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Compaq sales made to order

The desktop PC maker is hoping to cut costs and compete better with Dell and Gateway with a new distribution program.

Compaq Computer will next month release a new line of desktops that will look and act like any other Compaq desktop. The difference is that the machines won't actually get assembled until a customer orders one.

Users may not care how or when the vendor made the box. But the switch from volume to made-to-order manufacturing should show up on Compaq's balance sheet and let the company lower prices on at least some of its models.

Custom manufacturing cuts costs drastically by avoiding the creation of unwanted boxes. And Compaq needs to cut costs to compete more effectively than it has been against Dell Computer and Gateway.

"Compaq is at a wicked cost disadvantage to Dell," said Jeff Matthews, general partner at RAM Partners, a Greenwich, Connecticut-based investment house. "Dell added a billion in sales last quarter. Compaq sales grew by $600 million."

The made-to-order program will offer at least two computers at first, with more likely in the future, sources familiar with the company's plans told CNET's NEWS.COM.

A Compaq spokesman said the company would unveil details on its build-to-order plan around the middle of the year but would not comment on the specific models.

The made-to-order initiative will have three prongs:

  • Under the "build-to-order" program, customers will place their orders with computer resellers, which in turn will forward them to Compaq. Compaq will then build the boxes to customer specifications and send them to a distributor or integrator for installation of commercial software.

  • Under the "channel configuration" program, Compaq will ship the shells of computers to distributors and integrators. When a customer asks for a system, these partners will then install hard drives or memory units according to the order.

  • The "configure-to-order" program is designed for large corporate customers that want hundreds or thousands of customized computers. For these customers, a reseller will work with Compaq to fill the order.

    The Compaq spokesman said the build-to-order stage will come first, followed by the channel configuration and configure-to-order programs. Details, he added, are still being worked out.

    All three programs depend on a large number of reliable partners to deal directly with the customers. "The big question they haven't answered yet is how many partners they are going to have," said one high-level distribution executive.

    So far, sources said, Compaq has signed only two to three distributors and integrators to participate in the program but says that more will be added.

    Under traditional manufacturing methods, computer makers have to design a line of computers, buy components on credit, sell finished machines through distributors and resellers on credit, and then hope that customer demand meets their forecasts.

    Made-to-order manufacturing does away with most of the guess work. And, because the time between production and sale is compressed, manufacturing costs are less vulnerable to inflation.

    "Compaq is able to build stuff as cheaply as anyone. The 10 to 15 percent price differential with distribution is where they are getting clobbered," said Roger Kay, a senior research analyst at International Data Corporation. "Dell has the advantage of knowing what customers want."

    Unlike Dell or Gateway, however, Compaq isn't planning to sell the bulk of its computers directly through the mail. Instead, it will continue to sell its goods though its massive network of distributors, integrators and dealers.

    In fact, Greg Petsch, Compaq?s senior vice president of operations, told a group in Singapore yesterday that direct marketing was inefficient for selling to large corporate accounts. Compaq, he said, would follow a "hybrid" model, making computers to order but selling through the channel.

    Still, observers pointed out that the made-to-order initiative inches Compaq closer to a direct-sales model, which would potentially save the company even more money.

    Dell's part suppliers, for example, warehouse their products across the street from Dell's fabrication plant. This means that Dell only has to own the parts for the duration of a forklift ride.

    Building to order also gives a manufacturer immediate knowledge of what customers are buying.

    Compaq has already created "call centers" in Scotland that collect information on computer and software purchases, said Denise Sangster, president of Global Touch, a Berkeley, California-based consulting group.

    The company has said it will open similar call centers in North America later this year.

    Reuters contributed to this report.