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Why Dell's model isn't universal

A reader says Dell Computer's build-to-order model may work in the computer industry, but it won't work for the auto industry.


Why Dell's model isn't universal

In response to the June 23 commentary from McKinsey Quarterly, "The false promise of mass customization":

The article was obviously thoroughly researched and interesting in its analysis of whether the build-to-order model employed by Dell Computer could effectively be applied to other consumer products such as automobiles. However, it seemed to overlook one major reason why it works for Dell, and why it probably wouldn't work for cars.

Unlike nearly every other manufactured product, the cost of computer components (and hence the finished product) constantly declines in price. This makes keeping stock, or inventory, a liability rather than an asset. Just as with investment stock, if the value of the stock increases with time, it is advantageous to keep it in stock longer (because the price charged to the customer will only increase with time), but if its value decreases with time, by keeping a stock, you rapidly lose money.

Dell was successful with its build-to-order model precisely because its competitors, which maintained inventory, were building products that were worth much less when they shipped to the customer than when they were built. They were constantly fighting a losing battle against the decline of component prices and couldn't manage their profit margins well because of all the unpredictable variables involved. Dell was more successful with build-to-order because it was able to ship its products long before their value fell to approach their actual cost, and because it could better manage volatile component prices and market demand.

Consequently, there seems to be little reason to suppose that the same reasons that build-to-order made Dell successful would be applicable in any reasonable fashion to the automobile industry, where component prices (as is more typical for products) rise with inflation, volatility is not as much an issue, and market prices tend to be more stable.

Eric Ewanco
Shrewsbury, Mass.