Report on State of Mass Customization Implementation and Cost Drivers

Only 67% of BTO/ETO manufacturers know how much it costs to produce customized products, and 73% don’t know the cost of engineering change orders

MC industry reportA new report on mass customization and build-to-order manufacturing has recently been published by Cincom Systems, a manufacturer of configuration and quote-to-order solutions. The study is based on 72 interviews with senior engineering managers at manufacturers of complex industrial, electrical, and transportation equipment and systems between January and February 2007.

While such an industry-driven report is biased by the perspective if its sponsor (and also its interview base is pretty small and probably not representative), the study contains a number of interesting data which, from my experience, represent the state of many companies offering customized industrial products (b-to-b).

The report found that only 67% of build-to-order and engineer-to-order manufacturers know how much it costs to produce customized products, and 73% don’t know the cost of engineering change orders. Only 27% had figured out the cost of engineering change orders. But despite the lack of cost information, more than half of the survey respondents believe that they have the ability to charge a 10-25% or higher premium with a product customization strategy.

Customization rates will increase in the future

The disconnect between pricing assumptions surrounding product customization and traceable costs becomes a barrier to sustaining momentum with mass customization strategies into the future. This is especially true as the broad majority of managers interviewed by Cincom for this report state that requests for customized products have been increasing over the last five years, and 26% anticipate that the growth rate will be between 25% and 50% in the next two years. Managers quote the following corporate objectives which are driving customization efforts (in ranked order of importance): (i) Meet specific customer requirements, (ii) Demonstrate product leadership, (iii) Improve positioning against lower-cost competitors, (iv) Improve internal efficiencies, and (v) Enhance margins or price premiums.

Some other key findings, as quoted from the report:

“Product customization strategies are predominantly relied on by manufacturers to both increase production efficiencies at the low end of their product lines and drive up premium pricing at the high end. 73% of total respondents see product customization as critical for products over $100,000; 25% also see them as critical for products under $1,000.

There is a significant knowledge gap between what engineering needs to contribute to a mass customization strategy and what existing systems are delivering. While only 50% of respondents use any type of software for managing the product customization processes, 56% do not have service information, 55% do not have catalog and selling information, and 50% do not have product development information critical to support product customization.

One of the greatest risks to mass customization is the intensive amount of intellectual capital that engineers have, yet it is not captured anywhere (64%). Additionally, 35% of respondents report that there is no method in place for sharing knowledge throughout the company.”

Automated Product Configuration

The study asked managers about the tools they use to support mass customization. Not surprisingly, CAD is the primary tool used to support the customization process (92%). The implication is that the customization process is primarily drawing-driven based on tribal knowledge with heavy engineering involvement in the specification process. Beyond the CAD system, most manufacturers are using ad hoc technologies such as spreadsheets (51%) or manual processes supported by documentation (41%) to support the customization process. Few companies utilize automated configuration systems. Of those who do, 30% use homegrown systems and only 24% use third-party packages.

tools used for mcThese numbers indicate that there is rather little integration of tools within the customization process, and the level of integration decreases significantly as you move from manufacturing (ERP at 30%) through engineering (CAD at 24%) into the sales channel (Selling Systems at 14%). The lack of integration implies that there is a significant amount of manual intervention within the customization process requiring time and resources, and leaving opportunity for errors.

Barriers to Mass Customization

According to the study, most engineers believe that product complexity is not the primary barrier to customization. They cite lack of knowledge of options by the customer (67%) as the primary barrier to customization efforts. The implication is that the knowledge required to effectively sell customized products is not being effectively transferred to the customer. This is not surprising given the often technology-focused implementation of configuration systems. There are huge opportunities for improvement in sales and operational effectiveness to be gained by addressing this issue. Of the surveyed respondents, 43% indicated that inadequate systems are also a barrier to customization.

As written before, these numbers and findings have to be interpreted from the perspective of its originator: a company selling exactly those systems to improve the gaps identified in the survey. But despite all sales buzz, the study shows that many companies still have a long way to go to change their (craft) engineer-to-order systems to true mass customization operations.

Download the report.

A special issue of the IJMassC (4/2006) has a number of case studies that demonstrate how MC pioneers closed these gaps. Read especially the paper by Lars Hvam on the configuration system of APC, a provider of data center equipment.

About the Author:

Frank T. Piller is a Co-Director of the MIT Smart Customization Group at the MIT Media Lab, Massachusetts Institute of Technology, USA, and a chair professor of management at the Technology & Innovation Management Group of RWTH Aachen University, Germany, one of Europe’s leading institutes of technology. Before entering his recent position in Aachen, he worked at the MIT Sloan School of Management (2004-2007) and has been an associate professor of management at TUM Business School, Technische Universitaet Muenchen. Frequently quoted in The New York Times, The Economist, and Business Week, amongst others, Frank is regarded as one of the leading experts on strategies for customer-centric value creation, like mass customization, personalization, and innovation co-creation. His recent analysis of the crowdsourcing business model “Threadless” (co-authored with Susumu Ogawa), an innovative crowdsourcing business model in the fashion industry, has been elected as one of the Top-20 articles in MIT Sloan Management Review.