An Intriguing Build-to-Order Concept

June 11th, 2009 at 10:41am

Automakers have been studying how to devise a build-to-order system for years. The idea is to only build cars which customers have ordered, rather than fill up dealers’ lots with months worth of cars and then have customers buy what’s on the lots. So far almost everyone has focused on how to build a car faster, or process the paper work more quickly. But in the following article Steve Beeler proposes an intriguing way to do it. I’d love to hear what others have to say with his proposal.

-John McElroy

Nothing much good can be said about the vast stocks of unsold vehicles on dealer lots:  billions of dollars of scarce capital are tied up, lot rot deteriorates quality, customers can’t find exactly what they want but delivery times for special order vehicles are interminable, and margins suffer as incentives are required to move the metal.  The first manufacturer to solve the build-to-order puzzle will have competitive advantages in customer satisfaction and premium pricing.

An auto company’s order-to-cash process spans all of its functional chimneys.  A system-level, customer focused view of order-to-cash will encounter a number of dependencies:  platform strategy; product plans; features and options complexity; manufacturing sourcing, flexibility, and capacity; and so on.  It will also encounter two long standing Detroit paradigms: minimum cost equals maximum profits and booking profits at gate release.

The current wholesale “push” vehicle distribution system has roots back to the end of World War II.  In the years following the war, there was so much pent up demand for vehicles that anything with four wheels was snapped up.  In an environment of excess demand, it made good sense to mass produce vehicles in inflexible plants at the lowest cost mix and sequence.  Booking profits at gate release gave accounting profits a little boost and seemed harmless when captive credit companies had unlimited markets for their paper and the vehicle was sure to move off the dealer lot…and quickly.

Times have changed and the wholesale “push” is no longer serving Detroit well.  The industry is plagued by excess capacity, no pricing power, and more than four months of finished vehicle inventories.  With credit markets frozen, financing finished vehicles is problematic.  No longer is cash flow positive at gate release.  No longer are finished vehicle inventories assets.

Is a build-to-order “pull” distribution model a viable alternative to the current build-to-forecast “push” system?  Yes, with a twist.  The feasibility of a retail customer driven pull process has been demonstrated through a discrete event simulation.   The proof-of-concept build-to-order model (see schematic below) centralizes the finished vehicle inventory at the assembly plant and segments the market into “stock” vehicles and “special order” vehicles.

In more normal times (e.g., an economy with functioning credit markets), aggregate annual forecasts for vehicle families are reasonably accurate.  But with thousands of dealers, the “right” vehicle’s customer is almost certainly at the “wrong” dealer.  The twist is to not ship a vehicle from its assembly plant until a retail customer asks for it.

A typical vehicle family has tens, if not hundreds, of thousands of buildable combinations.  However, a relative small number (10% to 20%) account for a relatively large number (80% to 90%) of the vehicles built and sold.  This provides an opportunity to segment the market into “stock” vehicles and “special order” vehicles.

Click Image for Larger View

Paradoxically, stock vehicles can be built to forecast.  On any given day, five or six red sedans with black interiors and V-6 engines will be purchased at a dealer somewhere.   Tomorrow, another five or six of this same build combination will be purchased somewhere else.  And then again the day after that.  Why not have these vehicles in the assembly plant yard waiting to be shipped?  The proof-of-concept simulation predicted 90% order fulfillment from only a three-day supply of finished vehicles at the assembly plant.  Ten percent of the production schedule would be set aside for special order vehicles…with premium pricing.

The customer is happy, but the supply base is being killed by daily schedule instability, right?  Not at all.  In the proof of concept simulation, the take rate for V-6 engines was set at 60% of a total production of 1200 vehicles per day.  Daily usage varied from 900 to 540 engines and was in statistical control.  This level of daily usage variation is easily absorbed by typical assembly plant inventories.  The engine plant can ship 720 V-6 engines everyday.  The assembly plant inventory will grow and shrink but it will be stable and predictable.

But what if the market changes?  Feedback will be almost instantaneous.  If there was a gas price spike and I-4 engine demand grew relative to V-6′s, inventory levels in the assembly plant yard would reflect the shift within days.  In the time it takes the supply base to adjust, pricing actions would be taken to bring supply and demand back into equilibrium.

Will some dealers still choose to carry large stocks of vehicles?  Perhaps.  Adam Smith’s invisible hand will determine the optimum level of dealer inventories.  A dealer in a high-traffic suburban location might find it beneficial to carry more inventory than a rural dealer with a lower sales volume.  In all cases, vehicles will have been “pulled” not “pushed” into dealer lots and both the OEM and the dealer will obtain market clearing (and better) pricing.

In summary, here are the competitive advantages of a “pull” vehicle distribution process:

  • (1) improved customer satisfaction and better pricing (the right vehicle in the right place at the right time at the right price)
  • (2) huge cost savings in finished vehicle inventory carrying costs (90+ days @ $10 per day is real money)
  • (3) nearly instantaneous market feedback
  • (4) a barrier to entry against Indian and Chinese imports (build-to-order cannot be duplicated from an Asian assembly base)

Detroit’s build-to-forecast “push” distribution model is unsustainable.  As described above, build-to-order “pull” is an operationally feasible alternative.

Steve Beeler is a director at Production Modeling Corporation (PMC), an operations engineering and management consulting firm based in Dearborn, Michigan.  His practice targets middle market manufacturing and service companies.  Steve joined PMC after a 20-year career at Ford Motor Company where he guided assembly plants through ISO 9001 registration and led cross-functional / multinational enterprise simulation projects.  He is a professional engineer and holds a BSME from Massachusetts Institute of Technology and an MBA from Indiana University.

Steve Beeler
sbeeler@pmcorp.com

(313)441-4460 x1141

9 Comments to “An Intriguing Build-to-Order Concept”

  1. John Cuyle Says:

    I’m completely in favor of build to order. I have no idea how they go about optioning vehicles which sit on dealer lots but it is virtually impossible to find one with the correct options, which means it either has to be transferred from another dealer or custom ordered. It just seems silly to have 20 cars sitting on the lot of the basic type that someone might want but not have any of them be the vehicle that the customer actually wants to buy.

    I think dealers should probably have a couple three vehicles of a particular type as demonstrators which bookend the range and plan on ordering whatever car the customer actually wants. The reduction in dealers will help with this dramatically. Since voluntarily reducing the range of vehicles on the lot to buy no longer means a high likelihood of a customer going down the block to buy the car he wants, it’ll reduce the incentive for dealers to have lots of redundant cars in inventory.

    And, again, they never seem to have the one I want to buy anyway, so for me there’s no drawback as far as the car taking longer to get to me (probably an improvement since they would structure build schedules around being flexible) and the benefit of reduced prices as there’s no incentive to shove the buyer into a car which he doesn’t actually want to sell one that’s already on the lot.

  2. Bob Gordon Says:

    Everything Old is New Again…I hate to differ with Steve but the “build-to-order” mentality existed in this country until the boys in Detroit took it upon themselves to copy the Japanese push into the U.S. market in the late 60′s and early 70’s.

    Up until then, when an American wanted to buy a new car they went to a new car dealer test drove a salesman’s demo and then sat down and spec’d out the exact trim level and options the customer wanted in their new car…everything from radio to heater to power steering and power brakes and engine size and transmission type and gear ratios and rear axle ratios and interior and, and, and…

    This intelligent, consumer friendly and profitable way of buying and selling cars ended not because the public wanted it to end but because the management (?) in Detroit thought that in order to compete with the Japanese they had to mimic the boatload invasion…what they didn’t understand is that our domestic car makers held a giant competitive advantage because they could profitably “build-to-order” and deliver a custom built vehicle within 6-8 weeks.

    The Japanese on the other hand could not do this and so brought over their boatloads of white vehicles all configured the same way…

    I’m sure that the bean counters in Michigan endorsed this “new” way of selling, which turned out to be a short term gain and long term disaster.

    “Build-to-Order” makes more sense today than ever before. With the advent of flexible manufacturing techniques it can once again become a competitive advantage to those car companies that build their cars here in North American factories…hmmm it looks like the “imports” recognized this and have already built factories here in the U.S. eliminating geography as a competitive advantage for domestic car makers.

  3. Mike Korschun Says:

    When I bought an 87 Volvo I had the dealer add a factory cruise control unit and a roof rack. The car was designed to take a few options like that.

    It seems to me that cars could be designed to take more add on options at the dealer level although switching out engine/drive trains might be a bit much. Custom suspensions, upgraded electrical, seating and other systems are possible if the overall design allows for changes.

    Vehicles might also be delivered 90% built waiting for customer choices at time of purchase. Heavy duty trucks are shipped that way.

    Trying to build custom vehicles at a central factory probably creates too many errors to be practical. Dell computer has somewhat moved away from that structure.

    That’s my comment and I’m sticking to it!

  4. Carroll Says:

    This sounds nice. Mercedes-Benz & BMW can do special order customer cars for average people. Like upgrading the engine, suspension and interior on a good base vehicle. Like what Cadillac has done with the CTS-V here. I would like to sit at my desk online and order the car I want overnight and pick it up in two or three days. I plan on adding the LS9 enging and 6 speed manual transmission. Then add Recaro seats for support and feel in my SS2 Camaro RS.

  5. Edward Walsh Says:

    I agree with the writer of this article. In about 10 weeks my wife and I will need a replacement vehicle.

    Presently I am shopping around for my wife and I looking at what is available in the ‘models’ we personally like with the options, colors, etc. that are our preference. With this setup we could drop by the Dealership before the end of June, do a test drive of the various models, obtain a price of the vehicle we are interested in with the options we WANT and order it for delivery in 6 to 8 weeks.

    To me it is a win/win/win situation. We get the vehicle we want, the Dealership gets a customer/sale and the manufacturer sells their product. It has worked for some in the past and maybe moving forward the automotive industry needs to implement some new ways of doing things to the benefit of everyone.

    Edward Walsh
    Marystown, Newfoundland
    Canada

  6. George Woolford Says:

    The proposed model is pretty much how the German market in particular and much of the rest of Europe works. A mix of Dealer wholesale and Retail ordered units. Of course it helps that customers are willing to wait six to twelve weeks to get that vehicle just the way they want. I doubt that the US market would show such patience on an average.

  7. D Bruckbauer Says:

    Premium pricing for ordering what I want? BULL S**T! I 1984 I ordered my Buick Grand National the way that I wanted it, and they threw in the price of the G.N. package for free! They have been giving us what they want ever since. My friends son wanted to order a ’10 Camaro to his liking this past April, and the dealer told him it take until September to get it! Typical salesman trying to sell what he had on his lot, rather than actually working to make a sale.

  8. Tonami Says:

    Like BOb Gordon stated above, this is nothing new. But the art has been long forgotten by detroit. It does make a whole lot of sense in these times. I think to expedite the process. The automakers should take a page from sit in restaurants. I am always amazed at how these restaurants are able to meet all the chaotic individualistic orders with very little error. In most cases all the major ingredients for each dish has been prepared and is waiting for the order to initiate the level of combination. So making the cars 90% complete until and order is placed would alleviate a lot of errors. I would also like to state that although this concept cannot be duplicated from an Asian assembly base, Most of the so-called asian companies sell cars that are built here, and you know how fast those guys adapt. If this concept turns out to be well demonstrated. Those same asian carmakers would duplicate the process overnight in their local plants and even improve on it for good measure. The best part about this is that in the end “the customer is still the winner.”

  9. Dr Parry Says:

    We have recently completed a European study on BTO. The OEMs leading the way were Daimler and BMW. The project overview may be found at http://www.ilipt.org. We have also published a ‘how to do it’ book, drawing from all the experts within the project, “Build to Order: The Road to the 5-day Car”. The concept is being developed, but the fundamental is that the majority of cars will be built to order and that will make them cheaper for all as the capital employed in current stock push systems – $10s billions – will be removed.