In studying the effects of formalization of the ordering process we are ultimately interested in the contribution made by the ordering process to responsiveness and efficiency. In Chapter 3, we discussed some of the advantages and disadvantages of formalization. Advantages primarily relate to efficiency, but there are also indications that formalization may help to clarify priorities, avoid ambiguity, and improve flexibility. At the same time, high levels of formalization are associated with rigidity and the obstruction of innovation and change. The use of formalization may thus influence a company’s performance with regard to responsiveness and the efficiency of the production system.
In coordinating demand and production, the ordering process has a goal of contributing to responsiveness and to the efficiency of the production system. We therefore elaborate both responsiveness and the efficiency of the production system. In addition, we examine the efficiency of order processing.
Responsiveness
Responsiveness is defined as the ability of a company to fulfill customer requests and to respond to changing customer wishes (Kritchanchai and MacCarthy 1999). There are thus two dimensions of responsiveness: responding to changes in customer requirements and fulfilling customer wishes. Responding to changing customer requirements is often associated with the ability to:
- introduce new products
- provide a wide range of products - change the timing of the delivery, or
- change the level of output of the operation (Slack, Chambers, and Johnston 2004; Chang et al. 2003; Matson and McFarlane 1999).
Fulfilling customer wishes may also relate to customer requirements concerning speed and delivery reliability.
Efficiency of the production system
As mentioned above, we are also interested in the contribution that the ordering process makes to the efficiency of the production system. First, we note that this relationship is difficult to measure, as the ordering process has no direct influence on the efficiency of the production system. We argue that the influence of the ordering process on the efficiency of the production system is related to the coordination of demand and production, and more specifically to trade-off decisions between customer-responsive action and cost-conscious action made within the ordering process. Cost-conscious actions are often related to decisions regarding capacity utilization and stock levels. To study the effects of formalization of the ordering process on the efficiency of the production system, we therefore use capacity utilization and stock levels as indicators of
the efficiency of the production system. These indicators will be used to operationalize the adequacy of coordinating demand and production within the ordering process.
The first indicator linked to coordinating demand and production is capacity utilization. From an efficiency point of view, manufacturing companies often focus on high capacity utilization, as reflected in large batch production. With regard to responsiveness, however, large batches are often not desirable, as they may hinder the flexible response to changing customer wishes. We therefore argue that capacity utilization involves a complex trade-off decision in the ordering process. Capacity utilization can be operationalized by measuring the proportion of the theoretical maximum capacity that is used to produce value-added goods (Slack, Chambers, and Johnston 2004).
The second indicator related to coordinating demand and production is the stock level and costs associated with maintaining stock. Manufacturing companies often strive for stock levels that are high enough to account for unexpected customer demand. At the same time, companies are pressured to reduce stock levels for financial reasons. We therefore argue that stock levels and the associated inventory costs are indirectly influenced by trade-off decisions made within the ordering process. In studying the stock levels of each company, we distinguish between stocks of materials, semi-finished products (e.g., modules), and finished products (end items). To measure stock levels in such a way that allows us to compare the outcomes of different companies, we focus on measuring stock levels in comparison to target stock levels.
Efficiency of order processing
Because coordination of demand and production takes place within the ordering process, we also study the efficiency of order processing as a relevant indicator of the adequacy of coordinating demand and production. In judging the efficiency of order processing, we will use two main indicators: order processing lead time and coordination costs. Order processing lead time refers to the administrative lead time necessary to process an order from the moment the order is received until the production order is prepared and the customer’s order confirmation is finished. Coordination costs refer to the costs necessary to coordinate demand and production within the ordering process. Coordination costs may relate to the number of actors involved in processing the orders, but also to the coordination mechanisms used and the time necessary to achieve coordination.
Table 4.4 Operationalizations for responsiveness and efficiency Performance Operationalizations
Responsiveness
New products
Range of products: breadth of product range Timing of products: handling of rush orders
Speed: delivery time related to actual production lead time Reliability: percentage of orders within agreed delivery time Efficiency of the
production system
Stock levels: as perceived by managers involved and related to stock level goals
Capacity utilization: proportion of maximum capacity used for production;
Efficiency of order processing
Lead time for order processing: relationship between goal and realized lead time
Coordination costs: number of actors involved; coordination
mechanisms used; estimated time necessary to coordinate demand and production