In 1984, a university student with limited space and inventory started assembling computers in his university dorm room. Customers could select the PCs they wanted from a list of possible configurations. The student, Michael Dell, soon started a company that created and sold custom-built PCs. The company, Dell Technologies, still follows an assemble-to-order model for personal computers and laptops, allowing customers to choose from a range of options for each part of the PC. Once the customer places the order, the PC is assembled and shipped for delivery.
In countries and industries all around the world, the assemble-to-order manufacturing business model is used as it provides the ability to quickly deliver customized goods to customers.
What is Assemble-to-Order Manufacturing
Assemble-to-order (ATO), also called configure-to-order, is a standard manufacturing process where products are assembled and configured according to customer requirements. A manufacturer stocks up on sub-assemblies and parts and assembles them into the final product according to a set of specifications selected by a customer.
One of the key factors for ATO is how accurately the manufacturer forecasts orders for products, based on historical data, macroeconomic trends, and the overall condition of the market. The forecast determines what parts and sub-assemblies the manufacturer either makes or orders and then stocks to service customer demand.
Manufacturers using ATO also have to ensure two other factors are optimized.
- Manufacturing lead time (MLT) — the time required to manufacture an item. The process relies on the ability of the company to assemble and deliver goods quickly.
- Customer delivery lead time — the time from when a customer places an order to when it is delivered. Processes such as order-to-delivery, sometimes called order-to-cash, is key to operational efficiency and customer satisfaction.
Advantages of ATO Manufacturing
Whether it was by accident or design, Michael Dell stumbled on an advantage of ATO in that it is a lean mode of production. It requires less capital investment as companies only stock up on materials and assemblies that are needed. This reduces the costs of holding inventory and warehouse space, reduces cash tied up in inventory, and shortens the order-to-cash cycle. For Dell Technologies, the low-inventory strategy reduced the time it took to bring new PC models to market.
By optimizing MLT and having all the parts ready, manufacturers can deliver customized goods relatively quickly.
ATO manufacturers can also provide specialized products tailored to customer requirements. Since the product specifications are already known, products can be assembled quickly with fewer delays.
Challenges of ATO
There are of course challenges to the ATO mode of production.
The ability to deliver on customer orders depends on the reliability of demand forecasts. When forecasts are wrong, there may be a shortage of inventory parts in case of unusually high demand, and therefore an inability to deliver products and lost sales. When there is a surplus of parts due to unusually low demand there will be increased costs. Dell Technologies sold directly to customers and was therefore had access to a wealth of market data to efficiently forecast demand trends.
It is important for ATO manufacturers to monitor the status of their inventory. Before product changes are finalized, old inventory must be disposed of. When inventory is getting low, suppliers must be able to deliver parts and materials quickly. To tackle this, Dell developed long-term relationships with select component manufacturers and required them to establish inventory hubs near its assembly plants. Dell also shared its production schedules, sales forecasts and plans for new products with its suppliers to enable them to improve their delivery schedules.
Quality control on the final assembly is critical for ensuring the quality of finished goods. This entails not only procedures to prevent quality problems but also training of production staff so that work is done efficiently and properly and a quality product is delivered to customers.
ATO manufacturers cannot afford to lose focus on manufacturing and customer lead times as this drives a significant aspect of their competitiveness and customer satisfaction.
ATO is a manufacturing business model that provides mass customization and quick order fulfilment. However, it needs a system to ensure control of inventory, to provide information for production planning and scheduling, as well as sales data for forecasting demand. To integrate all those factors requires an ERP system. In Part Two we will discuss the ERP requirements of ATO.
