Can Ford's build-to-order strategy work in long term?

DETROIT — Ford Motor Co.'s pivot to a build- to-order sales model has been a lifeline for dealers suffering from near-empty lots amid the ongoing semiconductor shortage.

Now, CEO Jim Farley wants to keep up the strategy even after the chip crisis abates — pitting a desire for more-efficient production and bigger profit margins against American consumers' insistence on instant gratification.

"Buyers have been accustomed to wanting a car, buying a car and driving it home that day," Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions, told Automotive News.

But the chip shortage eliminated that option for many buyers. More than a quarter of Ford's retail sales in the third quarter came from its burgeoning order bank, which sits at roughly 139,000 vehicles and has grown with the help of a $1,000 discount for customers who wait.

Ford was the top seller in the U.S. for September and October among automakers that report monthly results, and though its numbers fell short of year-earlier levels, it outperformed the industry average in both months.

Some dealers say they're worried customers will grow frustrated and cancel orders if they're forced to wait weeks or months once inventories are no longer so sparse, pointing to long wait times for the Mustang Mach-E and Bronco as cause for concern. Others counter that online retailers have proved that buyers are willing to wait for purchases to arrive and that Tesla's success collecting orders for later delivery shows that shoppers don't always need to drive off with a new ride immediately.

"I used to go to the mall and do all my Christmas shopping in one day; now I do it online over three or four months," said Chip Diggs, director of Internet sales and marketing at Seelye Automotive Group in Kalamazoo, Mich., which has a Ford dealership among its four stores. "The model for the consumer has changed. If they're willing to wait two or three days for something from Amazon that's small, absolutely they'll wait for something that's [$50,000], [$60,000], $70,000 for six to 12 weeks."

Diggs said built-to-order vehicles have accounted for at least half of Seelye Ford's sales in the past few months.

He sees an advantage for small retailers that often lose business to larger auto groups with more inventory. Having fewer vehicles on the lot also would reduce dealers' floorplan costs.

"If you tell me I can keep a third of the inventory and still sell as many if not more cars, as a dealer, I'm in," he said.

The approach is designed to save Ford money as well.

During the company's second-quarter earnings call with Wall Street analysts, Farley said having an order bank forces Ford to reduce complexity and "put pressure on our industrial system to deliver quickly." He also suggested the automaker would need fewer discounts to push slow-selling vehicles off lots.

"I know we're wasting money on incentives," Farley said then. "I just don't know where. With an order-based system, we will have much less risk of that."

Don Jenkins, president of Jenkins & Wynne Ford, Honda & Lincoln in Clarksville, Tenn., says customers also can save money by ordering from the factory. Often when a dealership doesn't have the exact configuration a buyer wants, it trades inventory with a nearby store, spending time and money to transport the vehicles and passing that cost along to buyers.

In October, Jenkins said he sold 165 vehicles at retail without ever having more than 40 in stock at a time, with a majority of buyers placing custom orders for F-Series pickups and Explorer crossovers.

"When you're talking about the truck business, there are so many specific needs customers have and specific options," he said. "Most of our customers have been comfortable with that because they're getting exactly — not close to what they want — exactly what they want."

Jason Cole, executive vice president of Cole Automotive Group, which includes a Ford store in Ashland, Ky., says he wants the automaker to balance an order bank with stock vehicles because he isn't convinced build-to-order will appeal to everyone.

"Some of the people you sell to in the car business, they didn't wake up that morning planning to buy a car," he said.

"I think you're still going to need inventory for that kind of situation. Not everybody's as particular as some consumers."

He also said order cancellations would be a big risk, citing a handful of people who ordered Broncos from his store but backed out after the wait became longer than expected, partly because of quality issues.

"I wouldn't want every one of my sales tied to a three-month wait," Cole said.

Ford says it wants dealerships to carry at least some vehicles on their lots. The company had a roughly 20-day supply of vehicles at the end of September, according to CFO John Lawler, and is targeting a roughly 50- to 60-day supply once the chip shortage ends.

"Different segments will have different targets," Farley said at the end of the second quarter. "We actually did this post-financial crisis for a few years and then, over time, lost discipline. This is quite important for this management team."

Diggs thinks dealers can be successful with a build-to-order model if they pitch it to customers the right way.

That includes stressing that orders allow buyers to get exact customization instead of settling for what's available on the lot. He said if dealers remain engaged with a buyer throughout the wait, they can alleviate frustrations and help build excitement and anticipation for a vehicle's arrival.

Proponents of the model point to Europe, where automakers have found success with it for years.

In 2015, the National Automobile Dealers Association said roughly half of new vehicles sold in Europe were built to order, compared with just 5 percent in the U.S.

A number of automakers, including General Motors and BMW, have floated ideas for simple online ordering and quick delivery programs in the past that largely failed to materialize.

The chip shortage, however, has forced the issue back to the forefront.

"It hasn't happened because there was no reason to," Diggs said. "Now they're in a situation where they have no choice. Why do we lose weight? We know we should, but we don't do it until we go to the doctor and they tell us if we don't, we're going to die."