Alan Mitchell: Deliver value by getting rid of the crystal balls

When manufacturers misread market demand, the marketers get the blame. The smart money is on making goods to order, argues Alan Mitchell

Consider two figures. Last year in the US, the combined market share of Asian car producers such as Toyota, Honda and Nissan overtook those of the big three (General Motors, Ford and DaimlerChrysler) for the first time.

Companies like General Motors, which once commanded a 40 per cent share of the biggest car market in the world, don’t seem to be up to stopping an inexorable decline. GM’s share is down from 28.7 per cent share to 28.2 per cent over the past year. Ford is down from 24.7 per cent to 22.9 per cent, while the Asian producers are up three points from 26.9 per cent to 29.9 per cent. In a market of this size, three per cent in one year is big money.

Now consider the other figure. GM and Ford both take over 25 man-hours to make a car. The Japanese producers’ figures hover around 20 hours. The implications are very simple. The Japanese manufacturers can make good quality cars – often better than their American rivals – more cheaply. Which means they can sell them at a lower price. Which means they offer better value to their customers. Rocket science it is not.

Now take another massive industry with cut-throat competition: PCs. It isn’t a very profitable business nowadays, especially in America. The market is saturated. Quality and feature parity have set in and price wars are rife.

But while most manufacturers are issuing profit warnings and retrenching, one seems confident of weathering the storm, piling on the pressure by reducing prices even further and going for even greater market share. It’s Dell.

Competing on price? We’re trained from our earliest days to give that the Big No-No. If you train consumers to buy on price, they won’t buy on other attributes, such as brand, quality and innovation. That’s how you enter the killing fields of commoditisation and value destruction.

But look more deeply at these companies and you can see something rather different. Sure, they’re using price to beat the competition. But they’re not just competing on price. They’re competing on value. In fact, lower prices are a symptom of their success, not a cause.

They have one thing in common, and it’s very simple. They make to order, rather than making to forecast. They make what their customers want. Not metaphorically – as in abstract market research into “what the market wants” – but literally. They don’t do any making until they have an order. And then they make exactly what the order specifies. No more, no less.

That’s classic marketing, reinvented for a modern era when it’s possible for information to flow upwards from customers to companies as well as downwards from companies to customers.

The advantages of make-to-order production systems are well known. Less money is tied up in working capital and inventory. Cash flows are better. Instead of putting loads of money up front and waiting a couple of months to get it back, sometimes you get paid for your product before you’ve spent a penny making it.

But fundamentally, you avoid risk and waste in two ways. First, you avoid making stuff that nobody wants to buy (either because they don’t like it or because you’ve misread demand and made too much.) Second, you avoid the waste of missed opportunities: of failing to make the stuff that people do want, because you didn’t predict it.

This is in stark contrast to traditional push production systems. These start with the abstract market research form of “know your customer”. This research is then used to construct a forecast and production is driven by this forecast. Which is invariably wrong. Sometimes it’s wrong because of internal politics. People are under pressure to “make the numbers” so they bump up their forecasts to look good. Sometimes it’s wrong simply because a map is never as good as the territory; a forecast is not the same as actuality. So there’s always some mismatch between predicted and actual demand.

One result is that marketing is put under huge pressure to drive sales, to meet targets (targets which do not actually reflect the needs of the market, but the needs of the producer). Marketing becomes the hero – or villain. Will this brand repositioning, ad campaign or relationship marketing initiative deliver the volumes we’re depending on? Whether hero or villain, this spotlight on marketing is unfair. Executives are turning to marketing as the last chance to fix flaws that were built into the system from the very start.

In make-to-order systems, in other words, marketing’s core function of matching supply to demand is embedded in the very nature of its operations.

In push systems, on the other hand, this role is bolted on top. In make-to-order systems, marketing often appears to take the back seat. That’s because it has been internalised into the very sinews of the system. In push systems, everyone emphasises the importance of “marketing” precisely because it has not been internalised operationally.

In make-to-order systems, marketing effectiveness is all about avoiding waste. In push systems, it’s about eliminating waste. The difference is that you can’t eliminate waste unless you create it in the first place. That accounts for much of the performance differences between the Japanese car makers and Dell on the one hand, and their competitors on the other.

Making to order is an awful lot more easily said than done, and there are many levels and permutations. Do you make to dealer order or consumer order? How do you make an eight-year-old whiskey to order? Strip away the complications, however, and the underlying message is clear.

Make to order is a relatively new – and better – way of fulfilling the first of marketing’s two core economic functions: matching supply to demand. Now we’re also on the verge of revolutionising the second core function too: connecting buyers to sellers.

When we can revolutionise both, little that we take for granted as good marketing practice will remain unquestioned.

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