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Articles - Publication Date 5.4.1998
Replacing Inventory With IT
Compaq’s build-to-order strategy -- a competitive leap -- is powered by information.
By John Teresko
Last July when headlines trumpeted "Compaq Computer Cuts Prices," the emphasis was not on the company’s new focus on customers and the way it hopes to serve them better. Or the IT-driven restructuring that is making it possible. Price alone was in the news.
While it is true that the new business strategy enabled lowering U.S. business desktop prices across the board by as much as 22%, there was little reporting of a new corporate initiative directed toward the more significant issues of customer satisfaction, product quality, reliability, and stockholder value. Instead, the media dwelled on the fact that the price of the entry-level Compaq Deskpro 2000 PC was lowered by 14%, with three models being priced below $1,000.
Beyond mere price reductions, Compaq Computer Corp. was really announcing a strategy for long-term survival via a new business model that it believes will create a new customer-value revolution. The new model -- the Optimized Distribution Model (ODM) -- is one it believes will enable the industry’s most satisfying and complete product-ownership experience and the most efficient, cost-effective, and comprehensive order fulfillment process. A key part of ODM is a build-to-order concept in which Compaq is, in effect, using information technology to replace inventory.
"ODM signals the beginning of a new era at Compaq," says the company’s president and CEO Eckhard Pfeiffer. "With the launch of ODM, we are sending a shock wave through the industry. ODM sees our entire business from the customer’s point of view. The new model will shape the way all Compaq products are designed, built, configured, distributed, ordered, purchased, serviced, and upgraded, as well as the way Compaq engages customers and works with its reseller partners. . . . This is our way of enhancing relationships with our customers while increasing shareholder value."
The first phase of Compaq’s ODM strategy was the launch of build-to-order (BTO), a set of integrated business processes that span the length of the supply chain from suppliers to end customers. Compaq also announced the first products to be shipped under the model -- a new generation of commercial desktops that have been built to customer or channel orders rather than to forecast. Tim Cook, former vice president-corporate procurement who recently left Compaq for Apple Computer Inc., explains the dynamics of the of the change:
"Under the old business model we would have decided what we wanted to build for the next eight weeks, in essence guessing about what the customers wanted. By building, shipping, and storing [computers] in a distribution center we not only increased our costs, but we also created an artificial constraint by tying up critical parts in machines that did not meet customer needs. Secondly, if we built and stored them at a time when component costs were falling, it would be impossible to quickly capture the reductions and pass them on to the customer. . . . You’re not pleasing the customer because you’re stocking out on things and you may be asking your customers to pay more during a period of declining component prices."
With BTO Compaq doesn’t start building until an order is received, and therefore the company is more likely not to have a problem in terms of building the units because the components are at a parts level, rather than tied up in inventoried machines. As a result, predictability goes up and the number of constrained products goes way down. The resulting cost savings are passed on to the customer -- instead of having the costs associated with weeks or months of inventory, the savings that come from BTO are passed along. The customer benefits from greater value as well as from a more predictable delivery mechanism.
To accomplish the benefits of BTO, Compaq is drastically changing supplier relationships both in terms of numbers and the nature of the relationships.
"The focus is on having synergistic relationships rep
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“With the launch of ODM, we are sending a shock wave through the industry. ODM sees our entire business from the customer’s point of view.”
Eckhard Pfeiffer, president and CEO
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