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Make to Stock
Make to Order

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

Examples

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

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.

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

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

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

Compromise

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

BMW Group.
Brands and Models.

1 Series

3 Series

5 Series

7 Series

Source: Goudiano CSCMP 2005

Series

Motorcycles

BMW Group Development and Production Network

Dingolfing

Munich

Leipzig

Regensburg

Rosslyn

Graz

(external production)

Berlin

Shenyang

Source: Goudiano CSCMP 2005

Spartanburg

Oxford

Goodwood

Production Volume

Total: 1119.1

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-Order vs.
Built-to-Forecast

Built-to-Order

Built-to-Forecast

Sale from stock

Customized vehicle

higher level of customer satisfaction due to personalization
better inventory management
less sales incentives

Production

Customer

Storage

Production

Increasing Product Complexity

Product variety & Part complexity

1032 possible combinations of products at BMW
1017 possible combinations of BMW 7 series
~70 million configurations of the Ford Escape
>240 configurations of Toyota Scion

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

BMW 7 Series

350 Model

Versions

... leading to e.g. 1017 theoretical combinations

only for the BMW 7 Series

175 Interior

Equipment Options

Source: Goudiano CSCMP 2005

500 Extra

Equipment Options

90 Standard

Exterior Colors

Obstacles/ Requirements

Inability to supply customized vehicles within “acceptable” timeframes
Avg. Leadtime for customized vehicles: 6-10 weeks!!!
Short OTD
Process/Product/Volume flexibility
Flexibility from suppliers
Flexibility from logistics operators

BMW USA

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?

Flexibility

Equipment changes in % (accumulated)

Source: Goudiano CSCMP 2005

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

days before order freeze

Comfort seat

adjustable electronically

Xenon lights

Independent vehicle heater

Navigation systems

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 order

Purchasing

Logistics

Production

Distribution

Hand-over

Ordering

Delivery

Sales Processes and

Online Ordering

Optimize the whole process

The Push-Pull Interface

Production System before

Start Order Assignment

Sort

Early

Order Assignment

Bodyshell work Paint shop Assembly

Production System after

Frozen

Horizon

Sort

Late

Order Assignment

Start order assignment

OSM

Bodyshell work Paint shop Assembly

Build-to-Order

Build to Stock

Reduction of Leadtime

Flexibility for Order Change

Ordering/Scheduling

Production/Distribution

15 WD

28-32 WD

13-17 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

2 WD

4 WD

Breakthrough target:

Manage Capacity

Mix of vehicles

Source: Goudiano CSCMP 2005

Capacity oriented

Production planning

Seasonality

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

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

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

Managing Capacity

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

Recent Announcements

Dell to sell computers through
Wal-Mart
Staples
Best Buy
Why?

Discussion

Advantages of adding indirect retail channels

Disadvantages …

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

Finding the Right Mix

Managing uncertainty
Low cost, high commitment, low flexibility (“contract”)
Higher cost, low commitment, higher flexibility (“spot”)

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.