LinkedinGoogle Plus

The Pros and Cons of a Retail Trend: Build-to-Order Products

The Pros and Cons of a Retail Trend: Build-to-Order Products

Big box and ecommerce stores constantly review retail trends to try to find the best ways to stand out from the competition and capture shopper attention. By leveraging the best forecasting they have available, they can see which tactics best suit their budget, inventory capabilities, and shopper pain points. For some brands, that means applying a build-to-order strategy. This post looks at what build-to-order means, as well as the pros and cons of this approach.

What a Build-to-Order Strategy Looks Like

Build-to-order (BTO), sometimes called made-to-order, is a type of logistics process that only assembles products when a consumer has ordered them. Sometimes, this also leverages a specific type of supply chain called just-in-time (JIT) manufacturing, wherein a company doesn’t order the materials or parts they need until they are actually needed for production. Furthermore, there’s a related strategy that is sometimes used interchangeably with BTO called assemble-to-order (ATO), wherein a business doesn’t put together the pertinent parts of a product until someone makes an order.

Build-to-order products can be found in a variety of industries. Automotive companies, like Audi, can deploy it extensively, especially in Europe. Toyota is another good example, and what’s more, it also deploys JIT manufacturing. Similarly, Dell became as popular as it did by leveraging BTO in an extremely short turnaround-time, and for a while, some of Motorola’s most popular products were ATO. Companies like Vistaprint wouldn’t exist without BTO. More recent ventures, like fresh meal-kit delivery subscriptions, deploy a BTO that hones in on local resources to provide excellent foods on a weekly basis.

Pros

The two biggest benefits of a BTO strategy are more evident in the beginning. It provides a very flexible level of personalization, which is the key to interest. About 42% of shoppers are interested in technology to customize products, and just as they’re willing to exchange information for better deals, nearly 20% are willing to pay a 10% premium to get them. While CPG and OTC brands don’t leverage BTO often, if at all, right now, technological advances like 3D printing are putting direct-to-consumer sales within reach while providing a way to scale customized dietary needs, etc.

The other benefit is to retailers, rather than shoppers: no extra inventory. Inventory turnover is critical, especially for certain industries; for vehicles and electronics, consumers expect up-to-date, cutting-edge products available for purchase every year. If companies don’t leverage BTO, they can easily end up with excessive amounts of inventory that will see diminishing returns, if they see returns at all. The automotive industry provides a strong example — despite the fact that the industry saw record sales last year, record production also means that they have vehicles sitting on lots. For GM alone, that’s 1 million vehicles unsold, and sales have been falling through Q1 2017. For Ford, the second best seller in the U.S., a glut of inventory in 2016 has led to four quarters of earnings declines and a suffering stock price.

Cons

Unfortunately, stock levels are a double-edged sword, and the inability to scale can mean that you simply don’t have the inventory to meet demand. For example, the Motorola production facilities couldn’t scale quickly enough, and they closed the U.S. assembly operations. The brand has now moved away from that level of customization altogether, providing “mods” that can be attached to a device. Another potentially damning impact is if something goes wrong with the supply chain itself. In 1997, Toyota’s JIT strategy nearly crashed the company when a fire at a break parts factory halted production for two days; this had a ripple effect since Toyota couldn’t complete production without the part, its other suppliers also had to halt production. It cost Toyota alone $15 billion in revenue.

The other major drawback is production time. People are notoriously impatient — just look at the latest statistics on their attention span, how long they’re willing to wait for a web page to load, and the growth of two-day and same-day shipping options. For BTO products, it’s not that people are unwilling to wait, however, there’s a tight limit on how much time they’re willing to wait, which can vary by product. The auto industry provides another clear illustration of this — despite the fact that sales are falling and inventory is sitting on the lot, U.S. auto companies have an extremely hard time convincing shoppers to switch to customized purchases. Only 5% of sales in 2015 were BTO (as opposed to half of sales in Europe!) because shoppers want to test the car and take it home that day.

Like most retail trends, a build-to-order strategy isn’t the right fit for every brand, so it must be considered carefully. A business first needs to examine how much their shoppers are interested in build-to-order products and whether or not they’re willing to wait through the necessary lead time. Then the supply chain needs to be examined and adjusted to ensure inventory levels are optimal. This will require stellar forecasting; when it comes together, the results can help a business shine, but a misstep could also be fatal.