Mass customization satisfies consumer demand for low cost variety

The marketplace has come a long way since Henry Ford's all-black Model T, mass produced at a price "everyman" could afford. Today's consumers want products designed the way they like, at the right price and with quick availability. For those products, mass customization is the solution, according to a professor of supply chain management at the W. P. Carey School of Business. Manus Rungtusanatham says companies can provide customers with the choices they desire by paying attention to the number and complexities of the variables, then devising their supply chains and assembly lines to meet demand.

A hundred years ago, Henry Ford's factory made one product: the Model T, color black, at a price "everyman" could afford. The ubiquitous car became the icon for mass production. Later, General Motors established an alternate way of engaging customers: a different product for each identifiable market segment. Differentiation was born.

Today, however, most companies can no longer afford to choose to be either the low cost provider or the differentiator. Today, companies must do both: offer low cost, high quality products that meet customer's specific demands in a short amount of time. How can companies produce the right quantity for different customers in the marketplace without ending up with overstocks of items that do not sell or stock outs of items that sell well?

Some form of customization is the solution, but it's not as easy as it sounds, according to Manus Rungtusanatham, professor of supply chain management at the W. P. Carey School of Business. "What makes it so hard is that the market segments are getting smaller and smaller — down to the individual," he said. "At the same time, demand fluctuates — the characteristics of the products that are desired change as well as the quantities."

Consider the increase in product offerings available today. Between 1970 and 1990, according to Rungtusanatham, there was an 86 percent increase in the number of car models, a 200 percent increase in the items on the McDonald's menu, and a 5,700 percent increase in the number of styles of sports shoes. "For example, today, you can log on to the Adidas Web site and design and purchase a customized pair of sports shoes — one that fits you better than buying something off the racks."

The push for firms to provide greater product variety in the marketplace is being driven by a number of forces, he said. New markets, like China, are being deregulated, opening the door to large customer bases. Differences in product regulations across countries such as the electric current requirements in Europe — necessitate more variation.

At the same time, the amount of information available to consumers has exploded. Formerly, buyers learned about products by shopping physically — visiting a car dealership, for example. Today, the world marketplace is available for inspection by anyone with a computer and an Internet provider. Finally, distribution channels are dictating more variety: Wal-Mart does not want to sell the same model as that stocked at Sears.

A right way and a wrong way

How can manufacturers provide customer satisfaction in this new environment without sacrificing the efficiencies of assembly lines, batch processing, etc.? The wrong way, according to Rungtusanatham, is to create a factory and supply chain for each new product variant.Some companies have gone this route by establishing a company within a company, a plant within a plant. This "replication" approach is costly and fails to exploit efficiencies from commonalities that may exist

The right way, on the other hand, is to pursue a "mass customization or build-to-order" competitive strategy. Rungtusanatham says that on the supply side companies can provide customers with the choices they desire by paying attention to carefully dissecting what customers are asking for in the products being offered, how these products really vary from one customer to another, and then devising their manufacturing processes and supply chains to meet demand more efficiently and effectively.

The first step, he said, is to carefully define what a product family is. Think of a product family as a group of mutually substitutable products manufactured by the same company: that is, items with similar functionality that share a common technology and production process. Take, for example, cell phones.

Today, we have simple cell phones that serve the function of making calls and we have sophisticated cell phones that do everything — from PDA to MP3 player to camera. At a superficial level, one can define the product family as "cell phones" but a more appropriate way would be to define cell phones that serve a communication function as one product family and cell phones that do more than communications as another.

Once defined, then consider the number of substitutes that can be or need s to be offered within the product family as well as the total volume for the product family. The answers to these questions will determine how to appropriately design the manufacturing processes and supply chains.

Soft or hard?

Rungtusanatham and his colleagues at Institute de Empresa in Spain and at Universita di Padua in Italy have identified two approaches to implementing a "mass customization" strategy by studying companies that have responded successfully to the imperative for product variety. Manufacturers that have succeeded have let the characteristics of their product families determine the design of their processes, including their supply chains.

A product family that involves few product variants relative to total product family production volume is handled differently from a product family that offers a large number of variants relative to total product family production volume. One of the companies Rungtusanatham studied manufactures sports mopeds for the European market. Within a five-year period, the company saw a steep climb in competition and a quantum jump in the number of models on the market. How to navigate?

An analysis of the company's customer base showed that buyers were 18- to 24-year-old men, whose primary interest was styling. The manufacturer found that it could easily allow customers to express their choices in terms of styling differences while maintaining a standard basic body including the engine, allowing the company to offer 64 moped variants over a total product family production volume of 55,000 mopeds — in other words, a low number of variants relative to overall production volume for the product family.

The moped manufacturer adopts what Rungtusanatham calls soft mass customization, a "component swappable modularity" approach to mass customization. The company basically engages two different manufacturing processes and supply chains: one for the high-volume, standard parts that are used in the engines and bodies of all of its bikes, and a second for the parts allowing the company to create variants. For the high volume parts, the company negotiated long term deals with suppliers that obtained competitive prices and reliable delivery.

The variable parts were handled differently in the supply chain. Because these components are less predictable (depending on consumer whims), and because these buyers won't wait very long for their bikes, the company negotiated for high levels of responsiveness with the suppliers. That meant finding suppliers that were located close to the assembly plant — reducing delivery times, and that would commit to supplying parts fast. In the worst case, if suppliers could not agree to locate nearby, Rungtusanatham says that acquiring ownership interest in those firms may not be an unattractive option.

The second company Rungtusanatham studied was an example of a completely different customization problem. The company manufactures convection ovens offering approximately 300 variants across a single product family with total production volume of only 10,000 units. This company adopted what Rungtusanatham refers to as hard mass customization — a "combinational modularity" approach to mass customization.

"The difference is that with component swappable modularity, one piece never changes — in the case of the moped, it was the engine and body," Rungtusanatham said. "With combinational modularity, all of the pieces can vary." The key to success with hard mass customization, he explained, is ensuring that the varying pieces to be combined connect in the same manner during assembly.

"As long as all the pieces fit together every time, I can be fast in responding to what the customer wants even if this means the pieces are different from one customer to another," Rungtusanatham said. From a product design standpoint, all major components or subsystems can therefore be designed to vary, but their connections — how they combine together to form the final product — cannot.

The supply chain strategy for this company is different from the moped manufacturer. In this case, suppliers need to be treated as partners, helping with or even having full responsibility for the design of major components and subsystems, as well as ensuring that variants are efficiently generated to meet the demands of customers. Rather than being overly concerned about all suppliers, the bottleneck supplier — the one taking the longest time to provide the component or subsystem — deserves the most attention in order to guarantee quick delivery to customers, he said.

Success in customizing mass-produced products demands a long look across the triad of product design, manufacturing process design, and supply chain design. "Clearly, the efficiency of mass production cannot be fully realized with a mass customized environment," Rungtusanatham said, "but, at the very least, there is a right way to offer greater product variety through mass customization than simply operating yet another assembly line."