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.