HOUSTON— A YEAR ago, Eckhard Pfeiffer caused a stir in the personal computer industry when he predicted that the Compaq Computer Corporation would be No.1 by 1996.
At the time, Compaq was ranked third, behind I.B.M. and Apple. Rivals and analysts chided the Compaq president, calling his remarks arrogant, even foolhardy, given the notoriously volatile nature of the personal computer business.
Indeed, Mr. Pfeiffer's prediction proved inaccurate. Compaq is on track to be the industry's market-share leader this year, not in 1996. Dataquest, a market research firm in San Jose, Calif., recently reported that Compaq had forged ahead of the International Business Machines Corporationworldwide, having passed I.B.M. in the United States during the first half of 1994.
Compaq's rapid surge has been assisted by its archrival I.B.M., whose personal computer business has slipped again in the last year. But much of the credit goes to Compaq itself. In the PC industry, the dominant technologies may be owned by others -- the Intel Corporation makes the microchip that serves as the "brain" of most personal computers, while the Microsoft Corporation makes the software that gives a PC its basic operating instructions.
Yet Compaq, more than any other company, has shown the way not only to rapid growth but also to strong profitability for personal computer makers. In one of America's pioneer industries, Compaq has proven that assembling the technology of other companies does not mean eking out razor-thin profit margins or moving factories to third-world nations in search of cheap labor.
Much of the answer to how Compaq has attained its leadership position can be found on its factory floor in Houston. Under Mr. Pfeiffer, who became president and chief executive in 1991, Compaq has slashed manufacturing costs deeply and continuously, enabling the company to pursue its aggressive market-share strategy.
In the last three years, Compaq has doubled the number of PC's produced per square foot of factory space. The number of machines produced per worker has jumped 50 percent. Its higher production volume gives it greater clout to negotiate for price concessions on key parts like disk drives, so materials costs attributable to volume discounts have declined 10 percent annually.
Now, Compaq is getting ready to take the next step in manufacturing efficiency. It plans to scrap lengthy assembly lines entirely and shift to three-person "cells," in which a few workers assemble and test machines by themselves. For the last year, the company has been using the work-cell approach at its factory in Erskine, Scotland, outside Glasgow. And Compaq executives are encouraged by the results.
Compaq says that the output of each employee in the three-person cell has increased another 23 percent and output per square-foot of factory floor space rose 16 percent, compared to assembly lines.
Compaq believes the real payoff from the work-cell method will be to allow the company to build machines to customer order rather than to a forecast of what customers want. Matching production as nearly as possible to customer orders reduces cost at every step of the retail and manufacturing network -- inventory, handling, freight and unsold goods returned.
Perhaps most important in the personal computer business, shifting to a build-to-order system would reduce how much companies have to depend on market forecasts. Errant market forecasts have been the bugbear of the PC industry. In a business with six-month product cycles, market forecasting amounts to trying to hit a fast-moving target of customer demand twice a year for desktops, notebooks and servers. It can be a risky gamble, as virtually every major PC maker has discovered in recent years.
Since its turnaround in 1992, Compaq has done better than most in making accurate market forecasts. But even the Houston leader has made missteps. Last year, it had failures with a laser printer and pen-based computer, forcing Compaq to take a $10 million charge against earnings.
Yet Compaq no longer wants to be beholden to astute guesswork. By the end of next year the company intends to stop relying on forecasts and switch mainly to three-person cells that fill customer orders.
"A computer maker today must be able to configure to customer order, not just put a machine on the shelf and hope that a customer buys it," said Rick Hoole of Pittiglio, Rabin, Todd & McGrath, a management consultant in Weston, Mass.
A FEW mail-order PC makers, notably the Dell Computer Corporation and Gateway 2000, are using a build-to-order business model. But it is much easier for these direct marketers who offer 800-phone numbers and air-freight shipments from their factories to customers. Unlike Compaq or I.B.M., they bypass the retail sales channel, so there are no middlemen between them and customers.
Still, as more and more personal computers are sold into the home market, there is a significant handicap for those companies that don't sell through computer superstores, consumer electronics retailers and even mass-marketers like Sears and Wal-mart. The retail market increasingly is dominated by companies like Packard Bell that manufacture long production runs of preconfigured computer models.
BUT Compaq, which sells both directly to customers and through retailers, is facing the bigger challenge. The company is chasing what has been the Holy Grail of all producers of durable consumer goods -- a system to make only the product a consumer is ordering with the precise degree of customization that the consumer needs.
The auto makers have pursued that goal for years, with little success so far. But it should be easier in the PC industry, since a personal computer has only a few hundred parts instead of 10,000 or more in a car and the human labor in each PC is now down to 15 minutes instead of hours for a car.
Compaq's big rival, I.B.M., is pursuing the build-to-order formula as part of its comeback strategy. "We're building to customer order in Europe and have started on that road in the United States," said John T. McClelland, a vice president in I.B.M.'s PC business. "By the middle of 1995, we intend to be re-armed to be world leader again."
Perhaps, but catching Compaq will not be easy. Its efficiency and manufacturing prowess have been built up steadily since 1991, when the company was faltering badly and Mr. Pfeiffer, who had been in charge of Compaq's European operations, was summoned to Houston and installed as president and chief executive. Compaq had become bloated with bureaucracy. Customers were no longer willing to pay a premium for its machines, and Compaq was losing market share to cost-conscious makers of I.B.M.-compatible clones like Dell and Gateway.
Mr. Pfeiffer handed the job of slashing Compaq's factory-floor costs to his newly-promoted senior vice president of manufacturing, Greg Petsch. Compaq's strategy for achieving cost reductions was to crank up the volume of PC's they produced without investing in more factory space.
Compaq briefly considered another alternative: shutting its factories in Houston and Scotland and moving to the Far East where wages were lower. But the company calculated that labor cost per PC already was so small that a move wasn't worth the trouble. Instead, it began running its assembly lines at its Houston plant 24 hours a day.
AS costs fell rapidly, Compaq saw an opportunity to gain market share. "The chicken came before the egg," said Mr. Petsch, a soft-spoken 11-year veteran at Compaq, who like many of his colleagues came from Texas Instruments.
After taking over as the top manufacturing executive, Mr. Petsch set to streamlining operations by reducing the number of "indirect" workers -- those not directly involved in assembling PC's. Following the layoff of 2,500 workers in late 1991, he offered transfers to many workers from tasks such as inspection or supervision during the day shift to direct manufacturing jobs at night. "We had to replan the way you use people in factories," he recalled.
From a ratio of 1.1 support employee for each line worker, Compaq shifted gears, reducing the ratio to 0.38 support personnel for each line worker. Likewise, the ratio of supervisors to workers was reduced from 1 to 20 to about 1 to 70.
Mr. Petsch admitted that the reaction to all the job shuffling from the Compaq work force was mixed. Some embraced the change and the chance to learn new skills, while others, he said, complained that "the change played havoc with their family life."
As cost-cutting took hold, Compaq was able to offer entry-level PC's for $899 in 1992, the first time it offered a machine priced at under than $2,000. A virtuous cycle of buoyant demand, increased production and cost-savings from high-volume manufacturing was set in place.
Despite its cost-reduction drive, Compaq decided to continue to fabricate its own "motherboards" rather than buy them from suppliers. Most other PC makers, except I.B.M., farm out the production of the motherboards -- a semiconductor sandwich that includes the main chip, memory and other specialized components -- to outside subcontactors as a cost-saving step. The motherboard represents about 40 percent of the cost of a personal computer. Each PC model requires its own particular motherboard.
BUT soon after Compaq began running its motherboard production lines 24 hours a day, it discovered that its cost per motherboard was about $25 less than prices being quoted in the Far East. And Compaq doesn't have to wait the 15 to 20 days it takes for a motherboard to be shipped.
"If you can delay the definition of the motherboard until the time you receive the order, you also save a great deal on inventory and on obsolescence of parts," Mr. Petsch explained. The cost savings, he added, more than justified the $5 million to $6 million investment for each of Compaq's 13 motherboard production lines in Houston.
The current move to three-person work cells gives Compaq a new set of challenges. Since each worker must handle an array of tasks, the shift will require more training and education for employees. In the three-person cells, one person prepares all the seven or eight subassemblies that go into a computer, like the disk drive and the motherboard. The second person installs these into the PC's metal frame. And the third person performs all the tests to make sure all the circuits are connected properly.
Why are cells, in theory, so efficient? When an assembly line stopes, work is interrupted for up to two dozen other people on the line. If there is a problem in a cell, only the cell is affected.
"On an assembly line as many as 15 or 16 people touch each machine," said Brij Kathuria, Compaq's manager for product integrity. "Each time a different person touches a machine that takes time."
Photo: Greg Petsch, left, and Brij Kathuria work to keep costs down at Compaq's factory in Houston. (F. Carter Smith for The New York Times) Chart: "After the Assembly Line" shows the Compaq assembly line techniques.