BTO is easier said than done.
Fez
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ELECTRONIC BUYER NEWS
November 16, 1998, Issue: 1135
Section: Special Report: Next Marketable PC
----------------------------------------------------------------------Transition to BTO/CTO is not easy
Terrence Austin
When Dell Computer Corp. and Gateway 2000 Inc. started selling computers directly to customers, they had no way of knowing what impact their innovative model would have on PC supply-chain economics.
Their strategy improved delivery speed, customer choice, and inventory velocity. And now Compaq Computer Corp., Hewlett-Packard Co., IBM Corp., and others are aggressively betting the future on channel assembly, sales agents, continuous replenishment, retail kiosks, and other one-touch indirect models that link companies to end-customer demand-and help make vendors more flexible in how they respond to customer choices.
But the nagging fact is that the transition to the new model is not easy to get right, and thus for many companies the promise of greater efficiencies and improved financial performance has remained elusive.
The heart of the new model is build-to-order (BTO) or configure-to-order (CTO) capability. BTO is tied to a predetermined and usually fast-moving final product. CTO allows the customer to select among several configuration options such as memory, hard disk, and software.
The key is that under each approach, final assembly starts only when a firm customer order is received and cleared. In an industry in which prices decline every week and entire product families are made obsolete every six months, the flexibility that BTO/CTO affords is superior to traditional build-to-stock (BTS) approaches.
Not only can companies respond to constantly changing customer requirements, but they can direct demand to available options. It is also significantly easier to introduce new product options. Because companies are dealing with components as opposed to finished goods, they can be more accurate with forecasts and manage both margin erosion and obsolescence risk. And they are able to drive revenue with up-selling and cross-selling.
All this produces more revenue, higher margins, better inventory efficiency, and greater customer satisfaction. So, why hasn't the industry seen a dramatic, widespread, and successful migration to pure CTO and BTO? Because there are a number of daunting challenges.
For starters, there's the temptation to add complexity. One of the advantages of BTO/CTO is the choice it offers customers. But for a typical, configurable PC product, if every possible option were allowed-from chassis, CPU, and OS to memory, hard drive, etc.-there would be on the order of 70,000 possible configurations, plus all sorts of software bundles.
The key is to define the right number of options that are going to capture the sweet spot of customer demand. Once the right options are defined, more complexity can be avoided by ensuring that the product is designed with common parts and modular subassemblies.
Then there's the challenge of changing the entrenched planning mind-set-from one dictated by forecasts to one in which real orders rule.
The key to the BTO/CTO model is an unbroken connection between orders and actions. By contrast, the BTS model relies on efficiencies of scale and uses inventory and lead times to buffer against variations in supply and demand. With BTS, the unit-demand forecast is the central piece of information. As such, every functional department wants to have its own particular spin on the forecast, creating distortions and fragmentation. Even order data get distorted in the BTS environment because of channel fill and phantom demand issues.
But in the CTO/BTO world, real orders are what matter. Forecasts are still important but are used primarily for materials planning.
The problem: Fledgling CTO/BTO programs often can't resist putting planning buffers between activities and orders. An example: Manufacturing may not have fully retooled to a unit-of-one operation and may introduce a master production scheduling process to consolidate order volumes and achieve better line utilization and fewer setups. The trouble is, once the buffer between orders and action is broken, the benefits of CTO/BTO quickly disappear.
Finally, there's the challenge of ensuring scalability. It's relatively easy to "create" new manual processes that can sustain monthly volumes in the 100s and 1,000s. Often they simply are workarounds of an old BTS process. But once volumes increase, these manual processes become inadequate. The challenge for companies migrating to CTO/BTO is to create processes and systems that are able to cope with early low volumes and can also be automated and scaled up to handle monthly volumes in the hundreds of thousands.
So, while companies are making optimistic public announcements of ambitious BTO/CTO plans, many of them are quietly struggling behind the scenes to get it right. The stakes are high. Companies that fail to live up to the promises of configuration choice, greater availability, and the improved financial performance that customers and financial markets now expect could suffer long-term negative effects. Worse: An inadequately planned and poorly executed CTO model is likely to have a higher cost base than the traditional BTS model-resulting in even more pressure on already squeezed margins.
Meanwhile, the profits will be captured by companies that dedicate themselves to cautiously managing their migration to the new PC supply-chain economics, instead of having the migration manage them. |
