MCPC - 025 - 2007 Procurement Mechanisms for Customized Products

Customization is essentially a pull system and customers' demand for customized products is the ultimate force that drives a customization business. Research in product customization has been primarily focused on improving manufacturers' efficiency in eliciting and fulfilling customers' needs; less attention has been paid to customers' procurement decisions. Although systems like product configurators and design toolkits have been developed to facilitate customers in product customization, they are more " sales " tools than " procurement " tools. This paper views customization from customers' perspective and aims to understand the critical information, decisions, and incentives in procuring a customized product. Procurement of customized products is conceptualized as a contracting problem with an embedded co-design problem with information asymmetry. A decision framework for procuring customized products is constructed, different procurement scenarios are outlined and generic procurement mechanisms are surveyed and compared. This paper concludes by pointing out future research directions on procurement mechanism/system design towards improving customers' efficiency of procuring customized products. Introduction Customization has been recognized as a frontier for manufacturers to gain competitive advantage in an increasingly diversified and dynamic marketplace [0]. Recent years have witnessed rapid increase in output of customized products, spanning from capital goods like airplanes, machine tools, elevators and escalators to consumer goods like computers, printers, sneakers, and watches etc. [0,0,0]. With the proliferation of customized products and spread of customization technologies, there emerges a new competitive landscape where multiple manufacturers compete on customization for customers' patronage. For example, both Boeing and Airbus customize airplane interiors for airliners; Dell, HP, and Lenovo allow customers to configure their own computers; both Adidas and Nike offer custom made sneakers, etc. The increasing availability of customized products gives customers more choices that could potentially best fulfill their individual specific needs, which are often compromised in standard products designed for mass appeal. The escalating competition on customization among manufacturers further shifts bargaining power in customers' favor. However, to tap into the potential value offered by product customization, customers are faced with a series of difficult decisions in procurement, e.g.