Mass customization: providing custom products and services with mass production efficiency

Mass customization is designed to deliver highly customized products with mass production efficiency. While discussed in the literature for more than a decade, mass customization has only recently been introduced to a large extent. Using a number of case examples from the automotive, sports equipment, and credit card industry, we will discuss in this paper how mass customization supports and enhances operational and market effectiveness and review the success factors of making mass customization work. 125 1 Currently on an extended leave at MIT Sloan School of Management. Mass customization: providing custom products and services with mass production efficiency Many companies are faced today by an unprecedented trend towards individualization of demand. While customization is a known strategy in many business-to-business markets, today’s buyer’s markets are also compelling consumer companies to increasingly offer customized products. In particular, consumers with great purchasing power are attempting to express their personality through personalized or customized product choices. As a result, manufacturers are forced to build production systems with an increasing number of variants, right down to the production of units of one. An article in the U.S. News & World Report (November 21, 2005) underscores the tremendous need for customer-centricity. In this article, Barbara Kahn, Wharton Professor of Marketing, stresses its impact on customer expectations over the last few years: “It used to be [that] consumers wanted something state-of-theart. Now they want something tailored to them.” Indeed, Brand Keys, a research firm that studies customer loyalty, found that customization is 30 percent of what draws a person to a brand today, as opposed to only six percent in 1997. A recent Forrester report (“Who buys custom consumer products?” June 22, 2006) confirmed the attractiveness of customers purchasing customized products. They are better educated (thus less likely to compromise), have a higher income level, and are trendsetters in their group of peers: “These beliefs carry over into action, with [custom product] buyers more likely to tell others about products that interest them and e-mail products that interest them to others,” the report concludes. The proposition of mass customization is to capture these opportunities by bringing custom products within reach of the masses [Piller (2006)]. The common perception is that custom comes with a huge price premium, think Bow Lane instead of H&M. But the objective of mass customization is to overcome this perception and to make custom products achievable for large market segments, and not only for a few premium customers. Coined by Stan Davis in 1987 and made popular by Joseph Pine in 1993, the term mass customization has picked up significant momentum in recent years. Its origins, however, can be traced back to the 1970s, when the futurist Alvin Toffler described the opportunities which modern flexible manufacturing technologies will offer. According to Toffler, in a production system where switching costs are marginally small, high variety and individuality would come at almost no cost. It, however, took over three decades until the Internet provided the information structure to match the flexible manufacturing capabilities (envisioned by Toffler) with customer demands in sales efficiently. The reason for this time lag is that, compared to a mass production system, mass customization is characterized by a high intensity of interaction. The manufacturer has to interact with all customers individually to obtain specific information in order to define and translate their needs and desires into a definite product specifications. This elicitation process is, in many cases, much more than an exchange of information. It becomes an iterative act of co-creation and co-design between the customer and seller, incurring rather high costs of communication. Only the recently acquired low-cost communication capabilities of the Internet have made it possible to reduce transaction costs. This, in turn, enabled mass customization on a larger scale. Today, there are several well-known mass producers that have benefited from the application of mass customization, including Land’s End, Hertz, Lenscarfter, Cemex, Nike, Toyota, and Proctor & Gamble, just to name a few. Box 1 provides some recent examples of mass customization. Box 1: Recent examples of mass customization In the context of mass customization, the successful model of computer manufacturer Dell is often named as a prime example. Many other companies, however, have built sustained and lasting relationships with their customers through mass customization. Here are a few notable recent examples (for more cases, refer to www.mass-customization.de): Selve, a London and Munich-based manufacturer of custom women’s shoes, is a fine example of a company’s highly effective interaction with its customers in its conventional stores as well as online. Selve enables its customers to create their own shoes by choosing from a variety of 126 The journal of financial transformation materials and designs, on-top of a true custom fit based on a 3D-scan of the women’s feet. Trained consultants provide advice in the company’s stores, the online shop offers reorders. All shoes are made-to-order in Italy, delivered in about three weeks, and cost between U.S.$180 and U.S.$285 (www.selve.co.uk). miAdidas is a business unit of Adidas AG, the sports goods company, which offers custom sports shoes. While mass customization is a ubiquitous offering for sports shoes (there is not one large brand that is not offering custom sneakers), Adidas is the only company offering more than just the possibility to select between color options for otherwise standard models. At miAdidas, customers get a shoe manufactured to their needs with regard to fit (measurements), performance (custom cushioning), and design (color options). Shoes sell for a premium of about 30 percent and are produced within two weeks in China (www.miadidas.com). Time121 produces Swiss-made watches with almost infinite customization options. The company offers one of the best online configuration toolkits available today and enables its customers to become real co-designers of the watch. In addition, it takes advantage of a well designed modular pricing approach. Different components are differently priced, and by creating a product that matches each customer’s personal willingness-to-pay, the economist’s dream of individual price discrimination is fulfilled (www.factory121.com). Sears has become one of the leading players in the customization and personalization business in the U.S. Its affiliate company Land’s End was one of the first companies to offer mass customization of garments online and in large quantities. Today, up to 60 percent of all products in some categories are truly made-to-order. In its appliances business, the company offers personalization with onlinetoolkits where consumers can design their own kitchen and other rooms of their home (www.sears.com). Mass customization principles Mass customization, when properly implemented, results in significantly increased levels of operational effectiveness. Our analysis shows that mass customization could augment not only a company’s performance on price and customization performance, but also on other competitive priorities, such as quality, agility, and service. The basic principles of a mass customization system determining its operational effectiveness and efficiency are discussed below. Modular product and process structures Modularity is an essential part of every mass customization strategy [Duray et al. (2000), Gilmore and Pine (1997), Kumar (2004)]. A mass customization system is characterized by a low production cost per unit normally associated with mass production. To reach this objective, a mass customization system has a finite solution space, i.e., all processes are performed within a fixed product and process architecture characterized by flexible and responsive but stable processes. This is also the main difference between mass customization and conventional craft customization. In a craft production system, not only are the products engineered-to-order for each customer, but also the resulting fulfillment processes. In a mass customization system, however, the processes are fixed within a given range, i.e., designed to yield output limited to certain range of specifications, represented by a consequent modular product design. Each module serves one or more well-defined functions of the product and is available in several options that deliver a different performance level for the function(s) it is intended to serve. This principle shows that mass customization demands compromise. Not all notional customization options are being offered, but only those which are consistent with the capabilities of the processes, and the given product architecture and degree of variety. Consider as an example of modularity for mass customization the Sweden-based Scania. The company today is the world’s most profitable truck company and attributes this to the fact that its entire product offering is based on a clear mass customization structure. It is a good case to illustrate that there Mass customization: providing custom products and services with mass production efficiency