Procuring Customized Products: Integrating Contracting with Co-Design

Customization is essentially a pull system and customers’ demand for customized products is the ultimate force that drives a customization business. Research has been primarily focused on improving customizers’ efficiency in eliciting and fulfilling customers’ needs. This paper is concerned with customers’ procurement decisions when faced with multiple competing customizers. A conceptual framework is constructed to capture the essential decisions, information, and incentives involved in procuring customized products. Procuring customized products differs from procuring standard products in that product specifications become variable and other contract terms like price and delivery tend to vary with product specifications. Conceptually, it’s a contracting problem with an embedded collaborative design problem, with information asymmetrically distributed between customers and manufacturers in both the commercial domain and the technical domain. Based on specific information structure, different procurement scenarios for customized products are characterized and appropriate procurement mechanisms are discussed accordingly.