Customer interaction and digitizability a structural approach to mass customization by Frank Piller Department for General and Industrial Management Research Group Mass Customization Technische Universit t M nchen TUM Germany Enterprises in all branches of industry are being forced to react to the growing individualization of demand yet at the same time increasing competitive pressure dictates that costs must also continue to decrease Companies have to adopt strategies which embrace both a closer reaction to the customers needs and efficiency Mass Customization meets this challenge by offering individually customized goods and services at mass production efficieny However while Mass Customization has already been discussed in the literature for more than a decade increased practical implementation of this strategy can been found in business only within the last years This time lag may be explained by the fact that only since few years sufficient technologies exist to handle the information flows connected with mass customization Especially as mass customization enters more and more consumer markets new Internet technologies can be seen as its main enabler To connect strategies discussed in e business with the field of mass customization the paper deploys a structural approach to create mass customized concepts within electronic business This paper will be published in Rautenstrauch et al ed Moving towards mass customization Springer Heidelberg Berlin New York 2002 2 1 Individualization competitive pressure and mass customization It is the customer who determines what a business is In the very sense of Drucker s 1954 analysis the single customer has come more deeply into the firm s focus than ever Firms are faced by an uninterrupted trend towards individualization in all areas of life as new Delphi studies predict Explanations may be found in the tendency towards an experience economy the growing number of single households an orientation towards design and most importantly a new awareness of quality and functionality which demands durable and reliable products corresponding exactly to the specific needs of the purchaser In particular consumers with great purchasing power are increasingly attempting to express their personality by means of an individual product choice an example is BMW s new Individual Program which emphasizes the fulfillment of individual fittings and equipment Thus many suppliers are forced to create product programs with an increasing wealth of variants right down to the production of units of one differentiation by means of variety In the final consequence many companies have to process their customers individually Glazer 1999 Kahn 1998 Traditionally the objective of customizing goods and services is to attain an increased revenue by the ability to charge premium prices derived from the added value of a solution meeting the specific needs of a customer Porter 1980 However the present competitive situation of many industries prevents the company from reacting by a strategy of differentiation The cost benefit relation alters because buyers demand relatively high standards of quality service variety or functionality even when the sales price is favorable or vice versa suppliers have to meet additional requirements in pricing when a product is marketed differentiated Companies operating successfully under this condition have to start out from both the cost as well as the differentiation position at the same time However this is in conflict with the classical generic competitive strategies according to Porter 1980 i e differentiation cost leadership and focus strategies which became the precepts on which countless companies based their operations Kotha 1995 In his conception Porter follows the fundamental postulate of the incompatibility of differentiation and cost leadership A company must clearly decide on one type of strategy otherwise it runs the risk of getting stuck in the middle Porter 1980 16 While this conception became widely accepted among scholars and managers alike empirical studies e g Kekre Srinivasan 1990 Miller Dess 1993 Reitsperger et al 1993 and a detailed theoretical argumentation e g Faulkner Bowman 1992 Hill 1988 Murray 1988 demonstrate that competitive strategy does not necessitate choosing between cost leadership or differentiation Rather the simultaneous attainment of both strategic positions should be pursued within the context of a hybrid competitive strategy The practical implementation of hybrid competitive strategies is based on the potential offered by new technologies in manufacturing and information management At the time Porter s conception came about process technologies that are now perfected were only in the stage of development New manufacturing technologies computer integrated production and flexible manufacturing systems reduce the trade off between a wide range of variants flexibility and production cost productivity But in many cases the essential prerequisite for the implementation of a hybrid strategy is the electronic networking of purchasers and producers 3 as well as the suppliers involved Adequate technologies are available nowadays with the Internet and its sub technologies like SCM XML VPN and so on Precisely this combination of strategic challenges and new technological possibilities is the driver of mass customization While Davis coined the term in 1987 the concept attained wide popularity with Pine s 1993 book Mass customization means the production of goods and services for a relatively large market that exactly meets the needs of every individual demander with regard to certain product characteristics differentiation option at costs roughly corresponding to those of standard mass produced goods cost option The information collected in the course of the process of individualization serves to build up a lasting individual relationship with each customer relationship option In order to focus the discussion the remaining paper concentrates on the mass customization of goods and not services Further the term customer always refers to the end customer i e the consumer or user of the customized product differentiation option customized products cost option efficiency relationship option lock on Mass Customization Fig 1 The three levels of mass customization The implementation of mass customization takes place by means of various methods which combine different options for customization while maintaining the cost option similar classifications are described by Gilmore Pine 1997 Lampel Mintzberg 1996 McCutcheon et al 1994 Piller Schoder 1999 Pine 1993 Robertson Ulrich 1998 Figure 2 shows that modularization platform thinking can be regarded as the central principle of mass customization Feitzinger Lee 1997 Pine 1993 196 212 Sawhney 1998 A product with a modular design provides a supply network with the flexibility that it requires to customize a product quickly and inexpensively Feitzinger Lee 1997 117 A relatively high level of prefabrication permits scale oriented basic production whose results modules are combined or completed in the final steps of production according to a specific customer order 4 Soft Customization Customization based on fully standardized manufacturing processes Hard Customization Customization starts within the manufacturing processes Degree of customer specific activities of the value chain Self customization create customizable products and services Microsoft Office Aveda Personal Blends Lutron Electronics Customization Standardization Mix either the first or the last activities of the value chain are customized within the factory while keeping the others standardized Personal Spin Levi Strauss IC3D MySki Point of delivery customization customization of a standardized product at the point of delivery Paris Miki Dynafit and Nordica ski shoes Modular product architectures modularize components and combine them to customized products Anderson Windows Ross Controls Dell Creo shoes Idtown Customatix Service customization customize services around standardized products and services 1 800 Birthday Hertz Gold Club Peapod Flexible customization using flexible manufacturing systems for production of fully customized products without higher costs Sandvik Coromant Sovital Reflect for more examples of mass customization see www mass customization de Fig 2 Methods for achieving mass customization From a strategic point of view mass customization means differentiation through customization i e the production of goods in so many variants that the wishes of each relevant customer are fulfilled While most variety strategies assume that goods are produced in advance for defined market niches and placed in inventory for some anonymous customer a mass customized product is manufactured individually for an identified customer after the order has been received The demand for a relatively favorable cost level constitutes the cost option of mass customization A customized product can lead to lower costs when a combination of economies of scale and economies of scope is attained economies of integration Noori 1990 The differentiation option leads to greater product attractiveness In addition the individual contact between supplier and customer offers possibilities of building up a lasting relationship with the customer learning relationships Peppers Rogers 1997 Once the customer has successfully purchased an individual item the knowledge acquired by the supplier during the product configuration represents a considerable barrier against switching suppliers Even if a competitor possesses the same mass customization skills and even if he offers a lower price a switching customer would have to go again through the procedure of supplying information for product customization Also she is once 5 again faced with uncertainties in regard to the quality and the producer s behavior As these two factors lead directly to an increase in sales production volumes are increasing too the basis of economies of scale while modular product architectures allow firms to attain economies of scope At the same time the individual production of goods results in economies of efficiency better planning conditions reduction of fashion risks reduction of stock keeping of goods for distribution see Piller 2001 for a detailed discussion When the information acquired by the company about its various customers is aggregated and compared customer behavior becomes transparent Kotha 1995 New customers can be served better and more efficiently because they are offered an individual product variation which other customers with a similar profile have already purchased in the past profiling In addition the broad information basis allows firms to cut back on pools of fixed costs that came about due to the necessity of maintaining a high level of operational flexibility 2 Mass Customization and Electronic Business Until today mass customization is connected closely to the potential offered by new manufacturing technologies CIM flexible manufacturing systems reducing the trade off between variety and productivity Ahlstr m Westbrook 1999 Anderson 1997 Kotha 1995 Pine 1993 Rautenstrauch 1997 Tseng 1997 Victor Boynton 1998 Zipkin 2001 However we want to argue that information shall be regarded as the most important factor for the implementation of mass customization Being truly customer focused is not possible if the organization is not first information intensive Blattberg Glazer 1994 As shown in Figure 2 there are different conceptions to implement mass customization with diverse demands on production all methods lead towards a sharp increase in the amount of information and communication necessitated among those involved Mass customization is successful only when it can cover this need for information and communication both purpose fully and efficiently The reason for this information richness is based in comparison to the traditional push system of mass production on the need for direct interaction between the customer and seller for every single transaction a mechanism that will be discussed more detailed at the end of this paper Every order implies coordination about the customer specific product design as a result of the divided construction process of mass customization Hibbard 1999 While the product architectures and the range of possible variety are fixed during a preliminary design process the second step takes place in close interaction between the customer and the supplier The individual wishes and needs of each customer have to be transformed to a unique product specification The costs arising from customization consist largely of information costs They are accounted for by the investigation and specification of the customers wishes the configuration of individual products the transfer of the specifications to manufacturing an increased complexity in production planning and control the coordination with the suppliers involved in the individual prefabrication and the direct distribution of the goods All theses activities are characterized by a high information intense compared to traditional mass production Thus customer related value added is produced on the information level The importance of information processing for mass customization may explain the observation that most prominent examples of mass customization were founded just within 6 the last couple of years although the concept has already been discussed in management literature for more than a decade e g Davis 1987 Kotler 1989 Pine 1993 already Toffler 1970 described the basic idea Explanation for that time lag may be found in the fact that only within the last years sufficient technologies exist to handle the information flows connected with mass customization In former times firms reduced the information content of their processes in order to reach cost efficient outputs But today the opposite can be true An increasing information richness of products and processes guarantees its cost efficient and individualized production This is possible through the potentials of new information technologies Wigand Picot Reichwald 1997 Especially as mass customization enters more and more consumer markets new Internet technologies can be seen as its main enabler While in business to business markets personal sale and configuration is common in consumer markets the interaction often has to be fulfilled over the Internet Web based interaction tools like product configurators allow to outsource the time and cost consuming configuration process to the customer For low cost consumer goods extensive sales and configuration processes cannot be fulfilled by personal sales in a retail outlet if keeping the cost option of mass customization in mind Customized cosmetics like with a retail value of 10 cannot be sold in traditional channels The same is true for many other mass customized products with a relatively small margin Therefore mass customization can be seen closely related to e business and new possibilities connected with the Internet economy The use of the Internet as a communication medium facilitates the efficient production of customized goods as well as the personalization of customer relationships Therefore the vital role of information categorizes mass customization from a conceptual point as an application of Electronic Commerce respectively an e Business strategy Duray et al 2000 Fulkerson Shank 2000 Lee Barua Whinston 2000 Reichwald Piller M slein 2000b Zerdick et al 2000 3 The Information Cycle of Mass Customization Our research showed that companies pursuing mass customization successfully integrate a variety of important tasks for the empirical word building the background for this paper see Reichwald Piller Moeslein 2000a 2000b They build an integrated information flow that not only covers one transaction but also uses information gathered during the fulfillment of a customer specific order to improve their knowledge base The representation of these processes and of the tasks described before in an information cycle model shall stress the importance of an interconnected and integrated flow of information Figure 3 7 New Customers gathering information needed for customization configurators design tools Existing Customers re use information about customer databases Distribution and Customer Relationship Marketing individual delivery building long lasting customer relationships learning relationships customer knowledge Listen to your customers Needs desires experiences during use of a product Production and Assembly control of flexible manufacturing FMS standardized pre fabrication Kanban systems Supply Chain Integration information about customization of specific parts within integrated supply chains JIT Manufacturing Planning configuration customer specific design CAD production lots sequencing hybrid MRP II modular BOM Fig 3 The Information Cycle of Mass Customization 1 Listen to your customers The cycle starts with the individual needs of each customer The center of each mass customization program has to be information about the desires of a customer group regarding the product Although a major meaning of mass customization is that a mass customizer doesn t fulfill every wish of its customers that would be traditional customization at premier prices it is important to listen carefully to prospective customers to design a set of product variants and individualization options that on the one hand side has enough possibilities for customization but that on the other hand is as easy as possible in order to reduce complexity a main cost driver of mass customization 2 Configuration Here the task is to transfer the customers wishes in concrete product specifications This is one of the most critical parts of any mass customization business It s important to differentiate between old and new customers For new customers first a general profile of their desires and wishes
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