New article: How BTO can Help Design Half-Cost Products
by Dr. David M. Anderson, P.E., CMC
Build-to-Order is the capability to quickly build standard or mass-customized products upon receipt of spontaneous orders without forecasts, inventory, or purchasing delays.1 These products may be shipped directly to individual customers, to stores or dealers, or as a response to assemblersí "pull signals" (assemblersí signals that certain parts are needed right away for assembly).
Similarly, your suppliers may need to use Build-to-Order to respond to your pull signals, which is a key element of flow manufacturing. And yet, if suppliers can not actually build parts on-demand, then they will be tempted to meter them out from inventory, in essence, transferring your parts inventory to their finished goods inventory.
The basic strategies for implementing Build-to-Order are supply chain simplification, concurrent design of versatile products and flexible processes, the mass customization of variety, and the development of a spontaneous supply chain. Build to order can actually build products on-demand at less cost than mass produced batches, if "cost" is computed as total cost. Therefore, total cost measurements should also be part of this process.
The operational aspects of spontaneous build-to-order are discussed through illustrated examples in the mass customization article. One example is for electronics products. Another is for fabricated products.
Supply Chain Simplification
Although supply chain management is a much discussed topic today, most implementations fail to apply the basic lessons of Industrial Engineering 101: "Simplify before automating or computerizing." The simplification steps for supply chain management are standardization, automatic resupply techniques,, and rationalization of the product line to eliminate or outsource the unusual, low-volume products that contribute to part variety way out of proportion to their profit generation ability. The goal of supply chain simplification is to drastically reduce the variety of parts and raw materials to the point where these materials can be procured spontaneously by automatic and pull-based resupply techniques. Reducing the part and material variety will also shrink the vendor base, further simplifying the supply chain.
Part variety reduction. Drastic reductions in existing part variety are possible through Product Line Rationalization, which eliminates or outsources products and product variations that are problem prone, donít "fit" into a BTO/e-commerce environment, have low sales, have excessive overhead demands, are not really appreciated by customers, have limited future potential, or may really be losing money (total cost measurements will help identify money-losers). Eliminating old technology products can eliminate whole categories of part and suppliers. Not only is rationalization an important prerequisite for spontaneous BTO, as a stand alone program, it can have the immediate benefits of raising profits and freeing valuable resources to implement e-commerce and spontaneous BTO programs. Proctor & Gamble cut its product roster by a third and reduced production and distribution costs by $1.6 billion, or 8%, over five years! In hair care alone, it slashed product offerings in half and grew market share by 5 percentage points.6
Part variety can also be reduced by designing new products around standard parts. Using an effective zero-based standardization approach developed by the author,7 Intelís Systems Group reduced 20,000 active part numbers to 500 standard parts. One of these techniques is to eliminate separate categories of parts for various tolerances and strengths. By eliminating 5% tolerance resistors and making all resistors 1% tolerance, Intel was able to cut in half the number of resistors in its factories and this helped reduce 2,000 passive components (resistors, capacitors, and diodes) to 35 values.
Part variety can be further reduced by consolidating many inherently inflexible parts into a few very versatile standard shapes; this would apply to raw castings, molded parts, stampings, extrusions, custom silicon, power supplies, and bare printed circuit boards. Such a move might appear to raise part cost, but the combination of purchasing leverage and material overhead cost reductions will make this a net gain from a total cost basis.
Raw material variety reduction. Too many types of raw materials can thwart spontaneity and make the manufacturer have to choose between stocking all types or ordering them and waiting for delivery. The solution is to aggressively standardize incoming raw materials which are then cut into various shapes by programmable CNC equipment, such as laser cutters and screw machines. The ultimate scenario for spontaneous BTO is to reduce the number of raw material types within each category to one, in which case "ordering" material is as simple as matching the tonnage in to the tonnage out, so a steady flow of materials can be negotiated. Such purchasing leverage and other material overhead savings would compensate for any cut-off waste and for some products getting "better" material than they need.
As raw material variety is reduced, it becomes more feasible to use automatic resupply techniques, like kanban, min/max or breadtruck (discussed next).
Automatic resupply. If the above steps are successful in reducing part and material variety, then much, maybe all, of the procurement can be automatic based on demand, without the need of MRP or purchase orders, through kanban, min/max, and breadtruck resupply.
Kanban is a versatile technique that enables automatic resupply of parts that can be made in batches or have not-quite-spontaneous delivery times.
A related concept is the "min/max" technique, often used for raw material like sheet metal, where material is consumed until the stack reaches the "min" level, usually marked on the rack or wall. This triggers a re-order of the material to bring it up the "max" level.
The easiest and "lowest hanging fruit" in material logistics is the breadtruck (sometimes called "free-stock") delivery system for small, inexpensive parts, like fasteners. Instead of counting on forecasts to trigger an MRP system to generate purchase orders, all the "jelly bean" parts can be made available in bins at all the points of use. A local supplier is contracted to simply keep the bins full and bill the company monthly for what has been used, much like the way bread is resupplied by the breadtruck in a small market.
Although lean/flow production works best for level demand, spontaneous build-to-order techniques can accommodate seasonal demands better than stockpiling finished goods inventory, with all the associated inventory cost and risk of building products that may not sell. The first effort would be to try to level demand with off-season incentives based on actual differences in total cost. For the remaining seasonal variations, seasonal products can be manufactured on-demand with a minimum of part inventory and risk with industry-specific strategies (developed during Dr. Andersonís consulting engagements) that include the following:
Concurrent engineering of versatile products and flexible production
Concurrent engineering of product and processes. Existing product designs may not be suitable for spontaneous BTO or mass customization. There may be too many different products and, thus, too many different parts to distribute at all the points of use. Even within any group of products, there may be a needless and crippling proliferation of parts and materials. The specified parts may be hard to get quickly. The products and processes may have too many setups designed in. Quality may not be designed into the product/process which results in disruptions when failures loop back for correction. The product/process design may not make optimal use of CNC as most CNC equipment is used in a batch mode, not flexibly.
To be successful at designing products for spontaneous BTO, product development teams must proactively plan product portfolios for compatibility with spontaneous BTO operations, design products in synergistic product platforms, design around aggressively standardized parts and raw materials, make sure specified parts are quickly available, consolidate inflexible parts into very versatile standardized parts, assure quality by design with concurrently designed process controls, and concurrently engineer product platforms and flexible flow-based processes.
Further, product development teams need to eliminate setup by design by specifying common tools (cutting tools, bending mandrels, punches, etc.), designing versatile fixtures at each workstation that eliminate setup to locate parts or change fixtures, and making sure part count does not exceed available tool capacity or space at each work station.
Finally, products must be designed to maximize the use of available programmable CNC fabrication and assembly tools, without expensive and time-consuming setup delays.
Flow manufacturing & Lean Production. Spontaneous BTO and mass customization depend on flow manufacturing for efficient lot-size-of-one production. The one-piece flow aspect of flow manufacturing is especially important for e-commerce, since every piece may be different or even customized.
Flow/lean manufacturing is achieved by eliminating all setup, eliminating WIP inventory with one-piece flow, and arranging spontaneous delivery of parts and materials (discussed below) which are delivered to all points of use "dock-to-stock" without the delays and cost of incoming inspection. To accomplish this suppliers will need to be certified to assure quality at the source. Another aspect of flow manufacturing is the dedicated cell or line, which may be arranged to build any variation within a product family without any setup. Each cell has a compete set of "right-sized" inexpensive machines. Utilizing older machines, that have been made "obsolete" by centralized "mega-machines," is a very cost-effective way of building complete cells. The fact that cells consist of dedicated equipment occupying dedicated space often makes this incompatible with outsourcing, unless the outsourcer is strategic partner willing to make this type of commitment. This can become a effective a strategy for established companies to compete with "virtual manufacturing" web-based startups.
Mass Customization; the proactive management of variety
Mass Customization of variety. Mass producers may have done well making large batches of standard products and shipping them to distributors. But e-commerce sales are more varied and the order size is much smaller, approaching individual customers. Trying to satisfy this demand reactively in the mass production mode will be a slow and costly ordeal. Since mass customization handles variety proactively, it is fast and cost-effective, with no extra cost or delays to handle various models, options, and configurations. For more on mass customization see the article, Mass Customization.
Mass customizers can use their versatile design and manufacturing capabilities to offer new related, value-added products/services that expand the scope of their markets. These offerings may cost little extra to add, especially if they can be done in existing CNC operations. And yet, they may save customers so much time and money that they would gladly pay for the options, especially if these features are difficult for customers to make. For instance, one of the authorís clients, Hoffman/Schroff, built a plant in Lexington, Kentucky, which can spontaneously build-to-order a wide variety of standard or mass-customized electrical enclosures. Itís high-profit value-added opportunity is to use the very same CNC laser cutters that make the boxes to make the holes and cut-outs that cost their customers much time and money to do on their own.
Information systems. Although spontaneous BTO does not require elaborate information systems for material procurement and production management, e-commerce ventures will need effective web-sites and information systems that can rapidly handle a wide variety of orders (including mass-customized orders) through configurators and convert order entry data into parametric CAD models, CNC programs, electronic manual instructions, supplier pull signals, and shipping instructions.
Spontaneous Supply Chains
The typical response when suppliers are asked to deliver parts just-in-time to their customersí pull signals is to keep building the parts in large batches, try to stock enough in their finished goods inventory, and meter them out "just in time." However, this is not really just-in-time and it is certainly not conducive to spontaneous BTO. Parts availability would depend on the assemblersí forecasts, which are becoming increasingly less accurate, and the supplierís inventory, which is costly to carry, especially as obsolescence risks increase. There are four basic techniques that contribute to a spontaneous supply chain:
(a) Kanban resupply. As mentioned in the third point above, parts that qualify for kanban resupply, and the related techniques of min/max and breadtruck, can be made in batches as long as the response time and bin (or delivery) size is adequate. Even though parts are made in batches, this still qualifies for a spontaneous supply technique because the batch (a binís worth of parts) is made upon the pull signal that the current bin has emptied. Of course, the parts manufacturers may have to implement setup reduction to make small batch production economical. Thus, kanban resupply avoids the hazards of forecasting, the cost and delays of purchasing, and the cost and risk of inventory. The resupply is automatic once the pull signal gets to the supplier.
(b) Spontaneous build-to-order of parts. For parts that do not qualify for kanban, suppliers themselves would need to implement spontaneous BTO so that they could actually build on-demand to their customersí pull signals. This is the only way to supply mass-customized parts on-demand, which may be needed for mass-customized products. Spontaneous BTO of parts may require (1) the development of vendor-partner relationships for suppliers to establish the ability to build parts in any quantity on-demand and (2) versatile information systems to process and distribute the necessary information.
(c) In-house part fabrication. In order for spontaneous BTO to work, all parts and materials must be available on-demand. If there are any key parts that are not suitable for kanban and no supplier can build them to your pull signal, then you might have to bring those operations in-house. Companies that have outsourced certain operations in the interest of focusing on functional "core competencies" may have to reevaluate their strategies. Unfortunately, most outsourcing is a batch operation which does not lend itself to spontaneous BTO.
If the new core competency is to be spontaneous BTO or mass customization, then the manufacturer will need a complete supply chain that can build products and all their parts on-demand. This may require the selective "reintegration" of certain key steps.8 One of the authorís clients, Badger Meter, of Milwaukee, Wisconsin, found it was able to build a wide variety of water meters flexibly except the printing of the face plates, which had to cope with several ways of measuring water flow plus the logo of every customer (utility). So they learned how to print face plates in small quantities to complete the picture.
(d) Strategic stockpiles. Strategic stocks may be necessary until one
of the above three techniques can be applied. As far as overall inventory
strategy is concerned, this could be considered temporarily moving one
step backwards after moving twenty steps forward. Hopefully these parts are
standardized and consolidated so that there would be few to stock and each would
have a good chance of being used one way or another.
The Missing Link in e-commerce
The internet and sophisticated software permit manufacturers to process an endless stream of individual orders almost automatically. Our vast transportation infrastructure can deliver individual orders to stores or customers overnight. What is missing, and now needed to support e-commerce, is the ability to quickly manufacture individual products on-demand.
E-commerce poses several dilemmas for companies operating in the mass production mode. Trying to satisfy spontaneous orders from forecasted inventory is not compatible with the pace and breadth of e-commerce. Forecasting demand is becoming an exercise in futility as markets evolve at internet speed. Batch production is becoming inefficient and less responsive as product variety soars, order quantities approach one, and customers demand (or competitors offer) mass customized2 products. And now Lean Retailers are demanding that manufacturers resupply stores rapidly and frequently based on real-time store sales.
Some digital strategies3 accept the deficiencies of mass production and recommend "the illusion of build-to-order" by searching the web for inventory! On the transportation side, overnight shippers come to the same conclusions when they recommend that the way to reduce inventory levels is to know where the inventory is and how long it will take to ship it.4
Another way that manufacturers try to build-to-order is to order parts upon receipt of an order and make the customer wait until the parts come in. This may be acceptable for "big-ticket" products like airplanes, test equipment, and production machinery. But his would be a flawed strategy for e-commerce (and now also for business in general) since customers are coming to expect product to ship within 24 hours and can quickly scan the web for quicker competitors. Further, industrial suppliers need to be able to build products quickly in response to their customersí pull signals so that they can respond quickly to their customers.
A third way to build products to-order for e-commerce is to draw parts from forecasted inventory and assemble-to-order modular products. For this to work, the factory, supplier, or distributor must either carry large (and expensive) inventories or be good at forecasting the assemblerís demand. Ultimately the customer must pay for carrying cost of the inventory which over the last twenty years has averaged about 25% of inventory value per year.5 Not only does inventory raise the product cost and make the product less competitive, but it also makes the productís availability subject to outages and delays. This model has been successful for direct-sales personal computer assemblers because (1) it is superior to the competitorsí batch production and dealer distribution, (2) the very high volume can justify building a parts warehouse next to the assembly, and (3) the shear velocity of parts through the warehouse minimizes much of the cost and risk of inventory. However, the assemble-from-forecasted-parts model works only for modular products and may not be viable at low-to-medium production volumes.
The explosion of books, conferences, and consultancies on
e-commerce focus almost exclusively on services, information
"products," and software, not on physical products that have to be
manufactured and distributed. What is needed now for both e-commerce, and
commerce in general, is the ability to quickly manufacture individual products
Total cost measurements
Most of the above steps, viewed narrowly, may appear to be more expensive, and therefore may be resisted. Rationalization may appear to lower sales; Standardization and consolidation may appear to require most products to use better materials than they need; The lack of competitive bidding (inherent in vendor-partnerships) may appear to raise procurement costs; Reintegrating unfamiliar processes may appear to be less efficient than using specialists; Small batches, approaching one, and dedicated flow lines using simple equipment may appear to be inefficient from a mass production standpoint.
However, these programs will really lower the total cost. Therefore, in order to quantify, comprehend, and justify these programs, implementation needs to include total cost measurements, like Activity Based Costing. Fortunately there are quick and easy ways to implement ABC using cost drivers.9
Even beyond the total cost return of each of these elements, there is a significant value to the complete system: being able to efficiently build standard and mass-customized products on-demand for conventional channels or for the unlimited vista of e-commerce.
Dr. Anderson is a California-based consultant specializing in training and consulting on build-to-order, mass customization, lean/flow production, design for manufacturability, and cost reduction. He is the author of "Build-to-Order & Mass Customization, The Ultimate Supply Chain Management and Lean Manufacturing Strategy for Low-Cost On-Demand Production without Forecasts or Inventory" (2008, 512 pages; CIM Press, 1-805-924-0200, www.build-to-order-consulting.com/books.htm) and "Design for Manufacturability & Concurrent Engineering; How to Design for Low Cost, Design in High Quality, Design for Lean Manufacture, and Design Quickly for Fast Production" (2008, 448 pages; CIM Press, 1-805-924-0200; www.design4manufacturability.com/books.htm). He can be reached at (805) 924-0100 or firstname.lastname@example.org; web-site: www.build-to-order-consulting.com.
1. The phrase Spontaneous Build-to-Order was coined by the author and the concept was first presented in seminars presented by the Association for Manufacturing Excellence (AME) in October and November of 1998. This will be the subject of Dr. Andersonís next book: Spontaneous Build-to-Order, How to Build On-Demand Standard or Mass-Customized Products Without Forecasts, Inventory, or Purchasing Delays.
2. David M. Anderson, Build-to-Order & Mass Customization; The Ultimate Supply Chain Management and Lean Production Strategy for Low-Cost On-Demand Production without Forecasts or Inventory; (2004, 520 pages; CIM Press, 1-800-924-0200; www.build-to-order-consulting.com/books.htm).
3. Larry Downes and Chunka Mui, Unleashing the Killer App, Digital Strategies for Market Dominance, (1998, Harvard Business School Press), p. 146.
4. Don Tapscott, Ed. Blueprint for the Digital Economy, Chapter 11, "The New Logistics"
5. David M. Anderson, Agile Product Development for Mass Customization, (1997, McGraw-Hill) Chapter 3, Cost of Variety.
6. "Make it Simple; Thatís P&Gís new marketing mantra -- and itís spreading," cover story, Business Week, September 9, 1996.
7. David M. Anderson, Design for Manufacturability & Concurrent Engineering; How to Design for Low Cost, Design for High Quality, Design for Lean Manufacture, and Design Quickly for Fast Production, (2004, 520 pages; CIM Press, 1-805-924-0200), Chapter 5, Standardization.
8. At least one recent business book has a discussion of selective reintegration: Profit Patterns, by Adrian J. Slywotzky and David J. Morrison (1999, Times Business-Random House), p. 117.
9. Douglas T. Hicks, Activity-Based Costing; Making it work for Small and Mid-Size Companies, second edition(1998, John Wiley & Sons.)