Executive Briefings

Modified Mass Customization Offers Market Opportunities

A conversation with Mohan Balachandran , vice president-consumer industries, at i2 Technologies, Dallas.

Mohan Balachandran is a long-time student of trends in the consumer goods industries and is an expert on supply chain technology solutions for brand-driven companies. He shares his thoughts about mass customization and the challenges and opportunities this strategy presents for manufacturers of consumer goods.

 

Q: How did you become involved in the consumer goods supply chain?

Balachandran: I have been with i2 for about eight years and before that I worked in the consumer product space in India. Since joining i2, I have focused primarily on consumer packaged goods companies, especially those with strong attention to brands. For some time, many of these companies as well as consumer electronics companies have been trying to figure out how to grab a greater portion of their market by using tactics like mass customization.

As I explored this area further, it became clear that the cost of logistics was acting as a prohibitor. Consumers were becoming more specific about what they needed-they wanted products unique to them-but in many industries the logistics costs to support this were just too high. There were sub-sections of the market where the idea worked because the cost of transportation was not that important, and a few companies were able to separate themselves from the pack by providing custom products. So I began looking at these companies and trying to see how they made it work and asking if what they were doing could be applied in other industries.

At i2, as I worked with clients like Dell and Panasonic and Procter & Gamble and Adidas, I found a lot of interest in this topic. These companies also were asking how to address a smaller and smaller market segment. If it was not possible to go after an individual market of one, would it be possible to go after small, niche markets? And would there be an advantage to that? No one had very clear answers to those questions or a clear idea of how to go about implementing such a strategy.

 

Q: There was a big splash around mass customization in the '90s after Joe Pine's book on the subject came out, but then it seemed to die out. Has work been going on all that time?

Balachandran: Well I think things quieted down because companies were seeing that if they wanted to target each individual consumer, the cost of fulfilling that order would be too high. If you or I want a manufacturer to custom-make a television set-or anything else-the cost to manufacture and ship that product obviously will be much greater than if we simply go into a retail store and buy a piece of inventory off the floor. But what if the manufacturer could make a product that would appeal to a specific group of customers, such as college students? The idea is to identify a group demand that is both substantial enough and specific enough, so that consumers can have a product that feels like it was designed for them, without the company having to make something individual by individual. It's really a more advanced form of customer segmentation.

You can begin to see how this would work by using a matrix. Imagine that along the X axis you have your vertical market and you make some determinations about how granular you want to go. On the Y axis, you have your products, with different degrees of customization. Depending upon which of those four boxes you fit in, there are different implications about how you go to market and what it means in terms of your brand and the impact on the supply chain.

For example, in the bottom left quadrant you might have a product that is accessorized with a low level of customization-something that is a little different but that is not really unique to each customer. An example might be cell phones with different colored face plates. Then you think about the market segment that you want to target with this accessory. If you create a pink face plate, it might appeal to teenage girls, for example.

In this case, the impact on the supply chain would not be that much. Planning complexity would be increased because instead of dealing with 20 different types of cell phones, you now have 10 different face plates for each of those phones. But because face plates are not that high value, supply chain costs are not such a big concern. Forecasting becomes the primary issue, because you just have to make sure you have enough inventory.

If you want to look at a more granular market, the problem is that you have more segments to identify, and carrying the inventory appropriate to each segment becomes challenging. With more SKUs your costs are going to be higher, so you have to be a lot more careful in terms of how much inventory you carry where. As we all know, the problem with consumers is that they never buy what they're supposed to, so you have to hedge against that uncertainty with inventory.

 

Q: So the upper right-hand corner of this matrix would be the true make-to-order products?

Balachandran: Yes, the top right hand corner is the ultimate of mass customization, where you produce unique, one-off products. There are not really a lot of instances of this in the marketplace. More often, you see companies doing what I call 'guided customization.' This is where customers configure their own product, which is what the Dells and Lenovos of the world have been doing for some time with personal computers. The difference to note is that once a consumer begins the configuration process, he often is driven in a particular direction through pricing or other special offers.

Another approach is what Adidas is doing at myadidas.com, where consumers are allowed to make their own unique shoe. No one else is likely to have that same shoe. A few bicycle companies are doing something similar. This can be tricky for these companies because they are dealing with unique "eaches" at the same time that they must also support the demand for all their other products. On one line they may be mass manufacturing stuff, while on the next line they are trying to create one-offs, something unique. That can be a challenge.

As companies progress toward the top right-hand corner, they clearly need to figure out ways to reduce the amount of inventory they carry as finished goods and begin to carry more components or sub-assemblies. This allows them to react much faster to changes in demand. They also need to think about reducing lead times. If most of their goods are manufactured in China, they have to question whether consumers will be willing to wait 14 to 21 days or more to get the product they just designed. Customers who want a customized product often want it right now, so lead-time becomes important. For that reason, we see a number of companies rethinking their outsourcing strategies. Many are deciding to localize at least a portion of their manufacturing capacity. They may decide to serve 80 percent of their demand with international low-cost sourcing, but will do 20 percent locally to meet the changing demand from customers who don't want to wait for weeks. In this case, there are really two separate supply chains, one for mass production and one for the unique, in which some mix of local manufacturing would likely make sense to keep lead times shorter. There is really no one answer that fits all.

 

Q: So, does mass customization work better for companies that can "component-ize" their products?

Balachandran: Yes. The high-tech space is the best example because it is easy to separate out components and enable customers to understand these components and to buy in terms of which components they want. But if you are talking about shoes, the consumer is not likely to know the difference between different types of rubber, for example. In those cases, it might make more sense for these companies to shift to the left and allow users to pick from a pre-set selection of options.

 

Q: How does after-sales service play into customization?

Balachandran: That's a very important area. It might be that you can't make an individual product unique, but you can offer a combination of products or services that becomes unique. Instead of just offering a television, for example, a company might look instead at providing a completely installed home theater package. Again, putting that in place is not a trivial exercise because you need a lot of expertise, but the idea is to segment demand in terms of activity instead of individual product-instead of thinking about TVs, think about people who like to watch movies.

Another interesting piece is what we call the "long tail" of the supply chain, which falls into the bottom right-hand corner. "Long tail" is a term coined by the editor of Wired. It basically says that in addition to the normal distribution of peak or average demand, there is a long tail that sort of tapers off forever. These are little pieces of very specific demand from customers and if you can figure out a way to aggregate those sets of demands, you might actually have a good market. This is something that companies are increasingly investigating. The best opportunity is when you can tap into virtual delivery, which is what companies like Apple are doing with iTunes. In these models, which companies offer in conjunction with products like iPod, your market is already identified and the availability of the virtual product actually increases demand for the base product. It costs nothing to ship the virtual out and you can identify a lot of additional market niches by offering content separate from the product.

 

Q: What are the key technology pieces needed for mass customization?

Balachandran: In terms of planning, you need good forecasting. Second, you need inventory optimization, which determines how much inventory to carry where, at what levels, to address which market segments. Third, you need supply chain network optimization-what your network should look like and where should you add or subtract DCs or factories. And, of course you need a visibility layer that goes across your own company and across your partners as well. Finally, you need clean data and good data management. Often it is better not to think in terms of SKUs but rather think and manage in terms of components, because the end user will actually combine the components to create an SKU. And, of course, the pricing corresponding to all of that also is a core aspect of data management.

Mohan Balachandran is a long-time student of trends in the consumer goods industries and is an expert on supply chain technology solutions for brand-driven companies. He shares his thoughts about mass customization and the challenges and opportunities this strategy presents for manufacturers of consumer goods.

 

Q: How did you become involved in the consumer goods supply chain?

Balachandran: I have been with i2 for about eight years and before that I worked in the consumer product space in India. Since joining i2, I have focused primarily on consumer packaged goods companies, especially those with strong attention to brands. For some time, many of these companies as well as consumer electronics companies have been trying to figure out how to grab a greater portion of their market by using tactics like mass customization.

As I explored this area further, it became clear that the cost of logistics was acting as a prohibitor. Consumers were becoming more specific about what they needed-they wanted products unique to them-but in many industries the logistics costs to support this were just too high. There were sub-sections of the market where the idea worked because the cost of transportation was not that important, and a few companies were able to separate themselves from the pack by providing custom products. So I began looking at these companies and trying to see how they made it work and asking if what they were doing could be applied in other industries.

At i2, as I worked with clients like Dell and Panasonic and Procter & Gamble and Adidas, I found a lot of interest in this topic. These companies also were asking how to address a smaller and smaller market segment. If it was not possible to go after an individual market of one, would it be possible to go after small, niche markets? And would there be an advantage to that? No one had very clear answers to those questions or a clear idea of how to go about implementing such a strategy.

 

Q: There was a big splash around mass customization in the '90s after Joe Pine's book on the subject came out, but then it seemed to die out. Has work been going on all that time?

Balachandran: Well I think things quieted down because companies were seeing that if they wanted to target each individual consumer, the cost of fulfilling that order would be too high. If you or I want a manufacturer to custom-make a television set-or anything else-the cost to manufacture and ship that product obviously will be much greater than if we simply go into a retail store and buy a piece of inventory off the floor. But what if the manufacturer could make a product that would appeal to a specific group of customers, such as college students? The idea is to identify a group demand that is both substantial enough and specific enough, so that consumers can have a product that feels like it was designed for them, without the company having to make something individual by individual. It's really a more advanced form of customer segmentation.

You can begin to see how this would work by using a matrix. Imagine that along the X axis you have your vertical market and you make some determinations about how granular you want to go. On the Y axis, you have your products, with different degrees of customization. Depending upon which of those four boxes you fit in, there are different implications about how you go to market and what it means in terms of your brand and the impact on the supply chain.

For example, in the bottom left quadrant you might have a product that is accessorized with a low level of customization-something that is a little different but that is not really unique to each customer. An example might be cell phones with different colored face plates. Then you think about the market segment that you want to target with this accessory. If you create a pink face plate, it might appeal to teenage girls, for example.

In this case, the impact on the supply chain would not be that much. Planning complexity would be increased because instead of dealing with 20 different types of cell phones, you now have 10 different face plates for each of those phones. But because face plates are not that high value, supply chain costs are not such a big concern. Forecasting becomes the primary issue, because you just have to make sure you have enough inventory.

If you want to look at a more granular market, the problem is that you have more segments to identify, and carrying the inventory appropriate to each segment becomes challenging. With more SKUs your costs are going to be higher, so you have to be a lot more careful in terms of how much inventory you carry where. As we all know, the problem with consumers is that they never buy what they're supposed to, so you have to hedge against that uncertainty with inventory.

 

Q: So the upper right-hand corner of this matrix would be the true make-to-order products?

Balachandran: Yes, the top right hand corner is the ultimate of mass customization, where you produce unique, one-off products. There are not really a lot of instances of this in the marketplace. More often, you see companies doing what I call 'guided customization.' This is where customers configure their own product, which is what the Dells and Lenovos of the world have been doing for some time with personal computers. The difference to note is that once a consumer begins the configuration process, he often is driven in a particular direction through pricing or other special offers.

Another approach is what Adidas is doing at myadidas.com, where consumers are allowed to make their own unique shoe. No one else is likely to have that same shoe. A few bicycle companies are doing something similar. This can be tricky for these companies because they are dealing with unique "eaches" at the same time that they must also support the demand for all their other products. On one line they may be mass manufacturing stuff, while on the next line they are trying to create one-offs, something unique. That can be a challenge.

As companies progress toward the top right-hand corner, they clearly need to figure out ways to reduce the amount of inventory they carry as finished goods and begin to carry more components or sub-assemblies. This allows them to react much faster to changes in demand. They also need to think about reducing lead times. If most of their goods are manufactured in China, they have to question whether consumers will be willing to wait 14 to 21 days or more to get the product they just designed. Customers who want a customized product often want it right now, so lead-time becomes important. For that reason, we see a number of companies rethinking their outsourcing strategies. Many are deciding to localize at least a portion of their manufacturing capacity. They may decide to serve 80 percent of their demand with international low-cost sourcing, but will do 20 percent locally to meet the changing demand from customers who don't want to wait for weeks. In this case, there are really two separate supply chains, one for mass production and one for the unique, in which some mix of local manufacturing would likely make sense to keep lead times shorter. There is really no one answer that fits all.

 

Q: So, does mass customization work better for companies that can "component-ize" their products?

Balachandran: Yes. The high-tech space is the best example because it is easy to separate out components and enable customers to understand these components and to buy in terms of which components they want. But if you are talking about shoes, the consumer is not likely to know the difference between different types of rubber, for example. In those cases, it might make more sense for these companies to shift to the left and allow users to pick from a pre-set selection of options.

 

Q: How does after-sales service play into customization?

Balachandran: That's a very important area. It might be that you can't make an individual product unique, but you can offer a combination of products or services that becomes unique. Instead of just offering a television, for example, a company might look instead at providing a completely installed home theater package. Again, putting that in place is not a trivial exercise because you need a lot of expertise, but the idea is to segment demand in terms of activity instead of individual product-instead of thinking about TVs, think about people who like to watch movies.

Another interesting piece is what we call the "long tail" of the supply chain, which falls into the bottom right-hand corner. "Long tail" is a term coined by the editor of Wired. It basically says that in addition to the normal distribution of peak or average demand, there is a long tail that sort of tapers off forever. These are little pieces of very specific demand from customers and if you can figure out a way to aggregate those sets of demands, you might actually have a good market. This is something that companies are increasingly investigating. The best opportunity is when you can tap into virtual delivery, which is what companies like Apple are doing with iTunes. In these models, which companies offer in conjunction with products like iPod, your market is already identified and the availability of the virtual product actually increases demand for the base product. It costs nothing to ship the virtual out and you can identify a lot of additional market niches by offering content separate from the product.

 

Q: What are the key technology pieces needed for mass customization?

Balachandran: In terms of planning, you need good forecasting. Second, you need inventory optimization, which determines how much inventory to carry where, at what levels, to address which market segments. Third, you need supply chain network optimization-what your network should look like and where should you add or subtract DCs or factories. And, of course you need a visibility layer that goes across your own company and across your partners as well. Finally, you need clean data and good data management. Often it is better not to think in terms of SKUs but rather think and manage in terms of components, because the end user will actually combine the components to create an SKU. And, of course, the pricing corresponding to all of that also is a core aspect of data management.