The customized, digitized, have-it-your-way economy Mass customization will change the way products are made-- forever.
(FORTUNE Magazine) – A silent revolution is stirring in the way things are made and services are delivered. Companies with millions of customers are starting to build products designed just for you. You can, of course, buy a Dell computer assembled to your exact specifications. And you can buy a pair of Levi's cut to fit your body. But you can also buy pills with the exact blend of vitamins, minerals, and herbs that you like, glasses molded to fit your face precisely, CDs with music tracks that you choose, cosmetics mixed to match your skin tone, textbooks whose chapters are picked out by your professor, a loan structured to meet your financial profile, or a night at a hotel where every employee knows your favorite wine. And if your child does not like any of Mattel's 125 different Barbie dolls, she will soon be able to design her own.
Welcome to the world of mass customization, where mass-market goods and services are uniquely tailored to the needs of the individuals who buy them. Companies as diverse as BMW, Dell Computer, Levi Strauss, Mattel, McGraw-Hill, Wells Fargo, and a slew of leading Web businesses are adopting mass customization to maintain or obtain a competitive edge. Many are just beginning to dabble, but the direction in which they are headed is clear. Mass customization is more than just a manufacturing process, logistics system, or marketing strategy. It could well be the organizing principle of business in the next century, just as mass production was the organizing principle in this one.
The two philosophies couldn't clash more. Mass producers dictate a one-to-many relationship, while mass customizers require continual dialogue with customers. Mass production is cost-efficient. But mass customization is a flexible manufacturing technique that can slash inventory. And mass customization has two huge advantages over mass production: It is at the service of the customer, and it makes full use of cutting-edge technology.
A whole list of technological advances that make customization possible is finally in place. Computer-controlled factory equipment and industrial robots make it easier to quickly readjust assembly lines. The proliferation of bar-code scanners makes it possible to track virtually every part and product. Databases now store trillions of bytes of information, including individual customers' predilections for everything from cottage cheese to suede boots. Digital printers make it a cinch to change product packaging on the fly. Logistics and supply-chain management software tightly coordinates manufacturing and distribution.
And then there's the Internet, which ties these disparate pieces together. Says Joseph Pine, author of the pioneering book Mass Customization: "Anything you can digitize, you can customize." The Net makes it easy for companies to move data from an online order form to the factory floor. The Net makes it easy for manufacturing types to communicate with marketers. Most of all, the Net makes it easy for a company to conduct an ongoing, one-to-one dialogue with each of its customers, to learn about and respond to their exact preferences. Conversely, the Net is also often the best way for a customer to learn which company has the most to offer him--if he's not happy with one company's wares, nearly perfect information about a competitor's is just a mouse click away. Combine that with mass customization, and the nature of a company's relationship with its customers is forever changed. Much of the leverage that once belonged to companies now belongs to customers.
If a company can't customize, it's got a problem. The Industrial Age model of making things cheaper by making them the same will not hold. Competitors can copy product innovations faster than ever. Meanwhile, consumers demand more choices. Marketing guru Regis McKenna declares, "Choice has become a higher value than brand in America." The largest market shares for soda, beer, and software do not belong to Coca-Cola, Anheuser-Busch, or Microsoft. They belong to a category called Other. Now companies are trying to produce a unique Other for each of us. It is the logical culmination of markets' being chopped into finer and finer segments. After all, the ultimate niche is a market of one.
The best--and most famous--example of mass customization is Dell Computer, which has a direct relationship with customers and builds only PCs that have actually been ordered. Everyone from Compaq to IBM is struggling to copy Dell's model. And for good reason. Dell passed IBM last quarter to claim the No. 2 spot in PC market share (behind Compaq). While other computer manufacturers struggle for profits, Dell keeps reporting record numbers; in its most recent quarter the company's sales were up 54%, while earnings soared 62%. No wonder Michael Dell has become the poster boy of the new economy. As Pine says, "The closest person we have to Henry Ford is Michael Dell."
Dell's triumph is not so much technological as it is organizational. Dell keeps margins up by keeping inventory down. The company builds computers from modular components that are always readily available. But Dell doesn't want to store tons of parts: Computer components decline in value at a rate of about 1% a week, faster than just about any product other than sushi or losing lottery tickets. So the key to the system is ensuring that the right parts and products are delivered to the right place at the right time.
To do this, Dell employs sophisticated logistics software, some developed internally, some made by i2 Technologies. The software takes info gathered from customers and steers it to the parts of the organization that need it. When an order comes in, the data collected are quickly parsed out--to suppliers that need to rush over a shipment of hard drives, say, or to the factory floor, where assemblers put parts together in the customer's desired configuration. "Our goal," says vice chairman Kevin Rollins, "is to know exactly what the customer wants when they want it, so we will have no waste."
The company has been propelled by this thinking ever since Michael Dell started selling PCs from his college dorm room in 1983. The Web makes the process virtually seamless, by allowing the company to easily collect customized, digitized data that are ready for delivery to the people who need them. The result is an entire organization driven by orders placed by individual customers, an organization that does more Web-based commerce than almost anyone else. Dell's future doesn't depend on faster chips or modems--it depends on greater mastery of mass customization, of streamlining the flow of quality information.
It's not much of a surprise that a leading tech company like Dell is using software and the Net in such innovative ways. What's startling is the extent to which companies in other industries are embracing mass customization. Take Mattel. Starting by October, girls will be able to log on to barbie.com and design their own friend of Barbie's. They will be able to choose the doll's skin tone, eye color, hairdo, hair color, clothes, accessories, and name (6,000 permutations will be available initially). The girls will even fill out a questionnaire that asks about the doll's likes and dislikes. When the Barbie pal arrives in the mail, the girls will find their doll's name on the package, along with a computer-generated paragraph about her personality.
Offering such a product without the Net would be next to impossible. Mattel does make specific versions of Barbie for customers such as Toys "R" Us, and the company customizes cheerleader Barbies for universities. But this will be the first time Mattel produces Barbie dolls in lots of one. Like Dell, Mattel must use high-end manufacturing and logistics software to ensure that the order data on its Website are distributed to the parts of the company that need them. The only real concern is whether Mattel's systems can handle the expected demand in a timely fashion. Right now, marketing VP Anne Parducci is shooting for delivery of the dolls within six weeks--a bit much considering that that is how long it takes to get a custom-ordered BMW.
Nevertheless, Parducci is pumped. "Personalization is a dream we have had for several years," she says. Parducci thinks the custom Barbies could become one of next year's hottest toys. Then, says Parducci, "we are going to build a database of children's names, to develop a one-to-one relationship with these girls." That may sound creepy, but part of mass customization is treating your customers, even preteens, as adults. By allowing the girls to define beauty in their own terms, Mattel is in theory helping them feel good about themselves even as it collects personal data. That's quite a step for a company that has stamped out its own stereotypes of beauty for decades, but Parducci's market testing shows that girls' enthusiasm for being a fashion designer or creating a personality is "through the roof."
Levi Strauss also likes giving customers the chance to play fashion designer. For the past four years it has made measure-to-fit women's jeans under the Personal Pair banner. In October, Levi's will relaunch an expanded version called Original Spin, which will offer more options and will feature men's jeans as well.
With the help of a sales associate, customers will create the jeans they want by picking from six colors, three basic models, five different leg openings, and two types of fly. Then their waist, butt, and inseam will be measured. They will try on a plain pair of test-drive jeans to make sure they like the fit before the order is punched into a Web-based terminal linked to the stitching machines in the factory. Customers can even give the jeans a name--say, Rebel, for a pair of black ones. Two to three weeks later the jeans arrive in the mail; a bar-code tag sealed to the pocket lining stores the measurements for simple reordering.
Today a fully stocked Levi's store carries approximately 130 ready-to-wear pairs of jeans for any given waist and inseam. With Personal Pair, that number jumped to 430 choices. And with Original Spin, it will leap again, to about 750. Sanjay Choudhuri, Levi's director of mass customization, isn't in a hurry to add more choices. "It is critical to carefully pick the choices that you offer," says Choudhuri. "An unlimited amount will create inefficiencies at the plant." Dell Computer's Rollins agrees: "We want to offer fewer components all the time." To these two, mass customization isn't about infinite choices but about offering a healthy number of standard parts that can be mixed and matched in thousands of ways. That gives customers the illusion of boundless choice while keeping the complexity of the manufacturing process manageable.
Levi's charges a slight premium for custom jeans, but what Choudhuri really likes about the process is that Levi's can become your "jeans adviser." Selling off-the-shelf jeans ends a relationship; the customer walks out of the store as anonymous as anyone else on the street. Customizing jeans starts a relationship; the customer likes the fit, is ready for reorders, and forks over his name and address in case Levi's wants to send him promotional offers. And customers who design their own jeans make the perfect focus group; Levi's can apply what it learns from them to the jeans it mass-produces for the rest of us.
If Levi's experiment pays off, other apparel makers will follow its lead. In the not-so-distant future people may simply walk into body-scanning booths where they will be bathed with patterns of white light that will determine their exact three-dimensional structure. A not-for-profit company called [TC]2, funded by a consortium of companies including Levi's, is developing just such a technology. Last year some MIT business students proposed a similar idea for a custom-made bra company dubbed Perfect Underwear.
Morpheus Technologies, a wacky startup in Portland, Me., hopes to set up studios equipped with body scanners. Founder Parker Poole III wants to "digitize people and connect their measurement data to their credit cards." Someone with the foresight to be scanned by Morpheus could then call up Eddie Bauer, say, give his credit card number, and order a robe that matches his dimensions. His digital self could also be sent to Brooks Brothers for a suit. Gone will be the days of attentive men kneeling on the floor with pins in their mouths. Progress does have its price.
Thirty years ago auto manufacturers were, effectively, mass customizers. People would spend hours in the office of a car dealer, picking through pages of options. But that ended when car companies tried to improve manufacturing efficiency by offering little more than a few standard options packages. BMW wants to turn back the clock. About 60% of the cars it sells in Europe are built to order, vs. just 15% in the U.S. Europeans seem willing to wait three to four months for a vehicle, while most Americans won't wait longer than four weeks.
Now the company wants to make better use of its customer database to get more Americans to custom-order. BMW dealers save about $450 in inventory costs on every such order. Reinhard Fischer, head of logistics for BMW of North America, says, "The big battle is to take cost out of the distribution chain. The best way to do that is to build in just the things a consumer wants."
Since most BMWs in the U.S. are leased, the company knows when customers will need a new car. Some dealers now call customers a few months before their leases are up to see whether they'd like to custom-order their next car. Soon, however, customers will be able to configure their own car online and send that info to a dealer. Fischer can even see a day when the Website will offer data about vehicles sailing on ships from Germany, so that people can see whether a car matching their preferences is already on the way. That does, of course, raise the question, Why not send the requests directly to BMW, circumventing dealers altogether? Says Fischer: "We don't want to eliminate their role, but maybe they should have a 7% margin, not 16%." Ouch.
Such dilemmas are inevitable, given that mass customization streamlines the order process. What's more, mass customization is about creating products--be they PCs, jeans, cars, eyeglasses, loans, or even industrial soap--that match your needs better than anything a traditional middleman can possibly order for you.
LensCrafters, for instance, has made quick, in-store production of customized lenses common. But Tokyo-based Paris Miki takes the process a step further. Using special software, it designs lenses and a frame that conform both to the shape of a customer's face and to whether he wants, say, casual frames, a sports pair, sunglasses, or more formal specs. The customer can check out on a monitor various choices superimposed over a scanned image of his face. Once he chooses the pair he likes, the lenses are ground and the rimless frames attached.
While we tend to think of automation as a process that eliminates the need for human interaction, mass customization makes the relationship with customers more important than ever. ChemStation in Dayton has about 1,700 industrial-soap formulas--for car washes, factories, landfills, railroads, airlines, and mines. The company analyzes items that are to be cleaned (recent ones in its labs include flutes and goose down) or visits its customers' premises to analyze their dirt. After the analysis, the company brews up a special batch of cleanser. The soap is then placed on the customer's property in reusable containers ChemStation monitors and keeps full. For most customers, teaching another company their cleansing needs is not worth the effort. About 95% of ChemStation's clients never leave.
Hotels that want you to keep coming back are using software to personalize your experience. All Ritz-Carlton hotels, for instance, are linked to a database filled with the quirks and preferences of half-a-million guests. Any bellhop or desk clerk can find out whether you are allergic to feathers, what your favorite newspaper is, or how many extra towels you like.
Wells Fargo, the largest provider of Internet banking, already allows customers to apply for a home-equity loan over the Net and get a three-second decision on a loan structured specifically for them. A lot of behind-the-scenes technology makes this possible, including real-time links to credit bureaus, databases with checking-account histories and property values, and software that can do cash-flow analysis. With a few pieces of customized information from the loan seeker, the software whips into action to make a quick decision.
The bank also uses similar software in its small-business lending unit. According to vice chairman Terri Dial, Wells Fargo used to turn away lots of qualified small businesses--the loans were too small for Wells to justify the time spent on credit analysis. But now the company can collect a few key details from applicants, customize a loan, and approve or deny credit in four hours--down from the four days the process used to take. In some categories that Wells once virtually ignored, loan approvals are up as much as 50%. Says Dial: "You either invest in the technology or get out of that line of business."
She'd better keep investing. Combine the software that enables customization with the ubiquity of the Web, and you get a situation that threatens Wells' very existence. If consumers grow accustomed to designing their own products, will they trust brand-name manufacturers and service providers or will they turn to a new kind of middleman? Frank Shlier, a director of research at the Gartner Group in Stamford, Conn., sees disintermediaries emerging all over the Net to help people sift through the thousands of choices presented to them. In financial services, he suggests, there is "a new role for a trusted adviser, maybe someone who doesn't own any banks."
Shlier's middleman sounds a lot like Intuit, which lets visitors to its quicken.com Website apply for and purchase mortgages from a variety of lenders, fill out their taxes, or set up a portfolio to track their stocks, bonds, and mutual funds. Tapan Bhat, the exec who oversees quicken.com, says, "The Web is probably the medium most attuned to customization, yet so many sites are centered on the company instead of on the individual." What would lure someone to Levi's if she could instead visit a clothing Website that stored her digital dimensions and ordered custom-fit jeans from the manufacturer with the best price and fit? Elaborates Pehong Chen, CEO of Internet software outfit BroadVision: "The Nirvana is that you are so close to your customers, you can satisfy all their needs. Even if you don't make the item yourself, you own the relationship."
Amazon.com has three million relationships. It sells books online and now is moving into music (with videos probably next). Every time someone buys a book on its Website, Amazon.com learns her tastes and suggests other titles she might enjoy. The more Amazon.com learns, the better it serves its customers; the better it serves its customers, the more loyal they become. About 60% are repeat buyers.
The Web is a supermall of mass customizers. You can drop music tracks on your own CDs (cductive.com); choose from over a billion options of printed art, mats, and frames (artuframe.com); get stock picks geared to your goals (personalwealth.com); or make your own vitamins (acumins.com). And you can get all kinds of tailored data; NewsEdge, for example, will send a customized newspaper to your PC.
These companies want to keep customers happy by giving them a product that cannot be compared to a competitor's. Acumin, for instance, blends vitamins, herbs, and minerals per customers' instructions, compressing up to 95 ingredients into three to five pills. If a customer wants to start taking a new supplement, all Acumin needs to do is add it to the blend.
Acumin's products address what Pine calls customer sacrifice--the compromise we all make when we can't get exactly the product we want. CEO Brad Oberwager started the company two years ago, when his sister, who was undergoing a special cancer radiation treatment, couldn't find a multivitamin without iodine. (Her doctor had told her to avoid iodine.) "If someone would create a vitamin just for me, I would buy it," she told her brother. So he did.
The Web will make that kind of response the norm. Sure, there are any number of ways for consumers to provide a company with information about their preferences--they can call, they can write, or, heck, they can even walk into the brick-and-mortar store. But the Web changes everything--the information arrives in a digitized form ready for broadcast. Says i2 CEO Sanjiv Sidhu, "The Internet is bringing society into a culture of speed that has not really existed before." As new middlemen customize orders for the masses, differentiating one company from its competitors will become tougher than ever. Responding to price cuts or quality improvements will continue to be important, but the key differentiator may be how quickly a company can serve a customer. Says Artuframe.com CEO Bill Lederer: "Mass customization is novel today. It will be common tomorrow." If he is right, the Web will wind up creating a strange competitive landscape, where companies temporarily connect to satisfy one customer's desires, then disband, then reconnect with other enterprises to satisfy a different order from a different customer.
That's the vision anyway. For now, companies are struggling to take the first steps toward mass customization. The ones that are already there have been working on the process for years. Matthew Sigman is an executive at R.R. Donnelley & Sons, whose digital publishing business prints textbooks customized by individual college professors. "The challenge," Sigman warns, "is that if you are making units of one, your margin for error is zero." Custom-fit jeans do come with a money-back guarantee. Levi's can't afford for you not to like them.