Does mass customization pay? An economic approach to evaluate customer integration

The paper provides an integrated view of value creation in mass customization-based production models. While flexible manufacturing technologies are often seen as the main enabler of mass customization, we argue that modern information technologies play a similar important role. Their significance is based on enabling a distinctive principle of mass customization efficiently: customer integration into the production processes. The customer is integrated into value creation during the course of configuration, product specification and co-design. Customer integration is often seen as a necessity and source of additional costs of customization. However, we argue in this paper that customer integration may also be an important asset to increase efficiency and could pave the way for a new set of cost-saving potentials. We coin the term ‘economies of integration’ to sum up these saving potentials. Economies of integration arise from three sources: (1) from postponing some activities until an order is placed, (2) from more Authors: Frank T. Piller (Corresponding author) and Christof M. Stotko, TUM Business School, Department of General and Industrial Management, Technische Universität München (TUM), Leopoldstrasse 139, 80804 Munich, Germany. E-mails: [email protected] and [email protected] and Kathrin Moeslein, Advanced Institute of Management Research, London Business School, 6– 16 Huntsworth Mews, London, NW1 6DD, UK. E-mail: [email protected] FRANK PILLER directs the Research Group Mass Customization and Customer Integration (www.mass-customisation.de) at the TUM Business School of the Technische Universität München, Munich, Germany, and teaches in the MBA programme of TUM. His research interests are customer integration, mass customization and personalization, and technology and innovation management. KATHRIN MOESLEIN is a Research Associate at the Advanced Institute of Management Research at the London Business School, London, UK, and a senior Research Fellow at the TUM Business School. Her research focus is on technology and innovation management, organizational communication and strategic change. CHRISTOF M. STOTKO is a lecturer at the TUM Business School and works as project manager within a national collaborative research centre on mass customization (www.sfb582.de). In this function he is focusing on customer interaction processes and economies of mass customization. Production Planning & Control ISSN 0953–7287 print/ISSN 1366–5871 online # 2004 Taylor & Francis Ltd http://www.tandf.co.uk/journals DOI: 10.1080/0953728042000238773 precise information about market demands and (3) from the ability to increase loyalty by directly interacting with each customer. By examining and structuring the economic principles of mass customization the paper will give insights into the benefits, but also the constraints of a mass customization strategy. 1. New models of industrial value creation and methodological background Agile manufacturing, focused factories, lean manufacturing, customer relationship management and mass customization are strategies that have enjoyed increasing attention in the literature during the last decade (for further details on these approaches see Milgrom and Roberts 1990, Sahin 2000, Piller 2003). Despite different backgrounds and foci, these new concepts of industrial value creation share a common objective. They want to provide ways of enabling companies to increase cost efficiency continuously along the value chain while simultaneously increasing the ability to react to changing customers’ needs stemming from heterogeneous market demands. In all of these approaches customers are seen as partners (and not only addressees) of value creation and are integrated into some of the firm’s value-creating processes. According to the focus of this special issue of Production Planning & Control, we will concentrate on value creation in mass customization systems. Our intention is to present a model of value creation in mass customization systems. We will focus our analysis on the economic impact of customer integration. As we will discuss in more detail in the course of this paper, customer integration can be seen as a fundamental principle of mass customization. Our objective is to discuss how customer integration supports and enables the major promise of mass customization, which is to deliver goods and services that meet an individual customer’s needs with near massproduction efficiency (Tseng and Piller 2003). We will present a structural approach to assess the economic impact of customer integration which is seen as a main principle of mass customization. The background of our research is twofold. First, we conducted an intensive literature review of various areas of knowledge about mass customization, namely literature on customer interaction and configuration systems, literature on IT systems for mass customization, and literature on mass customization manufacturing. In addition, literature describing mass customization as a unique strategic approach or business model has been evaluated. We will quote the corresponding references to all areas within the discussion of the following section (see also Piller 2002, 2003, Franke and Piller 2003). Second, we used an extensive database covering information on more than 200 mass customization cases from industry to generate input for our structural approach. For the course of this paper, we have studied especially the business models and value-creating mechanisms of the 14 companies listed in table 1. As our objective is to assess the economic impact of mass customization, we concentrated on firms that are often referred to as a leading example, or chose companies that have been successfully carrying out mass customization operations for a longer period of time. Table 1. Mass customization examples covered in case study research. Company Products Markets (1) Creo (www.creo-shoes.com)* Fashion shoes Worldwide (but mainly Germany and USA) (2) Cmax (www.cmax.com)* Fashion shoes USA (3) Dell Computers (www.dell.com) PCs Worldwide (4) Dolzer (www.dolzer.de) Men’s (formal) wear Germany (5) Interactive Custom Clothes Company Designs (www.ic3d.com) Jeans USA (6) Lands’ End (www.landsend.com) Khakis (trousers) USA (7) Lego (www.lego.com) Comics, special toy kits (Mosaic product line) Worldwide (major markets are USA, Canada and Germany) (8) miAdidas (www.miadidas.com) Sports shoes (soccer, running, basketball) Germany, UK, Netherlands, Italy, Japan, Korea, USA (9) NikeID (www.nike.com) Sports shoes (design) USA, Germany, Japan (10) Reflect.com (www.reflect.com) Cosmetics and body care USA (11) Selve AG (www.selve.net) Women’s footwear Germany (12) Sovital (www.sovital.de) Vitamin products Germany (13) Timbuk2 (www.timbuk2.com) Bags and luggage USA, Canada (minor markets are Europe) (14) Westbury by C&A (www.CundA.de) Men’s (formal) wear Germany *Ceased operation. 436 F. T. Piller et al.