Applying Mass customization to Component Purchasing

Introduction

In the general model of mass customization, the ability to produce at costs similar to mass production is proposed as being dependent on the use of modular components, which can be configured in various ways to produce a customized end product. This model will be successful in a large percentage of cases.

Suppose, however, that a mass customiser is engaged in the production of a highly complex end product, and wishes to provide configuration options beyond those available from standard component modules. How would a mass customiser address this requirement?

Extending mass customization down the value chain

In an advanced mass customization concept, external suppliers may be integrated into the customization process. The result may be an extension of the economically possible degree of individualization.

This section looks at the factors which influence the level of supply chain integration in a mass customization environment. It goes on to describe the information flow chain between producer and suppliers for varying levels of supply chain integration.

Importance of Lead Time

In examining the question of supply chain integration, it is beneficial to firstly mention that a research has indicated that a customer is willing to pay 10-15% more for a mass customized product over a standard product. However, a customer is definitely not willing to wait longer for that product.

Also, in a mass customization environment, especially in the case of a complex product, there can no longer be buffer storage to keep inventory in reserve. Also, the reduction down to production lot size one requires an optimisation of the logistics. Therefore, the information logistics (the steering and control of all information flows) must be co-ordinated efficiently.

Processing an Order Through the Supply Chain

A mass customized purchase is 'pulled' through the supply chain, with orders being placed by customers and components being brought from inventory as required, and component purchases being made to replenish these stocks. David M. Anderson's book 'Build to Order & Mass Customization' focuses heavily on standardised parts that are routinely re-supplied, removing the need for individual purchase orders. The information system should provide for receiving these parts as fulfilling a standing order, rather than being linked to an individual purchase order.

In the diagram below, a simple e-commerce transaction is modelled from the point that the customer confirms the configuration until the order is confirmed or cancelled. This model assumes that the necessary materials and/or components are in existing inventory, or that the price of these does not vary with the configuration. In either situation, it is unnecessary to extend the information flow to the suppliers of the enterprise.

Click here for diagram Information flow for basic configuration - purchase model

Customisers requiring customized components

Coming back to our customiser of complex products, what happens if the customiser in turn requires components to be built to exact specifications? It is clear that the supply chain information systems must provide for the rapid availability to the supplier of the component specifications. Using an internet-based supply chain management system, it should be possible for the component order to be transmitted to the supplier as soon as the final customer confirms the purchase to the enterprise.

In such cases, if the price of the component varies with the specification, and the mass customiser does not wish to absorb the price risk, the component specification must be sent to the supplier for cost calculation, before the final supplier can calculate their own costs and thus the selling price to the final customer.

Such integration between different stages of the supply chain indicate a requirement for strong, stable relationships between enterprises at each of the stages. A supply chain can be 'integral', with a close proximity among the elements of four dimensions: Geographic, Organisational, Cultural and Electronic (Wolters et al., 2002). Where this is the case, it is likely that there will be a strong relationship between an enterprise and one supplier for each component. In this case, the supply chain management system would have direct connections for the chosen supplier at each stage. The purchase details would flow automatically on confirmation of the order. An e-commerce transaction model to reflect this situation is shown below.

Click here for diagram Configuration - purchase model with variable product costs and integrated suppliers

The opposite of the integrated supply chain is the modular supply chain. This type has a low proximity among the dimensions described above. There is likely to be a higher level of substitution between components, and a number of possible suppliers. Here, the supply chain management system would 'broadcast' a component specification to all of the suppliers and confirm a purchase from the most competitive supplier. Such a system is shown in the diagram below. This model would be most likely to occur in a market where the enterprise has considerable bargaining power over suppliers, as the significant investment for such a system is considerably less attractive when the supplier does not have a guarantee of exclusive supply.

Click here for diagram Configuration-purchase model in modular supply chain environment

Conclusion

This article takes the concept of mass customization and extends it down the value chain to component suppliers, examining how customized components could be purchased for a complex customized finished product. MadeForOne.com is unaware of any real-life implementation of such a model, and the level of supply chain efficencies required may be difficult to achieve. However, an approach such as this might someday be implemented where the normal model of customising from standard components does not provide a sufficient range of configuration options.

References

Anderson, David M. 2002, Build-to-Order & Mass Customization, Cambria, CA USA: CIM Press

Schenk, Michael, & Seelman-Eggebert, Ralph 2002, 'Mass customization facing logistics challenges', in C. Rautenstrauch, R. Seelmann-Eggebert & K. Turowski (eds), Moving into mass customization, Springer, Berlin, Germany, pp. 41-57

Caddy Ian, Helou, Mammy & Callan, Jim 2002, 'From mass production to mass customization: impact on integrated supply chains', in C. Rautenstrauch, R. Seelmann-Eggebert & K. Turowski (eds), Moving into mass customization, Springer, Berlin, Germany, pp. 59-70

Wolters, Matthijs J.J., van Heck, Erick & Vervest, Peter H.M. 2002, 'Modularity in three dimensions: a study of mass customization in the Dutch house building industry', in C. Rautenstrauch, R. Seelmann-Eggebert & K. Turowski (eds), Moving into mass customization, Springer, Berlin, Germany, pp. 215-230