Daily Archives: October 17, 2006

There’s Such a Thing as Too Much Flexibility (in your Make-to-Order Supply Chain)

As you have hopefully figured out by now, there were a lot of good presentations at the Fourth Annual International Symposium on Supply Chain Management. Some were more insightful than others, some more interesting than others, and some more eye opening than others. A presentation that fit into this last category was Sascha Schoor‘s presentation titled Flexibility Cost Oriented Management of New Car Orders in the Automotive Industry.

German premium car manufacturers differ from other European manufacturers and American manufacturers in two distinct areas:

  1. build to order
    almost 100% of cars are configured by customers or dealers
    (as opposed to 48% in Europe and 6% in the US)
  2. individual configuration
    there are theoretically up to 1032 different configurations of a BMW5

This is because German manufacturers believe that consumers not only want a significant amount of customization capability in their cars, but that customers also want the flexibility to change their order up until a few days before production begins – the “5 day car” model. However, the study carried out by the presenter determined that despite marketing’s insistence that being able to change an order up until 5 days before production was very important to consumers, this is not the case.

The study, which analyzed responses from 803 participants, 508 of which planned to buy a new car in the next 12 months and 295 of whom had recently bought a new car, found that the majority of customers would not only be satisfied with a longer delivery time and, thus, a reduced capability to change an order once it is made, but that a substantial number would be willing to accept a significantly longer delivery time if an early booking rebate was offered (with 69% willing to lock in an order early if a 5% to 10% rebate was offered).

When you consider that

  • only 13% of customers change their orders after signing, and of these, the median number of changes is less than 2%
  • a total of 85% of these customers would accept a longer delivery time with an early booking rebate,
  • most of the changes revolve around easily configured electrical components (i.e. stereo/CD), interior choices (seats, color), and exterior choices (paint, optional accessories), and
  • having your orders locked down a few days in advance allows you to configure your production lines for optimal productivity, which can greatly lower your costs

it becomes clear that German manufacturers could save a lot of money and substantially increase profits by adopting a happy medium between the German car philosophy and the American car philosophy and providing rebates for those customers who lock in build orders early or choose a standard configuration. Then, for the 15% of customers who want flexibility, they can still provide that flexibility at a premium.

What do you think?