Despite the obvious complications that build-to-order brings, carmakers are still interested in the principle. An analysis which considers the global changes in the industry, and whether building such a car in just a few days can ever become a reality?
In middle of last September, helped by her father, 18-year-old UK citizen Emma Wilding found herself in the fortunate position of being able to place an order for a brand-new Skoda Citigo.
Her father happens to be Richard Wilding, professor of supply chain strategy at Cranfield University's School of supply chain strategy at Cranfield University’sSchool of Management, and a longtime observer of the global automotive industry. Being ‘in the trade’, so to speak, he duly took full advantage of Skoda’s online order tracking system to monitor the progress of the new car, which was to be built at the Volkswagen Group plant in Bratislava, Slovakia.
"After being manufactured in the second week of October – nearly four weeks after we had placed the order – it was then in transit to a German port, where it sat for a week,” he says. “As of the end of October, it has now spent a week sitting in a UK port. We’re hoping that it will arrive at the dealer this week, and that we might get it next week.”
A certain irony is not lost on him. “You can put a car down the assembly tracks in three hours – and a further day of shipping time will reach an awful lot of Europe,” he notes. “Even allowing for an element of waiting time in the order book, it’s clearly taking longer to get the car to the customer, post-manufacture, than it is to get the components together and assemble it.”
Alan Braithwaite, chairman of supply chain consultants LCP Consulting, himself a visiting professor of supply chain management at Cranfield, offers another personal insight into today’s automotive industry.
He recently purchased a new BMW X3, which took an eye-popping seven months from order to delivery. It was a delay that he found surprising, but one he was happy to accept so as to get exactly the new car that he wanted.
“You have to remember that the automotive industry pioneered ‘just-in-time’ and lean manufacturing, but has since moved on,” he notes. “These days, a lot of the impetus is around dealing with variety and complexity, and reducing the economic run length associated with a given variant. Particularly at the premium end of the market, manufacturers are using long lead times to sequence highly customised vehicles down their assembly lines.”
Needless to say, it wasn’t supposed to be like this. With Europe mired in recession and consumers cutting back sharply on durable purchases such as cars, these data points contrast sharply with what many once thought the industry ought to be able to achieve, especially in a period of low demand.
For in the past 10 years or so, two major projects – involving experts drawn from academia, consulting and the automotive industry itself – have attempted to redefine the business of automotive supply chain management and vehicle manufacture, pointing the industry towards a build-to-order business model.
Their goal was to counter the long-familiar and oft-stated disconnect between supply and demand. Order a vehicle to be built-to-order, and a lead time of weeks or months was customary. Yet, at the same time, assembly lines were busily turning out vehicles that had been built-to-forecast, which would then clog up compounds around the world as finished goods inventory, until a buyer materialised, often incentivised by a discount.
The potential for improvement was obvious: instead of selling at a generous discount vehicles which had been built-to-forecast, why not simply build the vehicles that consumers and fleet owners actually wanted to buy?
The BTO roadmap The logic is compelling. But how to get there? How far could the industry go towards build-to-order and what changes would be necessary to manufacturers’ systems, processes, assembly technologies and logistics processes? These were the questions that the two studies addressed. And while the detail underpinning each study differed, the broad conclusion was the same: by using techniques such as modular construction and introducing changes to planning and logistics processes, significant improvements could be made.
In 1999-2001, for instance, a programme of research jointly funded by two British government bodies looked at the feasibility of a three-day car. Involving automotive manufacturers as diverse as Ford, Honda, Nissan, Volkswagen and GM, as well as logistics partners such as Wallenius Wilhelmsen Logistics, and dealerships such as Pendragon and Inchcape, the 3DayCar study identified, in precise detail, at which points in the process the 40 days between order and delivery actually built up.
Most of the elapsed time, it turned out, was consumed at the beginning of the process: order-entry (3.8 days); order bank (9.8 days); order scheduling (14.1 days) and sequencing (6 days). Once released to the assembly lines, production took 1.4 days, loading 0.9 days, and delivery to dealer 3.8 days. In other words, most of the time taken to produce a car could be defined as paper shuffling, not manufacturing or transporting it.
A few years later, with European Commission funding and assistance, another group of experts took another stab at the idea – a journey chronicled in 2008’s Build To Order: The Road to the 5Day Car, written and edited by two academics, Glenn Parry and Andrew Graves.
The work was nothing if not pragmatic and hard-nosed. Split into three ‘work areas’, each theme was led by a different body. Germany’s Siemens VDO Automotive headed one; the Fraunhofer Institute for Materials and Logistics, based in Dortmund, Germany, headed another; while the third was led by Britain’s University of Bath.
Project participants, though, were drawn from all over Europe – Ireland, France, Spain, the Czech Republic and even Russia. From the automotive industry, carmakers and suppliers as diverse as Daimler, BMW, Lear Automotive, Dana Corporation, ThyssenKrupp Automotive and CLEPA (the European Association of Automotive Suppliers) took part.
The broad conclusion was that, once again, significant improvements were attainable, and a more built-to-order business model was a realistic prospect. On a wide series of fronts – supplier parks, modular construction techniques, simplified component re-designs, alternative-planning techniques – action seemed possible.
More flexible than before
Five years on, it seems appropriate to ask what progress there has been. Is a true built-to-order strategy any closer to being reality? What changes have occurred and what barriers remain? Industry observers have some surprising answers.
First, the good news: build-to-order is alive and well. Indeed, the fact that Emma Wilding and Alan Braithwaite could order a built-to-order vehicle at all is testimony to a shift in the industry’s business model, says Dr Matthias Holweg, reader in operations management and director of the centre for process excellence and innovation at the University of Cambridge’s Judge Business School, and the author of a number of studies probing build-to-order in the automotive industry.
“These days, go to any major manufacturer and what you’ll see is a built-to-order volume of up to 60% – which is very different from what you’d have seen a dozen years ago,” says Holweg. “[By comparison,] the built-to-order content in the UK volume car market in 1999 was around 32%, up from just 10% in 1992.”
The difference, he reckons, is that the industry can see that despite the complications build-to-order brings, the model makes financial sense, which he has shown in a recent academic study conducted using a volume manufacturer’s real data.
“The industry isn’t stupid,” Holweg insists. “Whatever makes sense – at least at a point in time – will be adopted. It just takes time, because the industry moves fairly slowly.”
Indeed, he adds, look at the carmakers that participated most extensively in the 3DayCar and 5-Day Car projects, and what you’ll see are programmes that have emerged from that work. Nissan’s deouki seisan build-to-order programme, for instance, has its roots in a phrase that literally translates as ‘the customer leads the way’. Volkswagen has its ‘Order to Delivery’ (OtD) programme, while BMW also has its influential KOPV (Kundenorientierter Vertriebs-und Produktionsprozess or s ‘customer-orientated sales and production process’).
Ben Waller, senior researcher at industry analysts ICDP, is another industry observer pointing to progress. One upshot of the 3DayCar and 5-Day Car projects, he notes, was an investment by carmakers in developing more flexible pre-manufacture order amendment and sequencing systems, which enabled them to cut lead times. And while actual usage hasn’t exactly mirrored the level of investment – the economic conditions of the past five years being a strong causal factor – the result is much greater post-order flexibility.
Customers might be far from being able to order a customised car and receive it in just a few weeks (let alone days), however they can make late adjustments even just a few days before production. More importantly, a vehicle scheduled as a stock build can be modified prior to production to become a built-to-order vehicle.
“You can make changes much later than was possible ten years ago,” Waller notes. “It varies from manufacturer to manufacturer, but it’s often in the order of two weeks to a month.”
This practice of subtly changing a stock vehicle’s specifications to match an emerging build-to-order requirement has become more adapted among German manufacturers, including the Volkswagen Group and BMW, but recently Automotive Logistics has also discovered thats Toyota, which typically privileges stable production over consumer flexibility, has also made moves in this direction, at least in Europe (see p24 Automotive Logistics, October-December 2012).
Glenn Parry, associate professor of strategy and operations management at the University of the West of England Bristol Business School, and co-author of Build To Order: The Road to the 5Day Car, is another industry observer pointing to progress. Seeking an element of competitive edge, he asserts, a number of manufacturers have seemingly taken their work on build-to-order concepts in-house, rather than into the public domain.
“Periodically, I get phone calls and e-mails from people within the industry – people who I don’t know, and with whom I have had no prior contact – who want to ask very detailed questions about obscure parts of the book,” he says. “I’ve no proof, but I conclude from their level of interest that they are trying to implement the concepts internally.”
Can you build to order across continents? The trouble is that the world has changed, and as far as build-to-order is concerned, for the worse in many ways. What looked tantalisingly doable just a decade ago, now seems further away than ever. Carmakers, for instance, have complicated the picture. To begin with, notes the ICDP’s Waller, vehicle manufacture takes place increasingly far away from the markets where vehicles are to be sold.
“Transport costs have acted as something of a brake in recent times, but in terms of production, there’s been an undeniable shift eastwards,” he says. “The result is to lengthen the transport time between manufacture and delivery."
What’s more, says John Canvin, managing director of automotive standards body Odette International, there’s been a parallel trend for manufacturers to also increase the complexity of their product line-ups.
"A manufacturer which might have had 10 models 15 years ago, now has 30 – and is looking to move to 60 in the not too distant future,” he notes. “Throw in body styles, crossovers, option packs and trim levels, and there’s been a huge proliferation of components, which complicates the build-to-order proposition.”
And those components, in turn, are produced by a supplier base that is itself far less well disposed towards build-to-order than it might have been previously. Most obv iously, as Canv in observes, there’s been an even greater move to both global sourcing, and single sourcing, par ticularly across common vehicle platforms in different regions. While modular-based production and shared platforms are becoming much more ubiquitous, this manufacture is being coordinated across multiple continents. It’s not uncommon today, for example, for a vehicle to share a platform across Brazil, China and the US, with a considerable number of parts single-sourced in one of those locations. The result is not only a more complex supply chain but a necessity to hold more inventory.
“If the idea of build-to-order is to take inventory out of the supply chain, then the supply chain is less well-positioned for this than it was before,” Canvin notes. “Global sourcing, single sourcing – supply chains are longer, are more complex, and are arguably more risk-prone. Throw in the events of recent years – volcanic ash clouds, the Japanese earthquake and tsunami, and flooding in Thailand – and the temptation to hold more stock is obvious.”
And just as damaging as these natural events have been the global financial crises of recent years, say those close to the industry. To be sure, notes Holweg, the combination of ‘scrappage’ schemes and manufacturers keeping plants open by increasing their percentage of built-to-forecast vehicles was a setback.
“What we saw was that the build-to-order model wasn’t crisis-resistant,” he says. “In the real world, factories are a fixed cost and so are people. Manufacturers will keep going as long as they can and as best as they can before deciding to cut. A little extra inventory may prove cheaper than closing a plant.”
Capacity cuts In truth, there has been a larger correction in the automotive industry of producing volume closer in line with the sales market, particularly in North America. In Europe, too, carmakers are quicker to slow or halt production as sales slow, but there are a host of reasons – political, union, etc – why scaling back has been difficult.
However, automotive suppliers on both sides of the Atlantic have generally taken a more aggressive approach to cutting capacity, and one which has severely impaired their flexibility, says Richard Gane, a long-time automotive veteran and a director at supply chain and procurement software-provider Ve n d igital.
“Unlike vehicle manufacturers, suppliers did take capacity out, especially in the United States, where many went bankrupt,” he notes. “Even in Europe, it’s not difficult to find suppliers who cut back, and where seven-day work weeks and capacity contrasts are now business-as-usual. The result is that there’s no longer enough slack in the system for them to be flexible enough for build-to-order.”
And then, of course, there’s the whole nature of the post-manufacture supply chain to consider. Certainly, the tensions within the industry that have long prompted dealers to want to sell vehicles ex-stock, rather than build-to-order, remain strong.
“Fundamentally, dealers are incentivised to sell what they already have on-hand, rather than wait for an order to come in from the factory,” s ays Christopher Macgowan, visiting professor at the University of Buckingham Business School’s Centre for Automotive Management, and a former chief executive of both the UK’s Society of Motor Manufacturers and Traders and The Retail Motor Industry Federation.
“The relationship between manufacturer and dealer is better than it was, but it’s still an uneasy one, with room for improvement,” he adds.
So is the built-to-order car just a dream, then? Can the industry close the gap between present practice and the build-to-order ideal?
Cranfield’s Richard Wilding offers a note of cautious optimism. Today’s automotive business model, he suggests, reflects a trade-off – one in which the costs of vehicle production, inventory holdings and transport are constantly balanced against price, and therefore consumer and fleet demand.
“The move to a build-to-order model, or at least a much greater build-to-order proportion of output, could almost certainly be achieved,” he states. “But in the end, it all boils down to what the customer would be willing to pay for. And is the customer prepared to pay more in order to get delivery in a week, rather than a month? That’s the question that must be answered.”
