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As discussed in Section 4.2, the ordering process plays a central role in coordinating demand and production. We assume this role to vary according to characteristics of demand and the production system, resulting among others in a different degree of formalization. In this section, we discuss various patterns of order processing that emerge from the conceptual model and from the various interpretations of the role of the ordering process.

As shown in our conceptual model (see Figure 4.1), characteristics of demand and production are related to each other and the specific combination of these characteristics influence the complexity of coordinating demand and production. Studying the combination of demand and production characteristics, we argue that four ideal types of combinations exist. In discussing these ideal types we focus on two dimensions. With respect to demand, we focus on the uncertainty of demand. The uncertainty of demand is associated with the demand characteristics predictability, heterogeneity and customization. Demand is fairly uncertain when it is characterized as hard to predict, heterogeneous and customer specific.

With respect to production, we focus on the flexibility of production, as a production system must be flexible to be able to cope with uncertainty about demand, as discussed in Section 4.3.2. Bertrand et al. (1998) argue that, in general, the flexibility of a production system should be at least equal to the uncertainty confronting the production system. By definition, uncertainties are unexpected and must frequently be addressed

with short term, directly available flexibility (Bertrand, Wortmann, and Wijngaard 1998). We assume that production systems require a certain degree of flexibility in order to be able to address uncertainties in demand. Figure 4.2 illustrates the possible relationships between uncertainty of demand and flexibility of production.

Misfit

Too little flexibility to cope with uncertainty of demand.

Fit

Uncertainty of demand can be managed with flexibility of production. High Uncertainty of demand Low Fit

Little or no uncertainty and thus no flexibility needed.

Misfit

High degree of flexibility unnecessary for known orders that can be planned in advance.

Low High

Flexibility of production

Figure 4.2. Relationships between uncertainty of demand and flexibility of

production

In ordering processes that are confronted with little uncertainty of demand, there is no need for flexibility of production. Thus, low levels of uncertainty fit with low levels of flexibility. But, misfits occur when a company responds to low levels of uncertainty with high levels of flexibility. This misfit may have a particularly strong influence on the efficiency of the situation.

Ordering processes that are confronted with high levels of uncertainty of demand must have high levels of flexibility of production to manage the uncertainties. Misfits in the ordering process occur when manufacturing companies with little or no flexibility of production are confronted with high levels of uncertainty of demand.

On the basis of the relationships illustrated in Figure 4.2, we assume that the combination of demand characteristics, particularly uncertainty, and production characteristics, particularly flexibility, influences the complexity of coordinating demand and production and therefore also the role of the ordering process. Based on Figure 4.2 four main patterns of order processing are distinguished. Recognizing these patterns improves our understanding of the complexity of the ordering process and the related use of formalization. Figure 4.3 presents the proposed taxonomy of the order- processing patterns that is discussed further in the remainder of this section.

Compromising

The role of the ordering process is to find compromises between uncertain demand and rigid production possibilities.

Formalization is difficult and may focus on the organizational setting.

Puzzle-solving

The role of the ordering process is to find the optimal solution for fitting uncertain demand with flexible production possibilities.

Formalization may be used to decompose the control problem.

High

Uncertainty of demand

Low

Passing-on

The role of the ordering process is to pass on known orders to preplanned production possibilities.

Formalization high because of efficiency advantages.

Rearranging

The role of the ordering process is to rearrange known orders over flexible production possibilities.

Formalization to limit flexibility freedom.

Low High Flexibility of production Figure 4.3 Taxonomy of order-processing patterns.

Passing-on pattern of order processing

When predictable, standard demand is combined with little flexibility in the production system, we expect the role of the ordering process to be relatively simple, due to the availability of planned possibilities for producing the various products. The role of the ordering process is to pass customer orders on to production. We refer to this pattern of order processing as the “passing-on pattern.” Because simple and relatively predictable demand characterizes this situation, we assume that it is possible to formalize both logistical decisions and information-processing activities, as demand can be anticipated and planned in combination with production possibilities. A number of aspects can be planned in advance, including efficient capacity utilization, the stock levels necessary to guarantee both efficiency and responsiveness, and the delivery times that can be promised for each product group.

Rearranging pattern of order processing

When simple and predictable demand is combined with a highly flexible production system, the ordering process is confronted with a misfit. No flexibility is needed of the production system as demand is relatively simple and predictable. Flexibility in the production system, however, creates a number of possibilities for producing. In the attempt to link anticipated demand to the optimal production solution formalization may

be used to limit the choice in available production possibilities. This pattern of order processing differs from the passing-on pattern in that the multiple production possibilities necessitate more rearranging of orders. We therefore refer to this order- processing pattern as the “rearranging pattern.”

Puzzle-solving pattern of order processing

When it is possible to address uncertainties in demand and in production systems with flexibility of the production system, the ordering process may be rather complex, due in part to the availability of various options for responding to uncertainty. In particular, the number of options may increase the complexity of coordinating demand and production in order to balance efficiency and responsiveness. The complexity of this situation is analogous to solving a puzzle; it involves a search for the optimal solution for all parties involved. We therefore refer to this order-processing pattern as the “puzzle-solving pattern.” In these situations, the role of the ordering process is creative; the actors in the ordering process may try to find an optimal solution for every specific customer order. Although the availability of various solutions may necessitate some degree of formalization of this order-processing pattern in order to decompose the control problem, the perceived degree of complexity in this situation may make formalization difficult.

Compromising pattern of order processing

When uncertainties in demand and in the production system are not counterbalanced by flexibility in the production system, the ordering process again faces a misfit. The role of the ordering process in coordinating demand and production may be complex, as the number of possible responses to uncertain demand is limited. The order-processing pattern may be characterized as making compromises between customer demand and production. The interdependency between Sales and Production is likely to be high, and ambiguities in goals and interests may be particularly characteristic of this order- processing pattern. In such a “compromising pattern” of order processing, formalization may be necessary in order to control efficiency while realizing responsiveness. At the same time, formalization may be difficult, as demand cannot be anticipated. Formalization is likely to be associated primarily with the organizational setting. Depending on the role of the ordering process, we expect that different dimensions of the process may be formalized. As discussed in Chapter 3, the degree of formalization in the ordering process may differ for each of the three dimensions. By discussing the various order-processing patterns, we have elaborated on the variations of formalization over the three dimensions. In general, as order-processing situations become more complex, we expect formalization to be more difficult. The more complex order- processing situations (i.e., the compromising and puzzle-solving patterns) are of particular interest to this study.

4.7

Summary

In this chapter, we have constructed a conceptual model with which to study the degree of formalization of the ordering process. The conceptual model is based on the idea that the ordering process plays a central role in coordinating demand and production. We therefore argued that characteristics of demand and production, as well as specific combinations of these characteristics, influence the complexity of coordinating demand and production and thus the formalization of the ordering process. We defined sets of characteristics for each variable and operationalized the variables in order to develop operational measures for the empirical study. We also operationalized performance indicators related to responsiveness and efficiency in order to study the effects of formalization of the ordering process. In this way, we hope to be able to discuss the effects of formalization on the balance between responsiveness and efficiency.

On the basis of the discussion of the variables in the conceptual model and the relationships among them, we proposed a taxonomy of four main order-processing patterns. The taxonomy may enhance our understanding of complexity and formalization of the ordering process.

The conceptual model and the proposed taxonomy form the basis for our empirical study of ordering processes in five different manufacturing companies. In addition, they serve as a template for describing and analyzing empirical results from the five cases. Before proceeding to the description and analysis of the cases, however, we first discuss our research design for the case study research, focusing on issues of reliability and validity.

5 RESEARCH DESIGN