T6.1 Introduction and Definitions
T6.2 The Wikipedia Coverage
T6.3 Mass Customization
T6.4 Build-to-Order (BTO) Manufacturing
T6.6 Resources for the Tutorial
T6.1 INTRODUCTION AND DEFINITIONS
One of the major benefits of EC is the ability to customize products and personalize services and content to the taste or preference of the customer, and to do it all at a reasonable cost and speed.
This tutorial focuses on the topic of mass customization and build-to-order manufacturing, which deals with the issue of how it is possible to create customized products quickly and inexpensively so as to take advantage of EC capabilities to provide what people really want. We briefly describe personalization of content and services, a topic described in Chapters 7 and 8.
The process of mass customization is composed of two major steps. First, orders are taken (usually online), frequently with self-configuration by the customers. Orders are usually paid for in advance. Second, the orders are fulfilled using special methods (such as flexible manufacturing and robotics). This is in contrast with mass production of standard products.
The major concepts described in this tutorial are as follows.
Customization is defined as the creation of a product or service to the buyer’s specifications. For example, Dell makes a computer that you design. Burger King makes the burgers the way you like them. Historically, all products were customized, and they were made only once orders were confirmed. The process of creating customized product is known as build-to-order, or make-to-order.
Mass customization is a process that enables the creation (or production) of customized products to users’ specification. It is usually done with the use of flexible manufacturing (computer-aided, robotics), which permits the production of large quantities (mass), at a fast speed and at a low unit cost. In practice, mass customization is usually done as an assembly process of standard components (as done by HP or Dell).
Note: The terms customization and personalization are often used interchangeably. The reason is that by their definition any personalized service is in effect customization. However, in this book we use customization when we talk about customized products or services (e.g., travel, insurance, banking), and treat personalization as Web personalization (e.g., personalize your Yahoo! page, or personalized customer services such as provided by Amazon.com and other e-tailers). The latter are discussed in Chapters 7 and 8.
Web personalization refers to the ability to tailor a service or Web content to specific user preferences. For example, Amazon.com notifies customers by e-mail when new books on their favorite subjects, or by their favorite authors, are published. Several sites track news or stock prices based on the consumer’s preferences. For example, Google will e-mail you all news regarding topics of your choice (e.g., Chinese stocks, mass customization). The aim of personalization is to increase the usability of complex information by customizing the presentation, making the user interface more intuitive and easier to understand, and reducing information overload by tailoring content and navigation. For personalization techniques, see Chapters 7 and 8.
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T6.2 THE WIKIPEDIA COVERAGE
Wikipedia has only limited coverage about customization and mass customization, and a bit more about personalization.
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T6.3 MASS CUSTOMIZATION
Mass customization enables manufacturers to create specific products for each customer based on the customer’s exact needs and to do it for a large quantity of customers at a competitive price. For example, Motorola gathers customers’ needs for pagers or cellular phones, transmits the customers’ specifications electronically to the manufacturing plant where the devices are manufactured, and then the finished products are sent to the customers within a day. Dell pioneered this approach in building its computers. Many other companies are following Dell’s lead: Mattel’s My Design lets fashion-doll fans custom-build a friend for Barbie at Mattel’s Web site; the doll’s image is displayed on the screen before the person places an order. Nike allows customers to customize shoes, which can be delivered in a week. LEGO.com allows customers to configure several of its toys. Finally, De Beers, Blue Nile, and others allow customers to design their own engagement rings. The automotive industry started customizing its products and expects to save billions of dollars in inventory reduction alone every year by producing made-to-order cars (e.g., see scion.com). You can design your own T-shirt, Swatch watch, and many more products and services. Configuring the details of the customized products, including the final design, ordering, and paying for the products, is all done online. Customization can be done on a large scale, in which case it is called mass customization. For a historical discussion of the development of the idea of mass customization, see en.wikipedia.org/wiki/Mass_customization. With the use of mass-customization methods, the cost of customized products is at or slightly above the comparable retail price of standard products made in mass production.
THE EVOLUTION FROM MASS PRODUCTION TO MASS CUSTOMIZATION
The concept of build-to-order means that a firm starts to make a product or service only after an order for it is placed. It is also known as demand-driven manufacturing (DDM), customization, and pull technology (Anderson 2008). This concept is as old as commerce itself and was the only method of production until the Industrial Revolution. According to this concept, if a person needs a pair of shoes, he or she goes to a shoemaker, who takes the person’s measurements. The person negotiates quality, style, and price and pays a down payment (or pays in full). The shoemaker buys the materials and makes a customized product for the customer. Customized products are expensive, and it may take a long time to finish them. The Industrial Revolution introduced a new way of thinking about production.
The Industrial Revolution started with the concept of dividing work into small parts. Such division of labor makes the work simpler, requiring less training for employees. It also allows for specialization. Different employees become experts in executing simpler tasks. Because the work segments are simpler, it is easier to automate them. As machines were invented to make products, the concept of build-to-stock (or market) was developed. To implement build-to-stock (BTS), it was necessary to design standard products, produce them, store them, and then sell them.
The creation of standard products by automation drove prices down, and demand accelerated. The solution to the problem of increased demand was mass production. In mass production, a company produces large amounts of standard products at a very low cost and then “pushes” them to consumers. This process drove the need for sales and marketing organizations. Specialized sales forces resulted in increased competition and the desire to sell in wider, and more remote, markets. This model also required the creation of large factories and specialized departments such as accounting and personnel to manage the activities in the factories. With mass production, factory workers personally did not know the customers and frequently did not care about customers’ needs or product quality. However, the products were inexpensive and good enough to fuel demand, and thus the method of mass production became a dominant one. Mass production also required inventory systems at various places in the supply chain, which were based on forecasted demand. If the forecasted demand was wrong, the inventories were incorrect. Thus, companies were always trying to achieve the right balance between not having enough inventory to meet demand and having too much inventory on hand.
As society became more affluent, the demand for customized products increased. Manufacturers had to meet the demand for customized products to satisfy customers. As long as the demand for customized product was small, it could be met. Cars, for example, have long been produced using this model offering “options” to customers (see the Toyota and others’ experiences in Parry and Graves 2008). Customers were asked to pay a premium for customization and wait a long time to receive the customized product, and they were willing to do so. Note that the process starts with product configuration (Anderson 2008) namely, the customer decides what the product is going to look like, what operations it will perform, what components it will include, and what capabilities it will have (e.g., the functionalities in Dell).
Surely, the demand for customized products and services increased. Burger King introduced the concept of “having it your way,” and manufacturers sought ways to provide customized products in large quantities, quickly and inexpensively that is the essence of mass customization, as pioneered by Dell. Such solutions were usually enhanced by some kind of information technology. The introduction of customized personal computers (PCs) by Dell was so successful that many other industries wanted to try mass customization. EC can facilitate customization, even mass customization. Today there are many products that can be customized with the help of EC. For a large selection, see milkorsugar.com. To understand how companies can use EC for customization, let’s first compare mass production, also known as a push system, and mass customization, also known as a pull system, as shown in Exhibit T6.1.
EXHIBIT T6.1: Push Versus Pull Production Systems
EC AND MASS CUSTOMIZATION
Notice that one important area of mass customization in the supply chain is order taking. Using EC, a customer can self-configure the desired product online. The order is received in seconds. Once the order is verified and payment arranged, the order is sent electronically to the production floor. This saves time and money. For complex products, customers may collaborate in real time with the manufacturer’s designers, as is done at Cisco Systems. Again, time and money are saved and errors are reduced due to better communication and collaboration. Other contributions of EC are that the customers’ needs are visible to all partners in the order fulfillment chain (fewer delays, faster response time), inventories are reduced due to rapid communication, and digitizable products and services can be delivered electronically instantly.
A key issue in mass customization is finding what the customers want. In many cases, the seller can simply ask the customer to configure the product or service (as is done when you buy a PC). In other cases, the seller tries to predict what the customer wants and recommend it to him or her as done at Netflix (see Chapter 8). EC is very helpful in this area due to the use of online market research methods such as collaborative filtering (see Chapter 8). Using collaborative filtering, a company can discover what each customer wants without asking the customer directly. Such market research is accomplished more cheaply by a machine than by human researchers. For more information about how companies can benefit from mass customization, see Salvador, et al. (2009).
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T6.4 BUILT-TO-ORDER (BTO) MANUFACTURING
Build-to-order (pull) system is a manufacturing process that starts with an order (frequently customized). Once the order is paid for, the vendor starts to fulfill it. This changes not only production planning and control but also the entire supply chain and payment cycle. For example, manufacturing or assembly starts only after an order is received.
Example: Spreadshirt. Spreadshirt (spreadshirt.com) is a U.S.-based global company making custom T-shirts. It offers several options for ordering designed shirts as well as opening your own online T-shirt shop. Jelassi and Endres (2008) offer a detailed case study. The case outlines the production process in detail. The company is very profitable and growing rapidly.
From the production point of view, EC and IT also can enable mass customization. In the factory, for example, IT in general and EC in particular can help in expediting the production changeover from one customized item to another. Also, because most mass production products are based on the assembly of standard components, EC can help a company design the production process for a product in minutes and identify needed components and their location in storage. In addition, the use of flexible manufacturing and robotics can help (watch the video “Understanding: Robots—Mass Customization,” (youtube.com/watch?v=HJzzPXeDdX8). Furthermore, a production schedule can be generated automatically, and the needed resources can be deployed, including money. This is why many industries are planning to move to build-to-order using EC (e.g., see build-to-order-consulting.com). By doing so, manufacturers are expecting huge cost reductions, shorter order-to-delivery times, and lower inventory costs.
Mass customization on a large scale is not easy to attain (Anderson 2008; Gardner and Piller 2009) but if performed properly, it may become a dominant model in many industries.
Example. Let us assume that you want your new car to be yellow. But Toyota’s stock does not offer yellow. So, Toyota may paint the car for you quickly, which will cost you a lot. Or, if you are willing to wait, Toyota will wait until they have many orders for yellow cars, say 500, and then paint all of them at one time, at a lower cost. What costs money is the changeover in the production processes, and making small lots with high fixed costs (divided among a small quantity). An attempt to reduce both the changeover cost and time is the cornerstone of flexible manufacturing and the use of robots.
BENEFITS, LIMITATIONS, AND IMPLEMENTATION STRATEGY OF BUILD-TO-ORDER
The main advantage of the BTO approach in a high product-variety environment is the ability to supply the customer with the exact product specification required while reducing costly sales discounts and finished goods inventory as well as reducing stock obsolescence risk. Also, BTO allows for better cash flow and financial planning. The main disadvantage of BTO is that manufacturers are susceptible to market demand fluctuations leading to reduced capacity utilization in manufacturing. Hence, to ensure an effective use of production resources, a BTO approach is to frequently offer both standard and customized products. This is a popular strategy with car, computer, shoe, toy, and other manufacturers. Finding the correct and appropriate balance of build-to-order with build-to-stock to maintain stock levels appropriate to both the market requirements and operational stability is an effective strategy. For implementation of BTO strategies, see
Personalization is provided by EC vendors (such as Amazon.com or Yahoo!) on a regular basis, as marketing and customer service strategies. Users can create highly personalized pages for themselves that are constantly updated with information such as news articles and stock prices. Users can view photos, use a calculator, and perform similar self-activities. Users can also post necessary tools as modules, which appear as small square or rectangular objects, with the content or functionality inside. Users can arrange the modules on their sites.
One such personalization tool is My Yahoo!. This tool can be used to combine page segments featuring Yahoo!’s own news and information with segments containing RSS feeds. Microsoft’s My MSN is a similar tool.
A well-known mini-application for the desktop is Apple’s Dashboard, which allows Macintosh users to install tiny programs called widgets that perform searches, display photos and slideshows, track stocks, play music, and much more. Netvibes (netvibes.com) offers the best features of My Yahoo! and Dashboard. Modules can be added easily and are arranged in a menu. For graphics-rich content, users can use Pageflakes (pageflakes.com). Microsoft Windows 7 operating system has a comparable system called Sidebar.
Example: Amazon.com. Amazon.com’s catalog includes several million items. Easy navigation and personalization are provided. For instance, when a customer looks up a book on a certain topic, Amazon.com recommends popular books on the same topic (“customers who bought this book also bought…”). In addition, it recommends several authors in the customer’s area of interest. Recommendations appear several times during the surfing of the site. Amazon.com also offers a bundle of a similar book with the book the customer is interested in, for a large discount.
Consumers like differentiation and personalization and are frequently willing to pay more for them. Differentiation reduces the substitutability between products, benefiting sellers who use this strategy. Also, price cutting in differentiated markets does not impact market share very much.
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Gardner, D. J., and F. Piller, Mass Customization: How Build to Order, Assemble to Order, Configure to Order, Make to Order, and Engineer to Order Manufacturers Increase Profits and Better Satisfy Customers, Cupertino, CA: About Happy, 2009.
Jelassi, T., and A. Endres. Case #14: "Spreadshirt: Mass Customization on the Internet." Strategies for e-Business, 2nd ed. Harlow, England: FT/Prentice Hall, 2008.
Parry, G., and A. P. Graves. Build to Order: The Road to the 5-Day Car. London: Springer Verlag, 2008.
Salvador, F., P. M. De Holan, and F. Piller. "Cracking the Code of Mass Customization." MIT Sloan Management Review (Spring 2009).