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The demanding task for many companies today is to look at customers as individuals, to develop products and services proactively to individual customers’ preferences, and then to produce and distribute these offerings. In the last decade, mass customization has emerged as an approach to reach exactly this objective. This research-paper discusses the background of mass customization and the elements of this strategy, and it comments on its implementation in practice. In particular, it describes the four major building blocks of a mass customization system: (a) mass customization provides custom products or services meeting the needs of each individual customer; (b) this demands a cocreation process, which integrates the customer into the value chain of the provider; (c) mass customized products and services should be affordable for the same customers who previously purchased a standard good, which demands adequate prices and, subsequently, cost levels; and (d) to achieve such a situation of low costs and differentiation at the same time, mass customization relies on stable solution spaces, which set the constraints and fulfillment options of a mass customization system.
“It is the customer who determines what a business is” (Drucker, 1954). In the very sense of Drucker’s famous statement, the ability to manage the value chain from the customers’ point of view determines the competitiveness of many companies. In many industries, firms today are faced by an uninterrupted trend toward heterogeneity of demand. Explanations may be found in the growing number of single households, an orientation toward design, and a new awareness of quality and functionality that demands durable and reliable products corresponding exactly to the specific needs of the purchaser (Prahalad & Ramaswamy, 2004; Zuboff & Maxmin, 2003). In particular, consumers with great purchasing power are increasingly attempting to express their personality by means of an individual product choice. Thus, manufacturers are forced to create product programs with an increasing wealth of variants, right down to the production of units of one. As a final consequence, many companies have to process their customers’ demand individually.
To address this challenge, new technologies today provide several opportunities not available before. The advent of computing and communication technology enables pervasive connectivity and direct interaction possibilities among individual customers and between customers and suppliers. This connectivity offers an enormous amount of additional flexibility. Beyond “listening into the customer domain” (Dahan & Hauser, 2002) to address specific needs better and with shorter response time, manufacturers are enabled to look at customers as individuals and to proactively develop products to cater to them at the price they are willing to pay and the schedules that they are willing to accept. But despite all technological advances, this is by no means a straightforward task. Particularly in today’s highly competitive business environment, activities to serve customers have to be performed efficiently and effectively at the same time. Mass customization has emerged as the leading idea in the last decade to reach exactly this objective. The idea is to provide custom products and services with mass production efficiency. Companies offering mass customization are becoming customer-centric enterprises (Tseng & Piller, 2003), organizing all of their value-creation activities around interactions with individual customers.
When the subject of mass customization is raised, the successful model of computer supplier Dell is often named as one of the most impressive examples. The growth and success of Dell is based on the firm’s ability to produce custom computers on demand, meeting exactly the needs of each individual customer and producing these items without any inventory risk of finished goods only after an order has been placed (and paid). But many other companies have also sustained lasting relationships with their customers through mass customization. Consider the following less known but notable examples:
- Time offers Swiss-made custom watches in high quality and with almost infinite customization options. The company operates one of the best online configuration toolkits available today and enables its customers to become real codesigners. In addition, it also benefits from a strong modular pricing approach. Different components of a watch are priced differently, and by creating a product that matches exactly each customer’s personal willingness to pay, the economist’s dream of skinning the individual consumer rent comes true (121Time, 2006).
- Selve, a London- and Munich-based manufacturer of women’s custom shoes, is a fine example of a company that interacts well with its customers both in the traditional store and online. Selve enables its customers to create their own shoes by choosing from a variety of materials and designs, on top of a true custom fit of the shoes based on a 3-D scan of the women’s feet. Trained consultants provide advice in the company’s stores, and the online shop offers reorders. Shoes are all made to order in Italy, delivered in about three weeks, and cost between 150 and 250 Euro (US$180-285; Selve, 2007).
- Sears has become to one of the leading players in the customization and personalization business in the United States. Its affiliate company Land’s End was one of the first companies offering mass customization of garments online and in large quantities. Today, up to 60% of all products in some categories are truly made to order. But in its appliances business under the Sears and Kenmore brands, the company is a forerunner of offering online toolkits where consumers can design their own kitchens (and also other rooms of their homes) and equip them with custom furniture and appliances (Sears, 2007).
This research-paper will explore the common elements and characteristics of successful mass customization strategies. It is organized as follows. In the next section, we review the development of the customer perspective in the modern firm toward its recent form of customer centricity. We then define the term mass customization in larger detail. Afterward, four basic principles of this strategy are discussed. The research-paper closes with some remarks on the implementation of mass customization in industrial practice.
The Development Of Customer Orientation And Customer Centricity
The idea of a customer centric enterprise is to focus all company operations on serving customers and deliver unique value by considering customers as individuals (Sheth, Sisodia, & Sharma, 2000; Tseng & Piller, 2003). Contrary to other forms of customer orientation, value creation takes place in the form of a collaboration or cocreation process between the company and its customers. As we will discuss, this cocreation is a defining element of a mass customization strategy. To offer a better understanding of the differences of such a customer centric enterprise, we will briefly review in this section the development of the modern firm from its origins in mass production to its recent form of customer orientation and customer centricity.
Mass customization today is often seen as a strategy substituting mass production (Pine, 1993). But before mass production was brought about by the industrial revolution, products were customized with craftsmanship. Every customer was a segment of one, and marketing was individualized and personal but performed implicitly and as part of the interaction process. Craftsmanship often presented high-quality products that were available only to selected groups of individuals (with appropriate purchasing power). The advent of mass production standardized the products and operations to leverage economy of scales and division of labor. This reduced the cost of production drastically. Consequently, a mass population could now afford the goods and services that were previously available only to pockets of society. A new generation of mass consumers was created to enjoy the products that were designed to meet the demands of a segment of population large enough to justify the fixed cost of production including setup cost and capital outlays. The “mass consumption society” (Sheth, Sisodia, & Sharma, 2000, p. 55) aroused as a seller’s market, leading firms to adopt organizational forms centered on products. Groups of related products were seen during this period as the primary basis for structuring the organization (Homburg, Workman, & Jensen, 2000).
The resulting increase in product variety and in competition at the end of the 1950s led firms to start paying more attention to markets than to products. Market orientation as an organizational pattern of firms came up, following Drucker’s (1954) argument that creating a satisfied customer is the only valid definition of business purpose. Market orientation places as its first objective to uncover and satisfy customer needs at a profit. Kotler (1967/1991) popularized the market-oriented perspective, and it was soon widely adopted. Market orientation implies that one sees the total market not as a homogenous mass market but as market segments of consumers. Segmentation started with the notion of sociodemographic division with variables such as age, sex, and income. This resulted in a limited number of focused product variants (Smith, 1956). Later, segmentation became more refined. More subtly defined niches based on lifestyles and previous buying behavior resulted in an increasing number of product variants to care for individual, specific needs. Market segmentation demands information on consumers’ needs (Narver & Slater, 1990). Today’s instruments of market research were created as tools to satisfy exactly this set of demands by applying better understanding with information about customers.
With a continuous refinement of segmentation, market segmentation was replaced by the notion of customer orientation. Its principal features are (a) a set of beliefs that puts the customer’s interest first; (b) the ability of the organization to generate, disseminate, and use superior information about customers and competitors; and (c) the coordinated application of interfunctional resources to the creation of superior customer value (for a review of the literature, see Day, 1994). Especially the strong emphasis on providing “customer value” in all functions of the organization can be regarded as the differentiation of customer orientation to the previous stage of market orientation. The customer came closer into the focus of the firm. During this time, the notion of the marketing function as the central entity to deal with and think about a firm’s customers developed. Relationship management reinforced this perspective. It “emphasizes understanding and satisfying the needs, wants, and resources of individual consumers and customers rather than those of mass markets and mass segments” (Sheth, Sisodia, & Sharma, 2000). Instead of segments of customers, individual customers were seen as the target of the marketing mix, resulting in the term “one-to-one marketing” (McKenna, 1991). The members of one market segment are now no longer regarded as being heterogeneous in relation to their profit contribution for the firm, but each customer is assessed individually. Based on an individual output-to-input ratio of the marketing function for individual customers (“share of wallet”), customers are addressed either by a standardized offering or, if it pays off, by a customized offering (Parasuraman & Grewal, 2000). As a result, product-based strategies are being replaced with a competitive strategy approach based on growing the long-term customer equity of the firm.
The customer-centric enterprise combines the organization perspective of customer orientation with the individual perspective of relationship management (Piller, Reichwald, & Tseng, 2006; Tseng & Piller, 2003). It also extends the responsibility of dealing with the customer from the marketing function to the entire organization. Customer centricity means that the organization as a whole is committed to meeting the needs of all relevant customers. At the strategic level, this translates to the orientation and mind-set of a firm to share interdependencies and values with customers over the long term. At the tactical level, companies have to align their processes with the customers’ convenience with the utmost importance, instead of focusing on the convenience of operations. Of course, sufficient infrastructural systems and leadership structures have to be implemented to reach this state. These changes include a customer-centric organizational structure. Traditionally separated functions like sales, marketing (communications), and customer service should become integrated into one customer-centered activity (Sheth, Sisodia, & Sharma, 2000). Further, customer centricity is turning the marketing perspective from the demand to the supply side. Marketing management has traditionally been viewed as demand management. The focus has been on the product or the market, and marketing had to stabilize demand for an offering through promotional activities such as incentives or pricing policies. The customer-centric enterprise is turning its focus to the individual customer as the starting point for all activities. Instead of creating and stabilizing demand—that is, trying to influence people in terms of what to buy, when to buy, and how much to buy—firms should try to adjust their capabilities including product designs, production, and supply-chains to respond to customer demand. Mass customization can be seen as a strategy for companies to achieve these goals of customer centricity, both with regard to marketing and sales as well as with regard to operations and supply-chain management.
Mass Customization: An Operational Strategy To Enable Customer-Centric Enterprises
Davis, who coined the phrase in 1987, refers to mass customization when “the same large number of customers can be reached as in mass markets of the industrial economy, and simultaneously they can be treated individually as in the customized markets of preindustrial economies” (p. 169). Pine (1993) popularized this concept and defined mass customization as “providing tremendous variety and individual customization, at prices comparable to standard goods and services” to enable the production of products and service “with enough variety and customization that nearly everyone finds exactly what they want” (p. 9). A pragmatic but precise definition was introduced by Tseng and Jiao (2001). Mass customization corresponds to “the technologies and systems to deliver goods and services that meet individual customers’ needs with near mass production efficiency” (Tseng & Jiao, 2001, p. 685). This definition implies that the goal is to detect customers’ needs first and then to fulfill these needs with efficiency that almost equals that of mass production. Often, this definition is supplemented by the requirement that the individualized goods do not carry the price premiums connected traditionally with (craft) customization (Davis, 1987; Westbrook & Williamson, 1993). However, consumers frequently are found to be willing to pay a price premium for customization that reflects the increment of utility customers gain from a product that better fits their needs than the best standard product attainable (Chamberlin, 1962).
Concluding, we can define mass customization as follows: Mass customization refers to a customer codesign process of products and services that meet the needs of each individual customer with regard to certain product features.
All operations are performed within a fixed solution space, characterized by stable but still flexible and responsive processes. As a result, the costs associated with customization allow for a price level that does not imply a switch in an upper market segment.
In the next section, we will discuss the basic elements of this definition in further detail. Before, an important differentiation of the terms mass customization and personalization seems required, as sometimes both terms are used synonymously and as sometimes both are used explicitly differently. While customization relates to changing, assembling, or modifying product or service components according to customers’ needs and desires, personalization involves intense communication and interaction between two parties, namely customer and supplier. Personalization in general is about selecting or filtering information objects for an individual by using information about the individual (the customer profile) and then negotiating the selection with the individual. Thus, personalization compares strongly to recommendation: from a large set of possibilities, customer specific recommendations are selected (Imhoff, Loftis, & Geiger, 2001; Resnick & Varian, 1997). From a technical point of view, automatic personalization or recommendation means matching metainformation of products or information objects to metainformation of customers (stored in the customer profile). Personalization is increasingly considered an important ingredient of modern Internet applications. In most cases, personalization techniques are used for tailoring information services to personal user needs. In marketing, personalization supports one-to-one marketing (Peppers & Rogers, 1997), which should increase the customer share over a lifetime.
A good example of both customization and personalization is provided by Lands’ End, a catalog retailer. The company is a pioneer of exploring personalization techniques on the Internet, and it has been using a virtual model and recommendation service on its Web site since 1999. The system recommends a customized bundle of standard mass products matching each other and the customers’ style profile. This service provides customers with a set of coherent outfits rather than with isolated articles of clothing. But each product is still a standard product. In 2003, Land’s End also introduced mass customization. Over the Internet, customers can order made-to-measure trousers and shirts. All products are made to order in a specially assigned factory. The company offers a substantial number of design options and varieties that customers choose using a dedicated Internet toolkit. Obviously, mass customization and personalization can be combined and benefit each other. A customer may use the recommendation system based on his or her virtual model to explore the existing assortment of products and find those fitting to his or her needs. If such a product is not available in a category he or she likes, he or she may be transferred to the customization offering where he or she can configure this product, though having to pay a premium and to wait a bit longer until this item is produced just for him or her.
Elements Of Mass Customization Strategies
According to the definition of mass customization in the previous section, mass customization consists of four basic elements: (a) mass customization provides custom products or services meeting the needs of each individual customer; (b) this demands a cocreation process, which integrates the customer into the value chain of the provider; (c) to differentiate mass customization from conventional craftsmanship, mass customized products and services should be affordable for the same customers which previously purchased a standard good, which demands adequate prices and, subsequently, cost levels; and (d) to achieve such a situation of low costs and differentiation at the same time, mass customization relies on stable solution spaces, which set the constraints and fulfillment options of a mass customization system. In this section, we will discuss these four elements of mass customization in larger detail.
Custom Products Meeting The Needs Of Each Individual Customer
From a strategic management perspective, mass customization is a differentiation strategy. Referring to Chamberlin’s (1962) theory of monopolistic competition, customers gain from customization the increment of utility of a good that better fits to their needs than the best standard product attainable. The larger the heterogeneity of all customers’ preferences, the larger is this gain in utility. The value of a custom good can be measured as the increment in utility customers get from a product that fits better to their needs than the second-best solution available (Kaplan, Schoder, & Haenlein, 2007). Note that mass customization does not demand lot sizes of one. Custom products can be produced in larger quantities for an individual customer. This frequently happens in industrial market, when, for example, a supplier provides a custom component that is integrated in a product of the vendor.
From the perspective of product development, value by customization can be achieved by three design features of a product, which all can become the starting point of customization: the fit (measurements), functionality, and form (style and aesthetic design) of an offering.
- Fit and comfort (measurements). The traditional starting point for customization in consumer good markets is to fit a product according to personal measurements of the client, for example, body measurements or the dimensions of a room or other physical object. Market research identifies better fit as the strongest arguments in favor for mass customization (EuroShoe, 2003). Often, however, it is also the most difficult dimension to achieve, demanding complex systems to gather the customers’ dimensions exactly and to transfer them into a product that has to be based on a parametric design (to fulfill the requirement of a stable solution space, see the following). This often commands
for a total redesign of the product and the costly development of flexible product architectures with enough slack to accommodate all possible fitting demands of the customer base. In sales, expensive 3-D scanners or other devices are needed, which in turn demand highly qualified sales clerks to operate those (Berger, Moeslein, Piller, & Reichwald, 2005).
- Functionality. Functionality addresses issues like selecting speed, precision, power, cushioning, output devices, interfaces, connectivity, upgradeability, or similar technical attributes of an offering according to the requirements of the client. This is the traditional starting point of customization in industrial markets where machines, for example, are being adjusted to their place in an existing manufacturing system or components are being produced according to the exact specifications of their buyers. Functionality demands similar efforts to elicit customer information about the desired individual functionality as the fit dimension. In manufacturing, however, the growing software content of many products today enables the customizability of functional components more easily.
- Form (style and aesthetic design). Form (style and aesthetic design) relates to modifications aiming at sensual or optical senses, that is, selecting colors, styles, applications, cuts, or flavors. Many mass customization offerings in business-to-consumer e-commerce are based on such a possibility to codesign the outer appearance of a product. This kind of customization is often rather easy to implement in manufacturing, demanding a late degree of postponement (Duray, 2002), especially if digital printing technology can be applied. The desire for a particular outer appearance is often inspired by fashions, peers, role models, and so forth, and the individuals’ desire is to cope and adapt to these trends. In the psychological marketing literature, the construct of consumers’ need for uniqueness is discussed (Tepper, Bearter, & Hunter, 2001). Consumers acquire and display material possessions for feeling differentiated from other people or by actions that consumers perform explicitly to be recognized by others (counterconformity motivation). Some consumers express their desire for uniqueness by selecting material objects (fashion) that are ahead of the average trend and by purchasing handcrafted items or vintage goods from nontraditional outlets. Mass customization can be a further means to express their uniqueness, when consumers can design products to own personal specification in order to look different then the rest.
To illustrate these options, consider the example of a shoe. Here, fit is mostly defined by its last but also by the design of the upper, insole, outsole, and so forth. Style is the option to influence the aesthetic design of the product, that is, colors of the leathers or patterns. A shoe’s functionality can be defined by its cushioning, form of heels, or the structure of cleats. In the case of cereal, these options could be translated into package size (fit), taste (e.g., no chocolate and raisins or many strawberries), and nutrition (e.g., vitamins or special fibers). To match the level of customization offered by a manufacturer and the needs of the targeted market segment is a major success factor. When building a mass customization system, defining the options where customization should be placed and to which extent is a major task that demands thorough market research and evaluation.
Customization demands that the recipients of the customized goods transfer their needs and desires into a concrete product specification. Mass customization thus demands a process of customer codesign. Codesign activities are performed in an act of company-to-customer interaction and cooperation (Franke & Piller, 2003, 2004; Khalid & Helander, 2003; Tseng, Kjellberg, & Lu, 2003; von Hippel, 1998). Customers are integrated into value creation by defining, configuring, matching, or modifying an individual solution. Already in 1991, Udwadia and Kumar envisioned that customers and manufacturers would become “coconstructors” (i.e., codesigners) of products intended for each customer’s individual use. In their view, coconstruction would arise when customers had only a nebulous sense of what they wanted. Without the customers’ deep involvement, the manufacturer would be unable to fill each individualized product demand adequately. Computer technology, particularly the capacity to simulate potential product designs before a purchase, would enable the collaborative effort (Haug & Hvam, 2007; Ulrich, Anderson-Connell, & Wu, 2003). This understanding represents one of the four forms of mass customization as identified by Gilmore and Pine (1997), collaborative customization. In this strategy, the manufacturer and customer work together to identify and satisfy the customer’s needs through a system that allowed easy articulation of exact wants. Anderson-Connell, Ulrich, and Brannon (2002) used the term codesign to describe a collaborative relationship between consumers and manufacturers wherein, through a process of interaction between a design manager and a consumer, a product is designed according to consumer specification and based on the existing manufacturing components.
In mass customization, codesign activities are in general performed with the help of dedicated systems. These systems are known as configurators, choice boards, design systems, toolkits, or codesign platforms (Salvador & Forza, 2007). They are responsible for guiding the user through the configuration process. Whenever the term configurator or configuration system is quoted in literature, for the most part, it is used in a technical sense addressing a software tool. The success of such an interaction system, however, is by no means defined only by its technological capabilities but also by its integration in the sales environment, its ability to allow for learning by doing, its ability to provide experience and process satisfaction, and its integration into the brand concept. Tools for user integration in a mass customization system contain much more than arithmetic algorithms to combine modular components. Taking up an expression from von Hippel (2001), the more generic term toolkits for customer codesign may better cover the diverse activities taking place (Franke & Piller, 2003). In a toolkit, different variants are represented, visualized, assessed, and priced with an accompanying learning-by-doing process for the user.
Codesign differentiates mass customization from other strategies like agile manufacturing or postponement strategies in the distribution chain. It also provides new opportunities for marketing and customer relationship management. Recent research by Franke and Piller (2004) and Schreier (2006) has shown that up to 50% of the additional willingness to pay for customized (consumer) products can be explained by the positive perception of the codesign process itself. Products that a customer codesigns may also provide symbolic (intrinsic and social) benefits for the customer, resulting from the process of codesign and not its outcome (e.g., Piller, 2005; Reichwald, Midler, & Piller, 2005; Schreier, 2006). Schreier quoted, for example, a pride-of-authorship effect. Customers may cocreate something on their own, which may add value due to the sheer enthusiasm about the result. This effect relates to the need for uniqueness as discussed before, but it is based here on a unique task and not its outcome. In addition to enjoyment, task accomplishment has a sense of creativity. Participation in a codesign process may be considered a highly creative problem-solving process by individuals engaged in this task, becoming a motivator to purchase a mass customization product.
An important precondition to customer satisfaction from codesign is that the process itself is felicitous and successful. The customer has to be capable of performing the task. This competency issue involves flow, a construct often used by researchers to explain how customer participation in a process increases satisfaction (Csikszentmihalyi, 1990). Flow is the process of optimal experience achieved when motivated users perceive a balance between their skills and the challenge during an interaction process (Novak, Hoffman, & Young, 2000). Interacting with a codesign toolkit may lead exactly to this state. However, the peculiarities of user design with a codesign toolkit limit a direct transfer of the findings in other fields to codesign. Further empirical insights in this matter are therefore a prerequisite (Franke & Piller, 2003). Marketing researchers are just realizing this research opportunity (e.g., Dellaert & Stremersch, 2005; Randall, Terwiesch, & Ulrich, 2005; Simonson, 2005).
Customer codesign in a mass customization context establishes an interaction between the manufacturer and customer, which offers possibilities for building a lasting relationship. Once the customer has successfully purchased an individual item, the knowledge acquired by the manufacturer represents a considerable barrier against switching suppliers. Reorders are much easier and more possible. Codesign, thus, enables a company to increase the loyalty of its customers. Consider the case of Adidas, a large manufacturer of sports goods (Berger et al., 2005). In 2001, the company introduced its mass customization program “mi adidas,” offering custom sports boots in regard to fit, functionality, and aesthetic design. The process starts with a customer who wants to buy personalized running shoes for around $150. The more the customer tells the vendor about his or her likes and dislikes during the integration process, the better chance there is of a product being created that meets his or her exact needs on the first try. After delivery of the customized product, feedback from the customer enhances Adidas’ knowledge of the customer. The manufacturer can draw on detailed information about the customer for the next sale, ensuring that the service provided becomes quicker, simpler, and more focused. The state of information is increased and fine-tuned with each additional sale. This data is also used to propose subsequent purchases automatically once the life of the training shoes is over (for Adidas customers who train intensively, this can be every couple of months).
When Adidas enters a learning relationship with its customers, it increases the revenues from each customer because, and in addition to the actual product benefits, it simplifies the purchasing decision, so the customer keeps coming back. Why would a customer switch to a competitor—even one that can deliver a comparable customized product—if Adidas already has all of the information necessary to supply the product? A new supplier would need to repeat the initial process of gathering data from the customer. Moreover, the customer has now learned how his or her integration into the process successfully results in the creation of a product. By aggregating information from a segment of individual customers, Adidas also gains valuable market research knowledge. As a result, new products for the mass-market segment can be planned more efficiently and market research is more effective because of unfiltered access to data on market trends and customers’ needs. This is of special benefit to companies that unite large-scale, make-to-stock production with tailored services. Mass customization, thus, can become an enabling strategy for mass production.
Adequate Price and Cost Level
Mass customization sometimes is defined by the requirement that the individualized goods are provided at prices comparable to a mass produced item (Pine, 1993). However, mass customization practice shows that consumers are frequently willing to pay a price premium for customization that reflects the increment of utility they gain from a product that better fits to their needs than the best standard product attainable (see Franke & Piller, 2004; Levin, Schreiber, Lauriola, & Gaeth, 2002). Different to conventional craft customization, however, mass customization goods are targeting the same market segment that was previously purchasing the standard goods. Traditionally, craft customization is related to price premiums of such an extent that it targets a completely different market segment. This is not the case with mass customization.
From the manufacturer’s perspective, this price level demands for a cost level that allows such affordable premiums.
The primary challenge in pursuing mass customization from the perspective of operations strategy stems from two sources of additional cost flexibility (Su, Chang, & Ferguson, 2005): (a) increased complexity and (b) increased uncertainty in business operations, which by implication result in higher operational cost. A higher level of product customization requires greater product variety, which in turn entails greater number of parts, processes, suppliers, retailers, and distribution channels. A direct consequence of such proliferations is an increased complexity in managing all aspects of business from raw material procurement to production and eventually to distribution. Furthermore, increase in product variety has the effect of introducing greater uncertainty in demand realizations, increase in manufacturing cycle times, and increase in shipment lead times (Kumar & Piller, 2006; Yao, Han, Yang, & Rong, 2007). Increased system complexity and uncertainties (in demand and lead time) drive the operational cost upward due to more complex planning, greater hedging, increased resource usage, more complex production setups, diseconomies of scope, and higher distribution cost spread throughout the supply-chain. Furthermore, a sizeable increase in costs to support the customer codesign interface on a Web site or in a physical store is integral to a mass customization strategy.
These additional costs can be counterbalanced by a number of new profit or cost-saving potentials. First, customers often are willing to pay a premium for customization, at least to an extent. Second, a well-formulated, well-designed mass customization strategy could significantly offset the cost overruns through a number of strategic and tactical mechanisms. Two primary mechanisms of cost reduction in mass customization are delayed product differentiation (postponement) and the realization of economies of customer integration.
The latter mechanism has already been described in the previous section on customer codesign. Economies of customer integration result from information and relationships that a manufacturer gains when interacting with individual customers (Piller, Möslein, & Stotko, 2004). Resulting cost saving potentials are substantially based on the better access to knowledge about the needs and demands of the customer base (Kotha, 1995; Rangaswamy & Pal, 2003; Squire, Re-adman, Brown, & Bessant, 2004) such as (a) the reduced or eliminated need for forecasting product demand, (b) reduced or eliminated inventory levels of finished goods, (c) reduced product returns, (d) reduced obsolescence or antiquated fashion risks, and (e) the prevention of lost sales if customers cannot find the product in a store that fits to their requirements and, thus, allocate the purchasing budget to another item. The savings from these effects can be huge. Forrester Research estimated that the U.S. automotive industry could save up to $3,500 per vehicle by moving from its recent build-to-stock model to a build-to-order system. Similarly, for the apparel industry, cost savings up to 30% are estimated when moving to a on-demand system. Estimates for the apparel industry indicate that almost $300 billion are wasted annually due to erroneous forecasting, heavy inventory, fashion risks, and lost profits as a result of necessary discounts (Sanders, 2005).
The former concept, delayed product differentiation, refers to partitioning the supply-chain into two stages: a standardized portion of the product is made during the first stage, while the differentiated portion of the product is made in the second stage based on customer preference expressed in an order. The success of delayed product differentiation is a direct manifestation of the fact that most companies offer a portfolio of products that consists of families of closely related products, which differ from each other in a limited number of differentiated features. An example of delayed product differentiation in the automotive industry would be to send a standard version of the car (stripped or partially equipped version) to dealers and then allow dealers to install, based on specific customer requests, CD/DVD players, rear fin, interior leather or fabric, cruise control systems, and so forth. Prior to the point of differentiation, product parts are reengineered so that as many parts or components of the products are common to each configuration as possible. Cost savings result from the risk-pooling effect and reduction in inventory stocking costs. Additionally, as common performance levels of functionalities are selected by a number of customers, economies of scale can be achieved at the modular level for each version of the module, generating cost savings not available in pure customization-oriented production systems.
Stable Solution Space
In the previous section, a number of approaches have already been presented that aim to reduce the additional cost of mass customization. Another important principle to achieve “mass production efficiency” in mass customization is to control for the extent in which additional cost occurs. The major means to reach this objective is to achieve stability in the solution space of a mass customization system. The term solution space represents the preexisting capability and degrees of freedom built into a given manufacturer’s production system (von Hippel, 2001). The space in which a mass customization offering is able to satisfy a customer’s need is finite. Correspondingly, a successful mass customization system is characterized by stable but still flexible, responsive processes that provide a dynamic flow of products (Badurdeen & Masel, 2007; Pine, 1995; Salvador, Rungtusanatham, & Forza, 2004). Value creation within a stable solution space is the major differentiation of mass customization versus conventional (craft) customization. A traditional (craft) customizer reinvents not only its products but also its processes for each individual customer. But a mass customizer uses stable processes to deliver high-variety goods (Blecker & Abdelkafi, 2007; Pine, Victor, & Boynton, 1993). This allows a mass customizer to achieve “near mass production efficiency” but also implies that the customization options are limited to certain product features. Customers perform codesign activities within a list of options and predefined components. This space determines what universe of benefits an offer is intended to provide to customers and then within that universe what specific permutations of functionality can be provided (Pine, 1995). Mass customization does not mean to offer limitless choice but to offer choice that is restricted to options that are already represented in the fulfillment system. In the case of digital goods (or components), customization possibilities may be infinite.
In the case of physical goods, however, they are limited and may be represented by a modular product architecture. Modularity is an essential part of every mass customization strategy (Duray, 2002; Gilmore & Pine, 1997; Kumar, 2005; Mikkola, 2007; Tseng & Jiao, 2001). 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 that are consistent with the capabilities of the processes, the given product architecture, and the given degree of variety.
The product family approach has been recognized as an effective means to accommodate an increasing product variety across diverse market niches while still being able to achieve economies of scale (Tseng & Jiao, 2001; Zhang & Tseng, 2007). In addition to leveraging the costs of delivering variety, product family design can reduce development risks by reusing proven elements in a firm’s activities and offerings. The backdrop of a product family is a well-planned architecture—the conceptual structure and overall logical organization of generating a family of products—providing a generic umbrella to capture and utilize commonality. Within this architecture, each new product is instantiated and extends to anchor future designs to a common product line structure. The rationale of such a product family architecture lies not only in unburdening the knowledge base from keeping variant forms of the same solution but also in modeling the design process of a class of products that can widely variegate designs based on individual customization requirements within a coherent framework (Tseng & Jiao, 2001). Setting the modular product family structure of a mass customization system and its solution space becomes one of the foremost competitive capabilities of a mass customization company.
This research-paper has argued that mass customization can be seen as a response to today’s challenges of heterogeneous demands and the need of companies to become truly customer centric. When properly implemented, mass customization brings about across-the-board improvements in all dimensions of operations strategy: responsiveness, price, quality, and service (Ismail, Reid, Mooney, Poolton, & Arokiam, 2007). But there are also a number of critical observations. Mass customization is neither a “one size fits all” approach nor the right strategy in all contexts. A recent survey by FedEx Corporation in the apparel industry found that more than 90% of the respondents agree that mass customization will play a significant role in the next 5 years. Yet, not all performance outcomes related to mass customization implementation are necessarily positive. Levi’s Original Spin program (custom jeans) or Proctor & Gamble’s Reflect brand (custom cosmetics) are prominent examples for mass customization of large and powerful enterprises that could not fulfill their promises and that have been terminated. Research on the contingency factors of a mass customization system is still underdeveloped. There still is little knowledge in the management domain about the dominant capabilities of a mass customization system (Cavusoglu & Raghunathan, 2007; Moser, 2007).
One major reason why mass customization operations fail or do not develop as expected that has been discussed can be found in the customer domain. While mass customization provides additional benefits for users, it also comes with additional cost and risk. In addition to the direct cost of mass customization in form of the price premium, customers may perceive psychological or cognitive (indirect) costs. Cognitive costs result from the perceived risk of being involved in cocreation, which can be understood as the expectations of customers to realize a loss. Some authors emphasize the downsides of the cocreation behavior for the customer (Dellaert & Stremersch, 2005; Franke & Piller, 2003; Randall, Terwiesch, & Ulrich, 2005; Zipkin, 2001). They argue that the active role of the user-designer may lead to mass confusion. Schwartz (2004) noted this aspect of human nature in his study “The Paradox of Choice” and concluded that freedom of too much choice could be a form of tyranny for the customer. Customer satisfaction may not only plateau after a certain customization level of the product, it may decrease because of the frustration a customer feels due to excessive choice or variety. Thus, setting the right degree of customization and carefully selecting the options for customization is crucial for mass customization success. To investigate the factors and design features of a good codesign toolkit that prevents this mass confusion is a major field for further research.
On the firm’s perspective, a repeating pattern of failure can be seen in unsuccessfully managing the change process from a product-focused, mass production firm to a customer-centric organization (Moser, 2007). Business managers and their employees often get accustomed to a dominant logic shaped by the attitudes, behaviors, and assumptions that they have witnessed in their environments for a long time. The thinking of many managers still is conditioned by managerial routines, systems, and incentives created under the mass production framework. However, the genus of mass customization is a codesign process of cocreation of value in collaboration with the customer. Shifting the locus of value creation toward customers requires no less than a radical change in the management mind-set (Forza 6 Salvador, 2007). Firms, thus, must begin at the level of normative management with the challenge to change the old and adversarial perceptions of the customers and to develop an attitude of listening to and aligning with customers. Introducing mass customization must always be preceded by a well-conceived, well-deliberated change in management process that will make the organization more customer centric. Research on change management for mass customization almost does not yet exist.
Another area that demands further attention is related with the exploitation of customer knowledge gained during the codesign process. As mentioned before, value creation for the firm in a mass customization is substantially based on better access to knowledge about the needs and demands of the customer base (economies of integration). By aggregating this knowledge, the company can generate better market research information and more accurate forecasting concerning customer needs. This is especially true when the firm’s main business is still following the made-to-stock and inventory-based (mass) production system (Kotha, 1995). For the portion of business that is (still) manufactured on stock, the custom segment provides important market research information, which can be used to improve variant development and forecasting accuracy of products made to stock. Firms can also benefit from combining mass customization and mass production in one factory, using mass produced items to utilize overcapacities of the custom manufacture. To utilize this capability, however, the firm has to obtain adequate competences to design and redesign the routines that facilitate combining existing knowledge and the newly acquired and assimilated knowledge. Developing practices of combining mass production and mass customization operations successfully in one business model is still an open, but very promising, field in management and research.
But despite these challenges, mass customization has great potential to be a source of sustainable financial and strategic advantage. Today’s market characteristics and competitive challenges favor mass customization in many industries and market situations. Students and practitioners of management alike should learn more about this strategy and investigate how a customized mass customization approach can suit their businesses better.
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