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This
month's newsletter is actually a book review. The Second
Century: Reconnecting Customer and Value Chain through
Build-to-Order, Matthias Holweg and Frits K. Pil (MIT
Press, 2004) provides one of the most thorough, and
compelling, looks at the issues facing the automotive industry
in this period of intense global competition, fickle customer
demand, and low profitability. This book is the outgrowth of
the 3daycar Programme study conducted by MIT and the
Cardiff School of Business (UK) which chronicled the nature of
the automotive industry's examination of and experimentation
with Build-to-Order operating strategies. The authors, who
were part of the MIT study, provide a sobering message about
the prospects for the automotive industry based on the
difficulty many OEMs and suppliers are having with their
current method of manufacturing and distribution.
The
book is full of insights on build-to-order progress and sets
the record straight. The movement to build-to-order has been
around the automotive industry for a long time, in fact since
the industry began. Several automotive brands in Europe and
Japan pride themselves in their build-to-order capabilities.
Toyota provides 60% build-to-order in Japan but virtually none
in the U.S. and Europe. The authors point out that results
vary by manufacturer as well. While Toyota and Nissan are
actively implementing build-to-order in Japan, Hondas and
Subaru continue to make virtually all their cars to forecast.
Nissan implemented a new order entry system in 1991 that
allowed dealers to schedule daily orders 6 days prior to
production. Those days were reduced to 4 in 2001. In Europe,
the German market follows a long tradition of waits for custom
cars, with over 62% built to customer orders; in some case,
customers wait up to 6 months for delivery of their new car.
The
U.S. customer won't tolerate such a wait and, as a result, the
percentage of built-to-order autos in the U.S. is around 6%,
or a tenth of what goes on in both Japan and Europe. The
authors point out that for build-to-order to work in the U.S.,
a 2-3 week order-to-deliver cycle is required (62% of
customers surveyed indicated a willingness to wait up to 3
weeks while 20% were only willing to wait 1 week). One of the
most interesting analyses reported was the comparison of best
practices regarding order-to-delivery. While the worst was
nearly 100 days and the best was 21, the mean was 40. However,
the order-to-deliver process was broken into 6 categories:
order entry, order bank, scheduling, sequencing, production,
and distribution. By analyzing best practices in each
category, the authors found a composite best practice
capability of just less than 11 days! In other words, by
adopting current best practices in each of the categories,
build-to-order can meet customer expectations for
responsiveness and is a viable operating strategy in the U.S.
automotive industry.
The
difficulty the industry has is the unwillingness to change
some deeply seated habits. The authors list several: a
commitment to efficiency versus flexibility; a reliance on
forecasting despite its inaccuracies; the creation of "Lean"
islands of excellence without consideration for the holistic
needs of the value grid; and maintaining a "push"
mentality to create efficient mass production versus a "pull"
connection to the customer. In the meantime, the Holy Grail
remains volume. To borrow one of the authors' quotes here,
G.K. Chesterton, The Secret of Father Brown (1935)
said, 'It isn't that they can't see the solution. It is that
they can't see the problem.' As recent reports in the Wall
Street Journal attest, the efforts to achieve greater
productivity are monitored by analysts and managers alike with
even minor improvements rewarded. In the meantime, inventory
of automobiles on dealer lots in the U.S. is approaching $80
billion dollars with an average of 78 days stock.
The
book is sobering and factual. Data to support their position
is substantial. The solution they offer is simple: become
flexible. They stress that in order to be successful the value
grid (their description of the supply chain to demonstrate the
nonlinearity of the actual "chain") must achieve
flexibility in three areas: process, product, and volume. Of
the three, process flexibility is the hardest to achieve
(because it passes through the entire value grid) but product
flexibility, bringing the customer closer to customized
products is also critical. The authors describe volume
flexibility as enabling manufacturers to pace production to
market demands.
We
believe this book is a must read for anyone considering their
business model and the scope of operational strategies to use
to guide business success. As advocates of rapid
build-to-order operating strategies, we think the clock is
ticking. Costs are too high and global competitiveness too
fierce. As the pressure mounts, will it take a creative
visionary like Carlos Ghosn of Nissan whose mandate is to
achieve an order-to-delivery goal of 14 days in the U.S. to
show the way to even lower costs and better profitability? Or
perhaps, a company who is desperate like Toyota was 50 years
ago when they initiated what was to become the Toyota
Production System? While we pull for the creative visionary,
history is on the side of whoever is most desperate.
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