The Economist Jul 12th 2001
For years "mass customisation" has been the holy grail of manufacturing,
building to meet customers’ individual orders rather than for stock. Progress
is proving slow, but the journey is illuminating. This article, kindly reproduced
from The Economist, looks at the evolution of Build To Order techniques in manufacturing
with particular reference to the automotive industry.
Henry Ford launched mass production 88 years ago with his revolutionary assembly
line for the Model T car. It proved a brilliant system-at least, for as long
as there were customers waiting at the end of the line to drive Ford’s cars
away. But it lost some of its shine when customers became harder to find, meaning
that mass-produced cars sat expensively in parking lots and showrooms. Now a
new dream is at hand: to turn mass production on its head with the help of flexible
systems and Internet ordering. The goal is to deliver precisely the car that
a customer wants, as and when he wants it: goodbye inventory, hello "mass
As with cars, so with washing-machines, refrigerators, window-frames, packaging
equipment and even collectable dolls. All sorts of companies are discovering
that, if they make their factories lean and flexible, they can run their businesses
differently, freeing idle capital that has been tied up in stocks of parts and
finished products. The Internet has provided a handy means of linking up supply
chains, in real time, in order to put this revolution into effect.
Mass customisation – the selling of highly individual products but on a mass
scale – is a logical next step in the progress of BTO ("build-to-order"),
the manufacturing of goods only as and when there is an order from a customer.
Companies such as Dell Computer and Renault already make extensive use of BTO
systems, shortening delivery times and trimming work-in-progress. In essence,
they are taking the lean manufacturing techniques that western firms have spent
the past 15 years copying from Toyota in Japan, and extending them throughout
their "value chain", both upstream and downstream of the factory.
And that means turning a production-push industry into a demand-pull one.
is to build and deliver a car ordered by a customer within 15 days
The chairman of Renault, Louis Schweitzer, has declared that Renault’s ambition
is to build and deliver a car ordered by a customer within 15 days. "It
is the dream we are all running after," says Roberto Testore, the chief
executive of his Italian rival, Fiat Auto, "but it is difficult to bring
Move the metal
The prize to be won in the form of lower supply-chain costs is enormous. A
recent study by a group of consultants at McKinsey* put a figure on the amount
that is lost by producing cars to meet a demand that never materialises. Eliminating
such losses (and the associated discounts needed to sell off excessive stocks
of finished cars) could, according to McKinsey, be worth up to $80 billion a
year to the car manufacturers. Nissan Motor has estimated that converting entirely
to BTO could save up to $3,600 per vehicle. Nevertheless, despite some concerted
efforts, notably among car makers in Europe, the goal of the "three-day
car" (as one research project dubs BTO vehicles) could still be ten years
Ever since Henry Ford battled with Alfred Sloan’s General Motors for leadership
of the car industry in America in the 1920s, the watchword in Detroit has been
"move the metal". Models would be mass produced in batches of different
colours, or with different trims and options, based on the best guesses of the
marketing department as to how many of each variant could be sold. Big car manufacturers
became adept at leaning on dealers to absorb vehicles (even offering them up
to 30 days’ free credit) and encouraging them to sell below list price if they
No industry epitomises the traditionally gaping gulf between producer and consumer
quite as clearly as the car industry. The tensions in a car showroom-between
the salesman who wants to sell what he has in stock and the customer who wants
to buy what he has in mind-make buying a car one of the least enjoyable of all
The salesman for a dealership in mass-market cars has to make some three sales
a week to earn his wages. But dealerships are not thronged like food stores.
So when somebody actually comes through the door, the salesman is desperate
to close a deal, even if he does not have the version of the car that the customer
is actually looking for.
The mass-customisation zealots think that all this can be changed, creating
a world in which consumer satisfaction and producer profits rise steeply together,
as systems become more agile and faster. Everybody looks at how Michael Dell
dethroned Compaq, the PC-industry leader, with the simple business model of
direct sales over the telephone and the Internet. The Dell customer specifies
what features he wants on his PC and pays upfront by credit card. The machine
is then assembled and dispatched, usually arriving within three days.
“No industry epitomises the traditionally
gaping gulf between producer and consumer quite as clearly as the car industry”
Yet the real secret of how Dell Computer manages this trick lies in the way
that it restricts its computers to several key modules, and stocks a variety
of each, allowing a wide choice of customer specification. In fact, Dell PCs
can be put together in about four minutes flat, with a further 90 minutes needed
to load up the software. Most of the customisation comes from the software that
The essence of BTO production is to have standard pre-assembly of such modules,
which are then configured at a late stage in the manufacturing process. Dell
has to be sure that suppliers can respond quickly and furnish the necessary
quantities of the modules that are in demand. Leaving the customised bits to
the end of the assembly process helps to reap some of the benefits of mass production
while offering individual specification and rapid delivery to a "customer
of one". This formula, the antithesis of the mass market, has allowed Dell
to grow by 40% a year in recent years, even as the PC industry as a whole has
been growing by only 15-20%. Last year, Dell replaced Compaq as the world’s
biggest PC maker.
Computers are not the only consumer product for which lead times to delivery
have shrunk. Photographic development is another, going from five days to one,
or even to one hour for premium services in which the job is done in special
mini-labs rather than in the big photo-processing factories of yore. Another
is spectacles: some retailers can now deliver individually tailored lenses within
In these cases, the key enabling development has been the arrival of production
methods that allow manufacturing to be farmed out to small, local sites-ie,
the shops themselves. Some lean-production experts, such as Anand Sharma, the
founder of TBM Consulting in North Carolina, think that one consequence of building
to order rather than for stock will eventually be a change in the geography
of traditional manufacturing. Mr Sharma foresees the rise of "distributed
manufacturing" with, for instance, fewer giant plants and more small ones
assembling from pre-fabricated modules closer to the end-user.
The three-day car?
There has been a big change within the car industry in the way that orders
are handled. According to some recent studies, around 19% of cars ordered in
Europe are custom-made, compared with barely 7% in America. But the proportion
that are built-to-order (though not necessarily customised) in some countries
is a lot higher: in Germany, some 60% of cars are now built in response to customer
orders placed directly or indirectly with the factory. A study in Britain shows
that BTO cars rose from 10% of the total nine years ago to 32% in 1999.
Some 40 car companies and parts makers have set up a forum called the International
Car Distribution Programme (ICDP) to look into ways to streamline the distribution
and sale of cars. Based near Birmingham, England, ICDP brings together businessmen
and academics from across Europe to plot exactly what goes on in this area,
to study consumer reactions and to find ways of improving performance. The aim
is to find out how to supply and please more customers at lower cost.
|40 car companies
and parts makers have set
up a forum called the International Car Distribution Programme (ICDP) to
look into ways to streamline the distribution and sale of cars
This has led to an associated study involving such car makers as Volkswagen,
Ford, General Motors, Nissan, Honda and Peugeot. Known as the "3DayCar"
project, this explicitly sets out to see if the Dell Computer model can be applied
to car making. The team working on it is a mixture of economists, distribution
experts from other industries and former car-company managers who know how traditional
car distribution works.
The project director, John Whiteman, points out that most consumers who order
a customised car are used to waiting 50-60 days for it to be built and delivered.
As he says, "that shows how well they have been conditioned by the manufacturers."
Customers often identify delay with quality. In practice, says Mr Whiteman,
"it takes no longer to build a Bmw than it does to build an ordinary volume
model." This different expectation allows BMW to benefit greatly from its
flexible production lines.
Analysis by Mr Whiteman’s team has shown that out of the 42 days of order-to-delivery
(OTD) time for a typical volume car, actual production takes only two days,
with a further five for delivery from factory to dealer. The rest is all taken
up with handling paperwork, scheduling parts and determining a slot in the manufacturing
The team’s research across Europe suggests that customers would like to take
delivery of the car they order within one or two weeks. In Spain, according
to Fiat’s Mr Testore, if a dealer cannot promise a car within two weeks, customers
tend to shrug and go elsewhere. Some manufacturers, notably Renault, are speeding
up their production and ordering systems so that customers can get whatever
they want in less than 14 days. If you order a Renault you can make alterations
to the specification, colour and options, via a Renault dealer, up to 14 days
before the scheduled delivery date.
The downside of applying BTO to an industry such as car making is that consequent
peaks and troughs in demand threaten to make a mockery of mass manufacturing.
As the McKinsey paper points out, most car factories do not start to make profits
until they are working at 80% capacity. Fluctuating production leads to inefficiency
as factories reduce output in slack periods.
For that reason, McKinsey argues that BTO is a will o’ the wisp for car companies.
Its consultants suggest that "virtual" BTO is the real answer. That
means exploiting the Internet to find the whereabouts of a car that matches
an individual customer’s personal requirements somewhere within the existing
That way, customers get what they want sooner and inventory turns over faster-but
without losing the benefits of mass production. Car companies, the authors argue,
have better things to do (such as ensuring that they make cars that actually
appeal to consumers) than turning their manufacturing and distribution processes
In fact, car companies in Europe have been doing this virtual BTO for years.
They have set up regional distribution centres at which buffer stocks are held
for dealers to draw upon. Such centres are largely responsible for the rise
in the 1990s in the proportion of car buyers who get the exact specifications
that they want-in Britain, it has gone up from 25% to 76%.
The ICDP "3DayCar" team thinks that the trend is inexorably toward
greater and speedier consumer gratification. But its research suggests that
not all consumers want their cars within three days, even if that were feasible.
In reality, they have widely varied demands when it comes to timing. Fleet buyers,
for example, have programmed orders that stretch out into the future and can
help car companies to plan their production schedules. Other customers fall
somewhere in-between. The way to smooth demand, therefore, is to use price discrimination
to even out the peaks and the troughs. Rather than offering heavy discounts
to move stocks of cars that are piling up on the showroom forecourts, incentives
could be used to bring in orders for different waiting times. This is more or
less what airlines do when they sell seats on flights.
“The downside of applying BTO to
an industry such as car making is that consequent peaks and troughs in demand
threaten to make a mockery of mass manufacturing”
One of the biggest hurdles in the path of the three-day car is the paint shop,
which is traditionally an expensive bottleneck in the car factory. Changing
from one colour to another causes such a bother that car makers tend to run
big batches of vehicles in one colour at a time.
The only way round this is the sort of system that is used to make little Mercedes
Smart cars. They have metal frames on which are hung coloured outer panels.
This allows the customer to alter the colours later if he does not like his
original choice. Other companies, such as Fiat and Audi, have been using similar
frame construction methods for some of their models, rather than the conventional
monocoque bodies that are welded together from stamped steel panels.
Follow that washing machine
The car industry may be the pioneer, but many other manufacturers are also
looking for ways to reduce stocks. "American business is full of piles
of inventory," says Bill Beer, the boss of the biggest part of Maytag Corporation,
its appliances division, which is based in rural Iowa. "I see it as an
overhead conveyer belt with lots of $100 bills hanging from it. My job is to
pull down those bills."
Faced with fierce competition from companies such as General Electric and Whirlpool,
Maytag has chosen to make fancy washing-machines, dishwashers and refrigerators
that sell at around three times the price of mainstream products. This means
that there has to be a wide range of choices, putting a premium on flexible
manufacturing systems that can keep up with demand.
Mr Beer’s plan to grab the $100 bills is to move as close as he can to BTO.
He sees three steps along the way. At the bottom is old fashioned "build-to-forecast";
at the top is "build only against customer order". In the middle,
which is where Maytag is today, is "build-to-replenish"-ie, as soon
as one product is sold, start to make another. "The idea is that the product
does not go down the line until the cash register rings in a store. The real
trick is to organise yourself so that your supplier and your supplier’s supplier
also hear that ring."
To get anywhere near such a taut, demand-pull supply chain, Mr Beer and his
two manufacturing lieutenants (both from the motor industry, as it happens)
have, with the help of TBM, devised a combination of lean manufacturing and
quality-control techniques. The lean approach is standard: to install quality
and cut waste through piles of inventory along the line. The quality-control
work uses statistical tools to track the occurrence of faults and to spot even
the tiniest variations in the processes. Divergences from standard procedures
are what usually create faults.
are moving as close as they can to BTO – as are companies in the car industry
Walking around the floor of Maytag’s washing-machine factory in Iowa is like
a lesson in modern industrial archaeology. There are three levels of sophistication
on show. One part of the factory makes a traditional basic model in a traditional
manner, with one long assembly-line conveyer belt and lots of offline areas
in which faulty machines are taken out of the loop for repair. A second line,
making more sophisticated products, has a number of smaller production cells
instead of a long line, and only a few offline repair areas. Instead of a conveyer
belt, machines come along on little pads that stop them at each station for
a while. So far, so traditional.
But the third production area, making the most advanced Atlantis washing machines,
consists of just seven cells. In these, groups of workers make whole boatloads
of washers, which come off the line at the rate of one a minute. The work is
less mindless than performing single repetitive tasks, and each operator can
see what is going on around him. That means he can stop the line if something
is wrong, or move along to help a buddy at the next station when needed. Working
in such small cells means that no time is wasted by workers looking around for
parts. "Everything is brought to the worker, as if he were a surgeon,"
says Art Learmonth, one of Mr Beer’s manufacturing lieutenants. The cell arrangement
is also more flexible than one long line, in that seven different variations
of a washing machine can be turned out at the same time.
A similar reworking of the company’s Jackson, Tennessee, dishwasher factory
improved quality by 55%, cut work in progress by 60%, freed up 43,000 square
feet and increased capacity by 50%. Such factories can now turn out any model
at any hour of the production day, in response to feedback from the department
stores that sell Maytag’s products.
This "build-to-replenish" model is a key stage on the way to full-scale
BTO, which Maytag has already introduced for some of its top-of-the-line refrigerators.
Although it has not got there yet, the company’s aim is to "sell today
what we make tomorrow," says Mr Beer.
For Maytag, as for companies in the car industry and elsewhere, genuine mass
customisation may still be a long way off. But the journey towards it, via the
staging post of BTO, is teaching companies a lot about how to eliminate waste-of
both time and materials. This may be a case where travelling hopefully matters
almost as much as arriving.
* "The False Promise of Mass Customization", by Mani Agrawal,
T.V. Kumaresh and Glenn A. Mercer. McKinsey Quarterly, 2001 Number 3.