1 Make to Stock Make to Order

2 Learning Objectives Clarification of terms (via Hopp & Spearman) –Push, Pull, Make-to-Stock, Make-to- Order, Lean, Kanban… Exploration of Make-to-Stock vs Make-to-Order as tools for managing demand variability

3 Examples BMW –Make-to-stock THEN make-to-order Dell –Make-to-order AND (now) make-to-stock

4 The 3 Levers Manage variability with –Inventory: The classic buffer against changes in and uncertainty about demand. The cost is working capital and risk of obsolescence and damage, extra handling, etc. –Capacity: Changes in production rate, overtime, extra shifts, furloughs, shutdowns, etc. The cost is fixed capital invested in idle capacity, disruptions to workforce, suppliers, carriers, … –Time: Making the customer wait either via longer delivery commitments or backordering or The cost is in customer satisfaction, competitiveness, lost sales, etc.

5 Priorities Make-to-Stock –Protect capacity –Balance between availability (the time buffer) and inventory Make-to-Order –No (finished goods) inventory –Balance between Order-to-delivery time Capacity

6 Build-to-Stock Build-to-Stock is suited to situations … –Inventory cost/risk is low Demand is predictable Product is standard or even a commodity Low risk of obsolescence or price depreciation –Capacity is expensive or inflexible –Time is of the essence Customers won’t wait usually because a competitor will have the product Lead times are too long

7 Build-to-Order Build-to-Order is suited to situations … –Inventory cost/risk is high Demand is unpredictable Product is customized or highly differentiated High risk of obsolescence or price depreciation –Capacity is inexpensive and flexible –Time is less critical Customers will wait because no competitor can offer them (exactly) the same product Lead times are relatively short

8 Compromise It’s rare that a situation fits either perfectly. Always have to make compromises The “Cases” –BMW “Then” –Dell “And”

9 Z4 X5 X3 6 Series BMW Group. Brands and Models. Motorcycles 1 Series3 Series5 Series7 Series Source: Goudiano CSCMP 2005

10 BMW Group Development and Production Network

11 Z8 Dingolfing Munich Leipzig Regensburg Spartanburg Rosslyn Graz (external production) Berlin Oxford Goodwood Shenyang Source: Goudiano CSCMP 2005

12 Production Volume Total:

13 Production Volume Ford’s Worldwide vehicle unit sales of cars and trucks in 2004 (in thousands): The Americas 3,915 Ford Europe and PAG 2,476 Ford Asia Pacific and Africa 407 Total 6,798

Built-to-OrderBuilt-to-Forecast Sale from stock Customized vehicle Built-to-Order vs. Built-to-Forecast –higher level of customer satisfaction due to personalization –better inventory management –less sales incentives Customer StorageProduction Customer

15 Increasing Product Complexity Product variety & Part complexity –10 32 possible combinations of products at BMW –10 17 possible combinations of BMW 7 series –~70 million configurations of the Ford Escape –>2 40 configurations of Toyota Scion

16 Ford Escape 5 models (XLS manual, XLS automatic, XLT automatic, XLT sport, Limited automatic) 2 drive options (Front-wheel drive or four-wheel drive) 2 engine sizes (2.3L or 3.0L) 9 exterior color options (Dark Shadow Grey, Titanium Green, Redfire, Blazing Copper, Sonic Blue, Dark Stone, Black, Silver, Oxford White) 3 interior colors (Black, Flint, Pebble) 2 transmission options (4-speed, 5-speed) 4 wheel options (15” aluminum, 15” styled, 16” aluminum, 16” Bright Machined aluminum 2 choices of tires (BSW or OWL) 4 options of electronics (AM/FM Single CD with clock, AM/FM 6-CD, AM/FM Single-CD Cassette, Audiophile 6-CD) 4 options of seats (Cloth, Premium cloth, leather trimmed, premium leather) 5 special package options (Cargo convenience, convenience, leather comfort, safety, towing) representing 32 different possibilities 4 different upgrades (Spare tire, moon roof, roof rack and side step) representing 16 further options. These options lead to 70 million ~ 5x2x2x9x3x2x4x2x4x4x32x16

17 BMW 7 Series 350 Model Versions... leading to e.g theoretical combinations only for the BMW 7 Series 175 Interior Equipment Options Source: Goudiano CSCMP Extra Equipment Options 90 Standard Exterior Colors

18 Obstacles/ Requirements Inability to supply customized vehicles within “acceptable” timeframes –Avg. Leadtime for customized vehicles: weeks!!! Short OTD Process/Product/Volume flexibility Flexibility from suppliers Flexibility from logistics operators

19 BMW USA

20 BMW USA Z4 X5

21 BMW “Every customer receives his/her personalized vehicle at a compulsory date – at best at his/her preferred date” –100% delivery punctuality –Flexibility for order change Why offer flexibility?

22 Equipment changes in % (accumulated) Flexibility % Source: Goudiano CSCMP 2005

23 Process Monitoring and Target Control Distribution Process and Hand-over Sales Processes and Online Ordering Production- and Supply- Processes Dealer Sales System Production System Sales System Dealer Planning Dealer orderPurchasingLogisticsProductionDistributionHand-over Ordering Delivery Sales Processes and Online Ordering Optimize the whole process

24 The Push-Pull Interface Production System before Start Order Assignment Sort Early Order Assignment Bodyshell workPaint shop Assembly Production System after Frozen Horizon Sort Late Order Assignment Start order assignment OSM Bodyshell workPaint shop Assembly Build to Stock Build-to-Order

25 Flexibility for Order Change Reduction of Leadtime Ordering/SchedulingProduction/Distribution 15 WD WD WD Before: Order freeze Process Feasibility Supplier / Body shell work and Paint shop Change flexibility till 6 WD Distri- bution Assem -bly Hand-over to Sales 3 WD 10 WD 12 WD4 WD Breakthrough target:

26 Manage Capacity Mix of vehicles Capacity oriented Production planning Seasonality Source: Goudiano CSCMP 2005

27 Balance Time & Capacity Commits to a stated delivery date –Typically weeks in advance –Gives customer flexibility to change order in that time BMW balances capacity through –Build-to-stock/Build-to-order interface –Product mix at each plant –Shifting allocations among plants –Adjusting production within the plant Saturday & Sunday production Third Shift Annual plant shut-down

28 Challenges Uncertainty in demand is translated to part requirements As a smaller manufacturer BMW often doesn’t have the volumes to justify duplicate tooling so parts often come from Europe Together these mean higher parts inventories Even local suppliers must accommodate a high demand variability This affects carriers as well

29 Dell Builds to order for –Corporate and –Individual customers Firm commitments on delivery – within a matter of days –Except for component availability Also uses build-to-stock then build-to-order by forcing its suppliers to hold inventories at VMI hubs next to plants One motivation is (typical) price depreciation in computer components

30 Managing Capacity Several identical parallel lines Increase or decrease the number of lines operating based on the number of orders waiting Disruptions to staff

31 Recent Announcements Dell to sell computers through –Wal-Mart –Staples –Best Buy Why?

32 Discussion Advantages of adding indirect retail channels Disadvantages …

33 Effects on Managing Capacity? Retail channel (Build-to-Stock) adds another tool to help smooth demands on capacity Rather than shut down lines, make product for retail

34 Finding the Right Mix Managing uncertainty –Low cost, high commitment, low flexibility (“contract”) –Higher cost, low commitment, higher flexibility (“spot”)

35 Blended Model “Contract”: Build-to-Stock –For that portion of demand that is certain –Dedicate the capacity and run high-volume “Spot”: Build-to-Order –For that portion of demand that is uncertain –Reserve capacity and run fast and flexibly.