Can embracing the customer with Build-to-Order (BTO) cure the auto industry’s chronic lack of profits? That’s one of the questions posed by a new MIT study that follows the early 1990s’ study of lean production methods summarised in the book, ‘The machine that changed the world’. But some makers remain stubbornly wedded to the old ways and it’s not just the usual suspects. Neil Winton speaks to the authors of ‘The Second Century’.
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Renault, closely followed by BMW and Volvo, is embracing the customer and building more and more of its cars following direct orders from buyers. “Build-to-order” promises to cure the industry’s propensity to produce hundreds of thousands of cars nobody really wants, based on forecasts of likely, or hoped for, demand.
Ford, GM and VW are hesitating to go for build-to-order, despite claims that it will empty the fields full of countless unwanted cars which can only be sold by crippling discounts and price cuts.
Some Japanese manufacturers, for once, are hesitating. That’s the conclusion of Dr Matthias Holweg, co-author of a new book “The Second Century”, who says that the days of mass production and building to forecast are over. The car industry should stop producing shedloads of cars which, hopefully, might one day find a buyer. The customer should be the focus of production and build-to-order is the key to production with profit.
In an interview with Just-Auto, Holweg, lecturer at the Judge Institute of Management, University of Cambridge, said Ford, GM and Volkswagen remained wedded to the old ways. But BMW and Volvo are, with Renault, eschewing the old, discredited methods. Renault’s alliance partner Nissan has also seen the light, but Toyota and Honda are still trying to match demand to forecasts rather than actual orders outside of their home market.
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By GlobalDataChronic state
Holweg said the auto industry is in a chronic state. “Layoffs, abysmal profit margins, long waits for popular models, skittish shareholders, dubious investors, soaring development and marketing costs – it (the global auto industry) suffers just about every plague in Pandora’s industrial box.”
“In Europe, one fifth of customers drive home cars that are not what they intended to buy; in the United States, half do so.”
Build-to-order is the answer. “As we enter the second automotive century, the winners will not be those firms that search for larger and larger scale, or those that run efficient factories, or those that squeeze the last drop of profitability from their suppliers. The winners will be those that build products as if customers mattered.”
Absurd scenarios
Reliance on incentives leads to the perpetuation of absurd scenarios, where for instance a dealer persuades a number of customers to buy unwanted red cars with zero percent finance, trade-in incentives, free upgrades and other inducements. The factory, seeing the apparent success of the red painted versions, promptly raises production of cars nobody was willing to buy at the sticker price.
“The cycle is self-fulfilling. It breaks only when no amount of incentives will persuade a customer to buy a neon-pink car,” Holweg said.
Build-to-order will mean fewer cars sold, but prices will be much higher because they can match customer desires. Buyers will pay the full price for cars they want.
Sounds good but will it work?
Isn’t build-to-order just another buzzword, which, like socialism, sounds great, but doesn’t work or is counterproductive in practice? Surely, it is a pipedream to pretend that customers can visit a local dealer, demand all sorts of extras and make dozens of choices, and expect the car of his dreams to arrive on the doorstep in two weeks time?
Holweg concedes that unfortunately build-to-order was first mooted at about the same time as other false prophets were proclaiming that the Internet and electronic commerce would save the automotive world. When the notion of “e” commerce as saviour crashed and burned, some thought that build-to-order had disappeared with it.
Not so says Holweg. “When the e-bubble burst, build-to-order became a cold topic, but Renault and Volvo had plotted this route, and realised there were considerable savings to be made. BMW of the prestige manufacturers is probably the best one. Nissan is also trying the 14-day car in Japan.”
High rebates
“Some manufacturers are making more noise than progress. Ford, GM and VW, I’m afraid to say, are in this group and this is causing the current crisis. Look at their financial states with VW moaning about high rebates in the U.S., China and Germany.”
“What use is a factory that shaves minutes in assembly, when the finished product sits in stock for months?”
“Making to forecast is probably as effective as attempting to drive a car by looking in the rear-view mirror – by the time you see the turn, you’re past it, and the opportunity for redirection has been lost.”
Customise vehicles
“This mass production thinking worked well in times of high demand, but in today’s markets demanding customers want customised vehicles and you can’t do this in a mass market. They are still trying to achieve high capacity utilisation and going for market share, but this doesn’t tell you anything about profits. If you move to build-to-order and give customers what they want you can charge higher prices and generate bigger profits.”
Holweg said that customers currently have little chance of getting the car they want under mass production systems.
Almost two-thirds of Renault production is now build-to-order, according to Holweg.
Who dares wins
“The leaders of this will get the greatest benefits. Stocks (of cars) will fall and incentives will disappear. Look at the new (VW) Golf. A month or so after its launch we were seeing 2,000 euro discounts. What a disastrous situation for VW. Those that wait the longest will eventually be forced to adopt build-to-order. Those that don’t want to
change will become low-cost, niche, low-end producers – the Model T makers of modern times and will provide cheap motoring at the low end of the market, like Hyundai, Kia and Daewoo.”
Holweg said Toyota and Honda, thought by many to be leading lights in automotive production, apparently aren’t interested in build-to-order, at least outside of Japan. Holweg admits that their sales success is undeniable, but doubts if they are making good profits.
Europe can show the way
“In many ways one could argue that the United States showed the way into the era of mass production in the 1900s, Japan led the way into lean production in the 1950s, and now Europe is showing the world how to do build-to-order. Also build-to-order strategies are bound to a market region. So, Toyota, for example, might be very good at meeting customers’ orders in Japan, but sells a very large fraction of cars from stock in both Europe and the United States.”
Allowing customers to virtually design their own cars is a recipe for more content and higher profits.
More options equals more profit
Renault finds that when customers decide on which options to buy, rather than accept options which are included in a ready-made car at a dealership, the result is a much more expensive set of choices.
“Renault’s experience is that option content is much richer when customers order, than when dealers did it for them. Cautious dealers kept specification low to move the metal at the lowest possible price. These option-rich orders are very profitable for the manufacturers.”
Another victim of current mass production methods are the suppliers. When manufacturers are desperate to cut costs, they often turn first to suppliers and insist on cuts. This has left the suppliers so low in profitability their long-term viability is threatened, and often not making enough money to invest in new products, according to Holweg.
Must have great products
But not even a whole-hearted embrace of build-to-order is going to save manufacturers who don’t come up with great products.
“Build-to-order is only one piece of the puzzle. If you don’t have attractive products this won’t save you. But ridiculous levels of inventories in the U.S. and increasingly in Europe and China means that change is imperative. We changed to lean manufacturing about 15 years ago. Now is the time to think about how to use those flexible factories to do what the customer wants,” Holweg said.
“Responsiveness is an idea whose time has come. The long-term profit margins of most major players are less than 5 per cent. What do firms have left to lose?”
(The Second Century – Reconnecting Customer and Value Chain through Build-to-Order, by Matthias Holweg and Frits K. Pil, The MIT Press $35.00 (mitpress-orders@mit.edu)).
