Mass Customization: New directions for research

Frank T. Piller, MIT / TUM

www.mass-customization.de

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Copyright by Frank Piller 2005. www.mass-customization.de

Increase in variety in selected industries

2% p.a.

5% p.a.

4% p.a.

16% p.a.

14% p.a.

260

31

15

285

36

140 8 5 5 1

1970 1998
cars

1970 1998
bicycles

1972 1998
PC screen sizes

1970 1998
sneakers

1970 1998
contact lenses

Quelle: Cox & Alm, Federal Reserve Bank of Dallas, USA

High Variety Production Reduce time to market

8yrs
capabilities

4yrs

2yrs

6mos

much past research to build adequate

Explosive number of product variety Hit or miss product life

Copyright by Frank Piller 2005. www.mass-customization.de

An experiment
In a supermarket, 24 different fruit spreads are offered. In a sampling event, customers can sample the products and get a discount voucher. Two different settings are compared: 6 (out of 24) different fruit spreads are offered. All 24 fruits spreads are offered.

An experiment
6 (out of 24) different fruit spreads are offered. All 24 fruits spreads are offered.

Question: (a) In which setting do more customers participate in sampling? (b) In which setting do customers sample more products? (c) In which setting do customers buy more products?

Copyright by Frank Piller 2005. www.mass-customization.de

The Variety Paradox

(a) In the case of 24 varieties, more customers sample the products. (b) In average, both groups sample the same amount of variants. (c) 30 % of the customers getting offered 6 different varieties are making a purchase. Only 3 % of the customers getting offered all 24 different samples are making a purchase.

30 25 20 15 10 5 0
From:

An experiment (Franke / Piller 2004) The basic toolkit allows 648,000,000 design variants 150 faces

30 hour / minutes hands

60 cases

30 straps

30 seconds-hands

and our calculations show that customers use this huge solution space extensively.

Copyright by Frank Piller 2005. www.mass-customization.de

Mass Customization (high variety) yields an impressing value increment to users

92.0 Mean willingness to pay 48.5

+ 90%

21.5

+ 126%

n = 165 Bestselling standards Self-designed watch (toolkit) ideal watch (perfect toolkit)

Mass Customization (high variety) yields an impressing value increment to users and also to buyers of standard products: non user-designers liked the user-designs a lot

Mean willingness to pay 48.5

21.5

+ 126%

+ 7%

23.1

n = 248 Bestselling standards Self-designed watch (toolkit) Self-designed watches (toolkit), rated by non-designers

Copyright by Frank Piller 2005. www.mass-customization.de

Mass Customization

differentiation level
(customized products / services)

solution space level

(stable but flexible processes and product architectures)

co-creation level
(customer co-design)

cost level
(mass production efficiency)

redefine position high (dynamic)

Mass Customization

Invention
(market position of craft manufacturing)

rate of change of products

development (stabilization)

modularization

low (stable)

Mass Production
connected with

Continuous Improvement

low (stable) high (dynamic) rate of change for processes

Copyright by Frank Piller 2005. www.mass-customization.de

Mass Customization is a customer co-design process of products and services which 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.

The miAdidas Profit Mechanism

influencing factor: buyers need / desire in regard to customization (fit, function, aesthetic design) willingness to pay price premium (less consumer awareness of additional transaction costs and price limits due to competitive pressure)

mass customization program offered by supplier (perception of customization variety)

profit / firms performance

customer interaction and integration

total costs and profitability of mass customization offer

approaches to counter-balance additional costs (1) Principles of Mass Customization modular product families, flexible fabrication systems, stable processes, IT systems (2) Economies of Customer Integration decoupling and postponement efficiency in forecasting and product development (access to sticky information) utilization of customer base (increasing switching costs) additional costs of mass customization

costs of variety
/ complexity in manufacturing interaction and transaction costs

influencing factors: degree of interaction and postponement point

Copyright by Frank Piller 2005. www.mass-customization.de

Adidas Case Study

new differentiation possibilities value competition instead of price

The miAdidas Profit Mechanism

influencing factor: buyers need / desire in regard to customization (fit, function, aesthetic design) willingness to pay price premium (less consumer awareness of additional transaction costs and price limits due to competitive pressure)

mass customization program offered by supplier (perception of customization variety)

profit / firms performance

customer interaction and integration

total costs and profitability of mass customization offer

approaches to counter-balance additional costs (1) Principles of Mass Customization modular product families, flexible fabrication systems, stable processes, IT systems (2) Economies of Customer Integration decoupling and postponement efficiency in forecasting and product development (access to sticky information) utilization of customer base (increasing switching costs) additional costs of mass customization

costs of variety
/ complexity in manufacturing interaction and transaction costs

influencing factors: degree of interaction and postponement point

Copyright by Frank Piller 2005. www.mass-customization.de

Additional costs of high variety strategies (I) Loss of economies of specialization and economies of standardization more complex product development / design / documentation higher set up costs, more complex manufacturing planning, detailed quality control costs for better qualified labor higher capital investments in more advanced flexible production Cost driving mechanisms to minimize burdens (costs) of customization for the customer

Additional costs of high variety strategies (II) Loss of economies of specialization and economies of standardization Cost driving mechanisms to minimize burdens (costs) of customization for the customer investments in customer service centers highly qualified staff investments in configuration systems etc. investments in fitting accounting systems after-sales service complexity; product documentation

Copyright by Frank Piller 2005. www.mass-customization.de

The miAdidas Profit Mechanism

influencing factor: buyers need / desire in regard to customization (fit, function, aesthetic design) willingness to pay price premium (less consumer awareness of additional transaction costs and price limits due to competitive pressure)

mass customization program offered by supplier (perception of customization variety)

profit / firms performance

customer interaction and integration

total costs and profitability of mass customization offer

approaches to counter-balance additional costs (1) Principles of Mass Customization modular product families, flexible fabrication systems, stable processes, IT systems (2) Economies of Customer Integration decoupling and postponement efficiency in forecasting and product development (access to sticky information) utilization of customer base (increasing switching costs) additional costs of mass customization

costs of variety
/ complexity in manufacturing interaction and transaction costs

influencing factors: degree of interaction and postponement point

Principles of Mass Customization - Modular product architectures - Use of flexible manufacturing technologies (setting solution space & stable processes), on demand manufacturing - Use of dedicated systems for customer interaction

Copyright by Frank Piller 2005. www.mass-customization.de

The miAdidas Profit Mechanism

influencing factor: buyers need / desire in regard to customization (fit, function, aesthetic design) willingness to pay price premium (less consumer awareness of additional transaction costs and price limits due to competitive pressure)

mass customization program offered by supplier (perception of customization variety)

profit / firms performance

customer interaction and integration

total costs and profitability of mass customization offer

approaches to counter-balance additional costs (1) Principles of Mass Customization modular product families, flexible fabrication systems, stable processes, IT systems (2) Economies of Customer Integration decoupling and postponement efficiency in forecasting and product development (access to sticky information) utilization of customer base (increasing switching costs) additional costs of mass customization

costs of variety
/ complexity in manufacturing interaction and transaction costs

influencing factors: degree of interaction and postponement point

Adidas Case Study

new differentiation possibilities value competition instead of price reduced planning risk, increased flexibility new cost structures reduction of inventory, fashion risk

this may re-locate manufacturing back to western countries

Copyright by Frank Piller 2005. www.mass-customization.de

Bricks and Mortar outlets should be able to almost double their profits with made-to-measure apparel

SANDERS for mass customization

of textile products

Possible profit (before tax) with made-to-measure, bricks and mortar outlet, made in Asia, price premium 5%, example ladies trousers in %

3.5 13.3

0.8

9.0 2.6 2.5

4.0 9.5

5.0 5.0

Profit (Std.apparel)

PriceIncrease

Markdown reduction

(0% vs. (by 18%) (by 5%) (3,50% vs. (5 vs. 90 days 1,5%) 15%) at 15% p.a.)

Profit Stock Theft Purchasing Transport- Alterations G&A reduction reduction price-incr. cost-incr. (10% with increase (made-to(Air vs. sea) 25% of Price) measure)

Source: Sanders-analysis

www.sanders.ch

Adidas Case Study

new dimensions of shopping experience real customer relationship management

Copyright by Frank Piller 2005. www.mass-customization.de

improvement and fine tuning of configuration customer feedback, reaction

second (third ) order

continuous optimization (first) configuration of product or service storage of customer data and configuration

fulfillment of individual order

Adidas Case Study

customer knowledge life panel without panel effects lead user information higher market research efficiency third generation mass customization: combine mass production and mass customization

Copyright by Frank Piller 2005. www.mass-customization.de

The miAdidas Profit Mechanism

influencing factor: buyers need / desire in regard to customization (fit, function, aesthetic design) willingness to pay price premium (less consumer awareness of additional transaction costs and price limits due to competitive pressure)

mass customization program offered by supplier (perception of customization variety)

profit / firms performance

customer interaction and integration

total costs and profitability of mass customization offer

approaches to counter-balance additional costs (1) Principles of Mass Customization modular product families, flexible fabrication systems, stable processes, IT systems (2) Economies of Customer Integration decoupling and postponement efficiency in forecasting and product development (access to sticky information) utilization of customer base (increasing switching costs) additional costs of mass customization

costs of variety
/ complexity in manufacturing interaction and transaction costs

influencing factors: degree of interaction and postponement point

Copyright by Frank Piller 2005. www.mass-customization.de

Manufacturer Productivity forces

Customer Flexibility forces

Possible degrees of customer integration

Generic order processing Customer specific order processing

Order de-coupling point

Engineering Manufacturing Final assembly Sales/order After sales

engineer-toorder (codevelopment)
Customer codesign of product/service, followed by customized madeto-order.

made-toorder
Manufacturing of customized products including component manufacturing.

assembleto-order
Assembling of products/services from standardizes components/proce ss blocks.

match-toorder / locate to order

Selection of existing (standard) products or services according to customer requirements.

bundle-toorder
Bundling of existing products/services to customerspecific product.

But why is mass customization not there yet ?

Copyright by Frank Piller 2005. www.mass-customization.de

Production, co-design and interaction systems: Do we have the enabling technologies for mass customization? Proposition 1: Most manufacturing technologies for mass customization are available and well understood, but not integrated enough. Also, design and engineering capabilities able to utilize the new capabilities are still lacking (example: rapid manufacturing). Proposition 2: Adequate systems to perform customer co-design efficiently and effectively are available since just starting to penetrate the market space. Implementation of co-design systems is often still dominated by trial-and-error and not by a systematic process. Proposition 3: Research and managerial knowledge on the design and implementation of toolkits for customer co-design is lacking aspects of organization, marketing, usability, and their role in corporate strategy. This leads to a rather technology and not strategy focused implementation of a central enabling resource.

The market for mass customization: Do customers need custom products? Proposition 4: Due to limited experience of customers with customization in many industries, reliable market forecasts do not exist. This lack may prevent firms to invest in mass customization. Proposition 5: Many mass customization offerings do not create sufficient additional value for customers compared to their pre-fabricated alternatives. Research is still needed to understand when and how customization matters for consumers. Proposition 6: Mass customization offerings combining fit, functionality and style will be most successful in attracting consumer demand. Most of todays mass customization offerings, however, focus on only one of these levels. Proposition 7: Process satisfaction and value for customers offered by the co-design process itself are important complementary factors driving mass customization. Here, research just starts to understand the resulting opportunities.

Copyright by Frank Piller 2005. www.mass-customization.de

Mass confusion: What prevents customers from purchasing custom products?

Proposition 8: Potential customers of custom products face risks resulting directly from the customization process (as compared to purchasing a pre-fabricated good). These risks may be much stronger than the restricting effect of additional price premiums. Many mass customizers are not aware of these risks. Proposition 9: Many mass customizers lack adequate signaling and trust building to prevent the perception of mass confusion (cognitive costs of customers). As a result, mass customization offerings are often less attractive compared to their standard alternative.

Change management: Why do many firms fail when introducing mass customization? Proposition 10: Many mass customizers neglect the necessity of a cavernous change management process when introducing mass customization. Larger companies more likely demand a more complex migration process. Proposition 11: Customer co-design demands an organizational setting at the customer interface which includes the manufacturer and often also retailers and other intermediaries. This interface can become the source of various channel conflicts, holding up the implementation of mass customization. Proposition 12: Few companies utilize the full span of possibilities for value creation by mass customization. Many managers focus on the customized production process, neglecting the opportunities to aggregate customer co-design information to customer knowledge for innovation and strategic planning.

Copyright by Frank Piller 2005. www.mass-customization.de

The mass customization research landscape (outside the US) Individual Research Groups International Institute of Mass Customization & Personalization (Society)

National Grants

European Union Grants

Traditional Economy separation of market research, innovation and sales product services separate activity product innovation economies of scale and scope experience of use customer

Mass Customization integration of market research, innovation and sales + capability services dominant part + service innovation + economies of customer interaction + innovative experience + co-designer

Copyright by Frank Piller 2005. www.mass-customization.de

Some conclusions

Consumers are usually likely to want more variety but much less likely to pay/wait for it product variety decisions are tough Mass customization is an ideal; in reality we have to limit choices and stick to options within an envelop of variety Mass customization can be turned into open innovation three generations of mass customization Much work is still needed to make mass customization happen but the recent state of application means also that there are still many first mover opportunities The beauty of mass customization research is its major challenge: it has to be interdisciplinary and applied

piller@mit.edu www.mass-customization.de
The 2005 World Congress on Mass Customization and Personalization, Hong Kong, 18-21 Sept 2005 www.mcpc2005.com

Copyright by Frank Piller 2005. www.mass-customization.de