative measures, they are difficult to formalize. Formalization is therefore limited to the type of uncertainty it can handle. Uncertainty in which the organization is uncertain about what the variables are and how they are related do not lend themselves to formal languages” (Galbraith 1973 p. 34).
With respect to the ordering process, we draw special attention to the ambiguity in goals and interests of Sales and Production. In general, Sales will be highly motivated to accept as many orders as possible and to accept delivery times that are sometimes difficult to realize. On the other hand, Production will, in general, make every effort to optimize the utilization of capacity. When Sales and Production do not agree on the goals they pursue, they will have different perceptions of how to handle specific customer orders, thus giving rise to difficulties in defining rules for order handling. Table 4.3 presents an overview of the operationalizations for characteristics of complexity of the ordering process.
Table 4.3 Operationalizations for complexity of the ordering process
Complexity characteristics Operationalization
Task routine
Task variety: number of unexpected actions
Task analyzability: task divided in defined steps: yes/ no/ depends
Interdependence Pooled – sequential – reciprocal
Information needed to perform the task
Ambiguity Goals and performance objectives pursued