Tag: dell

The Myth of Build-to-Order

In working with manufacturers of configurable products, we have never met one that did not claim that they only build to order. “We don’t build until we have an order in hand” they all say. At first we believed them. A whole generation of companies has been transfixed by Michael Dell. No finished goods inventory; don’t assemble the parts until you know exactly what the customer wants; get the cash before you build the product.

Dell can assemble a computer in three minutes. A truck or a backhoe takes a little longer. But the same ideas should apply! Right?

Dell builds computers for final customers who come to its web site or its 1-800 phone line. Most manufacturers of expensive, complex products are once removed from their final customers. Their immediate customers are dealers. Final customers go to distributors and dealers to buy backhoes, tractors, work trucks, lighting fixtures, industrial fans, and so forth. The “customer orders” that the manufacturers so proudly wave are not final customer orders, they are actually channel/dealer orders. (Okay, this is an exaggeration, some are actual customer orders passed through by the dealers.) And how do the dealers place orders? They guess. They choose combinations of 30 or more options based on their experience. One manufacturer we worked with kept referring to these as “Christian orders”. After a while we asked them what they meant by “Christian orders”. With a big smile they said “Oh, we just take them on faith.”

So the dealers order certain product choice combinations to stock based on their intuition, and those units sit on their lots until they sell. Sure looks like finished goods inventory. There is some ambiguity about who actually owns the inventory. The manufacturer will say that the inventory belongs to the channel or dealer, so it’s not my problem any more. The dealer will say that the manufacturer finances his inventory; some cases has to take back the units and give his money back if a unit sits too long. In any case, the manufacturer knows that the dealer is not going to order any more units while his lot is full of “stale inventory” or “lot rocks”. (See Chrysler’s desperate attempt to force its dealers to accept more cars in 2008.)

So Dell computers are built to order. (And now also built-to-stock for their new retail model for stores such as Best Buy and Wal-Mart.) Jumbo jets are also built to order. But most configurable products are still a combination of build-to-order and build-to-stock, with manufacturers and dealers playing hot potato with the inventory. This means that somebody should be looking at the history of what combinations sold in the past, and trying to make sure that the stuff that they build is the stuff that sells! Looking at the sales patterns and trends is a very fast, efficient and intelligent way to determine what to carry. This is a more reliable than believing in Christian Orders or relying on dealers’ intuition. The manufacturers should be giving the dealers guidance on what to stock and order based on their global visibility into sales and customer buying trends. Customers buy combinations of features, and they do this in predictable ways. Detecting and using the patterns can make inventory turn faster, even if, technically it doesn’t exist.