Good Idea! Now find a better one.

There are geniuses at Ford Motor Company. They know exactly what customers want. So well in fact, that they load up an inventory of tens of thousands of cars at dealerships, confident that each car is exactly what one of their customers wants.

So how does Ford have such prescience and Dell has been doing everything in its power to reduce inventory for the past 10 years?

The benefits of reduced inventory, high turnover and “velocity” are well known. But I prefer to dig a little deeper. With high inventory: Where is your focus?

If you had hundreds of millions of dollars of inventory, like Ford, sitting out in the sun and rain depreciating, where would your focus be? On the cars or the customers?

Let’s Play

Let’s play with making car manufacturing a little more like Dell’s fulfillment process and see where our focus shifts:

Dell doesn’t begin to assemble your computer until after you’ve purchased it. The internal components have already been manufactured: hard drives, LCD screens, mother boards, microprocessors and DVD drives. But final manufacturing and assembly according to your specific preferences is held off until the last possible moment.

The “general” is done in anticipation of a purchase and the “specific” is done only after the customer places an order.

A Smaller Dealership

Imagine a dealership with unpainted bodies, unmounted motors, partially finished dashboards, seats without upholstery; an inventory not of finished cars but of finished and semi-finished components to be assembled when the customer selects features, fit, finish and trim.

Right now a dealer might have 100 Ford Expeditions on the lot. But if they only sell 2 a day, then they only really need 2-4 Expedition frames, dashboards and bodies on hand per day and, based on forecasted demand, some inventory of pre-painted body panels, fabrics, navigation units, rear lift-gate motors etc.

Benefits?

But so what? What does this give us? Well, if a recall prompts a design change to a specific part, swapping in a new version on an unassembled car is trivial.

If consumer demand indicates a preference for different interior/exterior color combinations, the parts inventory can be changed in a matter of days as opposed to months - Or even hours if you can paint body panels on site.

And the factory? It can be made simpler, smaller and more efficient because it doesn’t need to create versions of vehicles, only generic finished components. Everything that makes a vehicle individual to a customer is done at the dealership. You don’t ask “How many red Ford Expeditions should be made?”, you ask, “At what rate should we produce Ford Expedition frames and bodies to satisfy demand?”

Do you see the difference? Ignore the reduced capital costs. Ignore the lower insurance, depreciation, real estate and transportation costs. Ignore the savings from eliminating dealer incentives on mountains of unsold cars.

Filling up lots with cars requires that we focus on making cars. By reducing inventory and waiting until a customer makes his final selections to do final assembly means our focus is on providing exactly what the customer wants.

Reducing inventory requires that you be more responsive to customer demand. A finished car that can’t be sold should never have been built.

Bringing it home

Ford has a process that produces inventory which is then sold.
Dell has a process that produces computers that have already been bought.

Ford creates thousands of cars and then puts billions into selling what it has. Dell has customers who already want to buy and simply lets them choose exactly what they want.

How can Ford or any car manufacturer produce 100,000 cars before asking the customers what they want? The only way to know exactly what a customer wants is to watch what they do with their money, to watch what they buy.

And so to produce all that inventory before you really know what the customer wants is…well, arrogant. To evolve your processes to be receptive for when the customer takes out his wallet and declares what he wants is to recognize reality: you serve customers. Orient everything towards satisfying customers, not filling inventory.

Reducing inventory isn’t just about using capital wisely, it’s about removing distractions to your focus, the customer.