Characteristics of Different Operational Models

Based on the in-depth interviews with key managers, this section summarizes the characteristics of existing operational models. The various operational models adopted by notebook-computer manufacturers are characterized using their business and process models. The business model reflects the relationship focused on creating value-added activities between manufacturers and multinational brand companies.

OEM and ODM are the main business models adopted by notebook-computer manufacturers in Taiwan. In the case of the OEM model, manufacturer production planning is conducted based on brand company directions such as material selection, product specifications and processing control to satisfy customer needs. Generally, OEM manufacturers are generally not involved in marketing. The advantages of OEM manufacturers derive from low manufacturing cost and flexibility in mass customization. ODM manufacturers are responsible for new product design and manufacturing according to brand company needs and requirements. After receiving orders from brand companies, the process of procurement, manufacturing, assembling and delivering is re-arranged and re-integrated. The advantages of ODM firms derive from their abilities in product design and process integration, but these R&D investments are characterized by high risk.

Process model types are strongly connected to the relationship between materials management based on MRP (material requirements planning) and distribution management activity based on DRP (distribution requirements planning). Figure 3.1 represents relationship between materials and distribution management.

The buffer between the two functions is a major stock point. Downstream (to the right) no further stock besides demand would be held and upstream (to the left) stock would be held only if it is economically justified to do so. Distribution activity is frequently driven by brand company orders, while materials management activity is driven by a demand forecast. The major stock point can be termed the decoupling point, since it decouples order and forecast driven activity. The decoupling point can

also change depending upon market requirements/needs and product characteristics/features. Market requirements/needs dictate delivery times and required reliability, while product characteristics dictate throughput time during production and distribution. The different positions of major stock points result in different process models.

Figure 3.1 Relationship between Materials and Distribution Management

Process models are characterized by process arrangements and integrations.

These models can be seen as manufacturer’s internally operational control. Process control efficiency results in competitive advantages in the dimensions of cost, quality, speed and flexibility. BTF (Build To Forecast), BTO (Build To Order) and CTO (Configure To Order) are the main process models employed in Taiwan.

Manufacturers implementing the BTF model directly deliver products to buyers from finished-product stock point, the position of decoupling point, after receiving orders. Manufacturers perform material purchasing and production process planning based on market forecasts to increase production efficiency and reduce inventory costs. Finished products are produced and delivered to stock. Manufacturers implementing the BTO model activate the production process after receiving buyer orders. First purchase partial materials according to buyer demand forecasts and then purchase other materials and components after confirming those orders. All products are manufactured according to buyer requirements/needs. Only raw materials and components based on MRP are held in stock. Upon receiving brand company orders, products are manufactured and then shipped. No stock of finished products is held.

Manufacturers implementing the CTO model emphasize the differentiate components being finally configured to buyers’ orders. The stocks are held during work in process. No finished product stock is held. The manufacturing process can be separated into two parts. First, general types of semi-products and components are produced in advance. Second, key components that satisfy different end customer needs are purchased and assembled into final products. The first part resembles a BTF model. Meanwhile, the second part resembles the BTO model.

Final products are assembled to buyer requirements/needs.

SUPPLIERS

RAW MATERIAL

STOCKS

WORK IN PROCESS STOCKS

FINISHED PRODUCT STOCKS

DEPOT

STOCKS BUYERS

MATERIALS MANAGEMENT

DISTRIBUTION MANAGEMENT SUPPLIERS

RAW MATERIAL

STOCKS

WORK IN PROCESS STOCKS

FINISHED PRODUCT STOCKS

DEPOT

STOCKS BUYERS

MATERIALS MANAGEMENT

DISTRIBUTION MANAGEMENT

Process models adopted by manufacturers depend on order driven activity being decoupled from forecast driven activity. These two types of activity differ essentially.

Order driven activity is based on the known requirements of brand companies, meaning that manufacturers are managing certainty. In contrast, forecast driven activity involves an attempt to manage uncertainty. Manufacturers pay more attention to this uncertain part of the manufacturing process. The position of decoupling point in the supply chain strongly influences process model selection. It depends on considerations of inventory holding, resource requirements and time limitations.

Six operational models can be derived from the combination of business models (OEM/ODM) and process models (BTF/BTO/CTO). Based on the above discussion, the relevant activities in different operational models can be summarized in Table 3.2. Only ODM with BTF/BTO/CTO models participate in product design under the requirements of brand companies. For all operational models, “Demand Forecast”,

“Purchase”, “Manufacture” and “Delivery” are general activities. Such activities differ from the relationship between manufacturers and brand companies. The OEM/CTO and ODM/ CTO models focus on customization following essential assembly activity. Stock points and types vary with different operational models.

According to the process diagram shown in Figure 3.2, finished product inventory is possessed in OEM/BTF and ODM/BTF models, material inventory is possessed in OEM/BTO and ODM/BTO models, as well as component inventory is possessed in OEM/CTO and ODM/CTO models. Furthermore, purchase activity is divided into two steps in the OEM/BTO and ODM/BTO models. Manufacturers purchase partial materials based on demand forecast. After receiving orders from brand companies, purchase materials again and then manufacture products to meet those orders.

Customization is the core competence in the OEM/CTO and ODM/CTO models.

The manufacturing process comprises two parts. The first part is component manufacturing for differentiated product configuration. Meanwhile, the second part is driven by the orders from brand companies. Manufacturers start purchasing differentiated key components and assembling final products to satisfy custom-made orders.

TYPE Product Design

Demand

Forecast Purchase Manufacture Assembly Delivery Material Stock

Table 3.2 Activities Involved in Various Operational Models

Business models represent the cooperative relationship between notebook-computer manufacturers and multinational brand companies in global operations. Quick and precise responses to brand company orders are undoubtedly important and form the basis of cooperation. Consequently, “Strategic Alliance” and

“Logistics Facilities Locations” are important to manufacturers for purposes of forming a rapidly responsive supply chain. To support the global operations of brand companies, the process model is important in representing process control efficiency, including purchasing, manufacturing, inventory management, delivery scheduling and customer service. Restated, different operational models adopted by manufacturers form seamless and efficient logistics activities to assist brand companies in global marketing and extension.

Figure 3.2 Process in Different Operational Models

Demand Forecasting Demand

Forecasting PurchasePurchase ManufactureManufacture Finished Inventory Forecasting Demand Forecasting

Manufacture DeliveryDelivery

Orders

Demand Forecasting Demand Forecasting

Manufacture DeliveryDelivery

Orders

Forecasting Demand

Forecasting PurchasePurchase ManufactureManufacture Finished Inventory Forecasting Demand Forecasting

Manufacture DeliveryDelivery

Orders

Demand Forecasting Demand Forecasting

Manufacture DeliveryDelivery

Orders