The (customer order) decoupling point (CODP) or order penetration point is one of the most well-known logistical concepts. It indicates the inventory location in the value stream up to which the customer order penetrates. The CODP is one of the key design decisions in structuring the value stream and its management. For instance, the CODP separates the part of the value stream that is order- driven (downstream of the CODP), from the part that is forecast-driven (upstream of the CODP). But is that necessarily true? Doesn’t Kanban, in fact, represent a good example of managing the upstream part of the value stream based upon consumption rather than forecast? and aren’t a lot of companies still clustering their customer orders downstream of the CODP or working with lot sizes, resulting in products manufactured too early, too late or just too much? This blog post nuances the existing control dogma in relation to the CODP.
I encourage you to read the entire blog post, Pushing and Pulling in the Supply Chain.
If you think about the CODP being the fulcrum point of the supply chain or a seesaw, we are always trying to create a balance between supply and demand. However, there is typically some type of buffer stock or a customer willing to wait a certain period which I like to think of as a flat point on top of the fulcrum. However, this causes another problem. When one side supply or demand, is in excess it tips dramatically in that direction. Our prevention for this is how accurately we forecast. Read what Eli Schragenheim said in a Business901 podcast about forecasting.
Forecasting tries to give me some information. Let us say partial information about the huge question about what will happen tomorrow. How much will I sell tomorrow? How much work will I be able to finish tomorrow? Which means we are not prophets, we do not know what will happen tomorrow, period.
We cannot really predict the future. We can predict some reasonable range of the future, and this is what we need to make any decision. Forecasting is an unbelievably important tool for managers, but again they need to understand what does it mean and what does it contain and how wrong could it be.
I don’t know how wrong because they don’t like to say how wrong about forecast, which was never intended to give you anything that precise. So what do you mean by wrong? It could tell you whether you can have a narrow, a range or quite a wide range, make up your mind what you are going to do with it. I think it is very valuable information that is really required for daily decision making and I am sorry to say that a vast majority of the people do not understand it.
I participated in quite a discussion about uncertainty with Eli. The transcription and podcast can be found at Using Theory of Constraints to Handle Uncertainty in Decision Making.
In most markets, it is very difficult to keep a balance and when the safety stock in not replenished in time or the customer demands quickly dwindled, well let’s just say all forecasts are wrong. So, what to do? This is what makes Lean Marketing for Service Dominant Thinkers (SD-Logic) so powerful. When these principles are applied it moves forecasting further upstream. We are not forecasting from a perspective of our markets rather we are forecasting from a perspective of our customer’s markets. We have effectively moved our Customer Order Decoupling Point (CODP) to the customers point of use.