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In operations, notably in production, this dynamic is leading to conflicting objectives, which must be balanced according to strategic priorities to succeed in this turbulent environment. While prioritizing the reduction of direct production costs yields immediate bottom-line effects, it may inadvertently lead to neglecting inventory management, tying up capital, and disregarding customer needs. On the other side, inventory reduction poses risks to delivery capabilities, while delivery performance and flexibility demands from customers complicate efforts to minimize production costs.

The definition of production principles offers a proven methodology to achieve a balanced production strategy. Products with high demand are well-suited for Make-to-Stock production of large batches, optimizing direct production costs. Conversely, niche products or special variants with limited order quantities should be produced as Make-to-Order, mitigating the risk of long-term inventories tying up capital. Apart from these clear cases, the product portfolio likely encompasses multiple products where the optimal production principle may not be identified as straightforward.

Allocating appropriate production principles to each article requires a transparent decision-making framework with relevant criteria. These criteria can include cost, product data, demand data and various other data points from different value chain perspectives, depending on complexity and specifics of processes. Once the relevant criteria and the decision-making framework have been established, the evaluation can be conducted, and production principles can be determined. Given the multitude of influencing factors, the initial classification outcome must be coordinated and validated with stakeholders across the entire value chain, including sales, supply chain, production, logistics and others involved.

In a dynamic market environment, the accuracy and robustness of the classification heavily rely on the quality of forecasts e.g., demand planning. Consequently, it is necessary to perform the valuation regularly, for instance, as an integral part of the sales and operations planning process. After final adjustments, the assigned production principles must be implemented in the material data of the planning system to ensure proper consideration in the planning process.

1) Establishment of clear governance and decision criteria: Implementing standardized governance and decision criteria is essential to maintain consistency and objectivity in the decision-making process. This framework ensures that decisions are consistently guided by the same set of principles and standards, optimizing the effectiveness of the production strategy.

2) Engagement of stakeholders across the value chain: A collaborative approach is crucial to combine the collective input of all stakeholders across the value chain and to foster robust and comprehensive decision-making.

3) Ongoing evaluation and adaptation: Given the high degree of volatility due to numerous influencing factors and a dynamic market environment, regular evaluation and adaptation is critical. This enables the organization to maintain agility and responsiveness in the face of future market developments.

The optimizations lead to various benefits throughout the value chain. Here are the top three effects at a glance:

• Improved production and capital costs: Optimizing production costs involves reducing the costs of goods sold and maximizing machine capacity utilization. Additionally, improved inventory levels lead to reduced capital binding costs and enhanced inventory turnover rates.
• Shortened delivery times and strengthened customer focus: Achieving target service levels through shorter delivery times and higher hit rates, ultimately results in higher customer satisfaction. Furthermore, customer satisfaction is increased through product-specific Make-to-Order and Make-to-Stock allocations, with Make-to-Order articles continuing to meet customer-specific requirements and Make-to-Stock articles benefiting from improved delivery times.
• Enhanced production planning and resource allocation: Considering base loads consisting of Make-to-Stock articles supports better predictability and streamlined planning processes by reducing the need for firefighting and enabling proactive planning optimizations. It also helps to improve the allocation of capacities to different resources while reducing the risk of misalignment between production and demand.

Companies that succeed in optimizing operations while maintaining high customer focus have a distinct competitive advantage. Learn more about it on our Operations Insights Blog or contact us at any time for more in-depth discussions!

Dommermuth, J. / Drüppel, M. / Orlea, K. / Weigelt, Y. / Wenzel, M.