The auto industry will adopt a build-to-order (BTO) car manufacturing and sales approach over the next four years to improve market responsiveness and bolster sagging profits. According to a new Report from Forrester Research, Inc. (Nasdaq: FORR), industry players will create a BTO information platform to connect front-end sales processes with back-end manufacturing and logistics. Achieving the full benefits of BTO will require a radical shift from a production-centric “push” model to a customer-centric “pull” model.

“With the ability to build vehicles to specific customer orders, the auto industry will overhaul the manufacturing mindset to emphasize customer service and satisfaction over inventory and profits over volume” said W. Daniel Garretson, senior analyst at Forrester. “The end result will not only be happier, more loyal customers, but reduced costs and increased margins, as well.”

Today’s automakers focus on maximizing asset productivity, often at the expense of customer satisfaction and industry profitability. With very little direct information about customer demand, manufacturers push wave after wave of new cars out to dealers. As a result, unwanted vehicles sit on dealer lots for an average of more than 45 days, forcing dealers to pay $300 and up in carrying costs and eventually surrender to price incentives that reduce vehicle profits by 30%.

In addition, Forrester estimates that the industry loses as much as 2% of sales — a cool $7 billion per year — when potential customers walk away rather than face suboptimal off-the-lot choices or the arduous configuration process and long lead times of factory-ordered vehicles. Industry quick-fix efforts to optimize individual processes — such as Web sales referrals — fall far short of giving customers the right vehicle at the right place at the right time.

Forrester predicts that by implementing BTO capabilities, the auto industry will reduce dealer lot inventory by 50%, saving carrying costs of more than $150 per vehicle. Additional savings will top $700 per vehicle in costs associated with inventory clearance, such as incentive discounts and mass-marketing campaigns.

The transition to BTO will take place in two overlapping stages. In the next three to four years, industry players will collaborate to create a three-part, end-to-end information management platform. Configuration and ordering tools will improve the customer experience, supply chain systems will enable flexible and responsive manufacturing, and logistics tracking tools will slash delivery times by as much as 50%.

By 2005, BTO purchasing will enter a hypergrowth phase as the industry mindset shifts from “push” to “pull.” Forrester predicts that by 2010, some 20% of vehicles will be built-to-order. As BTO takes hold, automakers will adopt a new, profitability-driven manufacturing model that focuses on increased production flexibility and car dealers will shift their business practices from pushing sales to focusing on inventory management and consultative selling.

For the Report “The Build-To-Order (R)evolution,” Forrester interviewed senior executives from automobile manufacturers, suppliers, and dealer groups, as well as thought leaders from a variety of technology vendors and professional services firms.