Supply Chain – Decoupling

Graphic Source: http://68.media.tumblr.com

Traditionally, the decoupling point methodology has been associated with the material flow pipeline.  However, to maximize improvement in supply chain dynamics, information flow is equally important.  Many of the problems that may pop-up are the result of the distortion of marketplace sales information as it is transferred upstream through the supply chain.  However, we confine our analysis to material-flow pipeline only.

Before we get down to analyze the decoupling point, let us define it and understand the same in simple words.  The decoupling point is a standard term given to the position in the material pipeline where the product flow changes from “Push” to “Pull”. It should therefore also correspond to the Demand Penetration Point.  Having understood in common man’s language what is decoupling point, let us also understand in formal words.

“The point in the product axis to which the customer’s order penetrates.  It is where order driven and the forecast driven activities meet.  As a rule, the Decoupling point coincides with an important stock point – in control terms a main stock point – from which the customer has to be supplied.”

 The material decoupling point thereby acts as a buffer between upstream and downstream players in the supply chain.  This enables upstream players to be protected from fluctuating consumer buying behavior therefore establishing smoother upstream dynamics while downstream consumer demand is still met via a product pull from the buffer stock.

The above graphic summarizes the two sides of the material flow situation.  The above diagram will also give the explanation to the above mentioned definition.  The strategic position of the material decoupling point depends very much on the product type, consumer demands and supply chain approach adopted.  We have two solutions on hand to minimize the inventory holding.  One is to BTO (Build to Order) and the trade off are, high cost of quick production cycle, delivery lead time, and the quality of the product.  Where as the advantages are, Inventory carrying is eliminated thus resulting in cost savings, aggressive pricing is possible and it is possible to react quickly to market dynamics.  This is a very flexible situation.  The second option is Postponement. The governing principle one should not forget is that the decoupling point should be moved as close as possible to the consumer.  This approach also enables full capitalization of the benefits of divorcing the customer variability from the demands placed on the majority of players in the supply chain.

The difficulties of matching supply and demand due to the inherent dynamics within a supply chain structure are a long standing and widespread problem.  Market sales information notoriously suffers from delay and distortion as it moves upstream through the supply chain.  This result in production profiles at the factory, which bear little resemblance to the end consumer’s buying behavior.  In spite of so many innovations and re-engineering the supply chain, the fact is that today’s supply chains are still suffering the often-painful and some time fatal effects of upstream orders magnification.  To overcome this impact, the concepts of VMI, BTO, Postponement, Cross Docking etc. are being used in the modern Supply Chain.  These concepts are mostly successful in the IT and Electronics Industry.  Automotive industry is inching towards VMI in order to eliminate the Inventory.  Unless a serious attempt is made to take the decoupling point closer to the consumer, we may not be in a position to achieve the objection of lean supply chain.