Build-to-order buying is NOT that easy
By James Carbone -- Purchasing, 6/18/1998
The goal of the build-to-order business model that was pioneered by Dell Computer and embraced by many other PC companies is simple: Give the customer the product he wants when he wants it. In practical terms that means within five days. But the execution of the model is much more complicated because customer requirements vary, computer technology changes quickly, and competition is cutthroat.The complication is borne out by the fact that only about 25% of PCs shipped are build-to-order (BTO), according to Norm Bogen, a computer industry analyst for high-tech market research firm In-Stat. Dell's business is 100% build-to-order; the company has no finished-goods inventory. Gateway's business is about 90% build-to-order, but other companies like Compaq, NEC-Packard Bell, and Hewlett Packard are just moving to it and are struggling.
As these companies move to BTO, it impacts purchasing and the expectations that PC manufacturers have of suppliers. Suppliers must not only have the latest and greatest technology and the highest quality, they must also be able to deliver just-in-time, despite volatile delivery requirements. Those requirements must be updated frequently and often are transmitted to suppliers via electronic data interchange (EDI).
In many cases suppliers don't deliver to OEMs but to "hubs," where printed circuit boards, monitors, drives, and other parts are warehoused, aggregated, and then shipped to the factory floor as needed. In other cases, suppliers will have a warehouse near a PC company's plant where parts are stored and shipped on demand.
Mark Cirinna, director of materials strategy at Compaq Computer Corp., says just-in-time delivery and electronic data interchange are the linchpins of purchasing high-tech parts in build-to-order. Compaq, which spends about $17 billion per year with about 500 suppliers, began build-to-order last summer. About 10% of its business is BTO and eventually Compaq plans to have virtually all of its business in the BTO model.
Compaq, the number-one PC company in the world, has found BTO challenging. Compaq makes everything from sub-$1,000 desktops to high-priced workstations and servers. With build-to-order, customers can specify how much memory, what size drive, and what type of monitor and software they want. Customizing those products to a customer's specifications is no easy undertaking and requires a lot of support from suppliers.
"The fundamental backbone of build-to-order is just-in-time," says Cirinna. "We have pretty much all of these suppliers on just-in-time. We stage material at the hubs, which are very close to our manufacturing locations. When a computer order is received, the signal is transmitted to the hub, where the material is aggregated and then shipped to the factory," Cirinna says. The computer is then built, tested, and shipped to the customer.
Linked by EDI
Compaq's factories, hubs, and suppliers are tied together by EDI. About every four hours, the factory sends an EDI transmission to the hubs, informing them of what parts the factory needs based on orders for new computers. The information also is sent to the parts suppliers so that the hub can be replenished.
"Every supplier has to have a base level of EDI," says Cirinna "There aren't a lot of POs anymore." Forecasts are sent via EDI, triggering action on a blanket purchase order.
Since Compaq began moving to BTO, many suppliers have found it challenging, says Cirinna. "Unless an electronics company has been dealing with automotive companies, they have no comprehension of what they must do to manage and synchronize materials flow with us in this model. It has put a lot of pressure on them to develop EDI links and their logistics management," he says.
Suppliers are under a lot more pressure with BTO to deliver on time. Delivering a build-to-order computer in five days is considered world class. The days when suppliers would have a +3, -3 delivery window are over. "It's a very precise model," says Cirinna. "The parts have to be there when we reach out for them. There's no room to make up for a mistake. There's a lot of stress on the supply web to execute with precision. It's the number-one thing."
Orders are perishable
Build-to-order also is challenging for procurement. "With the build-to-stock model, there is room for rework or reschedule," says Cirinna. "With BTO, when you take an order from a customer, you're now on record for a date that it will receive something. There's no room for execution errors. Customer orders are very perishable. Somebody can cancel that and buy from a competitor," he says.
Cirinna says BTO changes the procurement process. "Most models are transactional when it comes to purchasing. The procurement model we run today is much more synergistic." With the old process, Compaq buyers would purchase parts from suppliers. Compaq would build the computers and ship them to customers.
But BTO complicates the process because of the use of forecasts, EDI, and hubs. "We need more in-depth relationships with suppliers," he says. Suppliers need to be more heavily involved in Compaq's planning process.
Suppliers also need to be heavily involved in the design process so PC companies can equip their products with the latest technology. That's why Micron Electronics, a build-to-order PC company, has divided purchasing into strategic and tactical organizations.
The need to be strategic
Micron's strategic procurement organization identifies suppliers of the leading-edge technology and negotiates umbrella agreements with them, according to Nelson Hanks, senior vice president of purchasing. Tactical purchasing handles the day-to-day activities such as placing purchase orders and handling inventory control.
Strategic procurement, which is centralized, works with engineers and product marketing to keep on top of what's being designed into new computer systems. Strategic commodity teams also keep abreast of the latest technology developments by reviewing technology roadmaps of suppliers.
"The challenge is to identify those two or three suppliers that always seem to leapfrog each other," says Hanks. "Those suppliers always seem to have the right kind of investment in research and development, world-class facilities, and the time-to-market that you want."
That's important because platforms for PC companies in BTO can change every five to eight months, and a new component such as a graphics card can change in 30 days.
The importance of cost
Alliances in BTO are needed not just for the latest and greatest technology, but also to keep costs low. Build-to-order PC Company Gateway uses as few suppliers as possible to help keep costs low. In all, the company has about 100 suppliers and generally will have two sources for a commodity. The primary source receives about 80% of the business for a commodity. The alliances it has forged with suppliers help the company bring systems to market with the latest technology at a low cost.
These alliances are critical to the company's mission and to the direct-order business model. "Our model is a value model," says Bern Ebert, vice president, global planning, procurement and quality. "Our objective is to have the highest-value product."
Cost reductions that Gateway 2000 receives from suppliers are passed on to customers in price reductions or in feature enhancements. Because Gateway sells direct to customers and not through retail stores or resellers, cost savings can be passed on quickly to computer buyers.
Build-to-order also helps PC companies lower their inventories, which is a key benefit. For instance, Dell says that it has no finished-goods inventory because a product is shipped as soon as it is finished. It also is looking to measure raw inventory in hours instead of days because of world-class JIT programs with suppliers.
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