Mass customization.

What's more important to customers--low prices or unique products? New customization technologies enable a company to offer both.

In today's increasingly turbulent business environment, companies must not only satisfy their customers but delight them. Customers now demand greater product variety, while increasing competition--particularly that arising from the globalization of markets--also forces businesses to slash costs. In the past, companies pursued either a low cost or high differentiation strategy; now they must find a way to combine the best of both. The solution: Mass customize products and services.

Gaining favor in both manufacturing and service industries, mass customization is a new system of management that relies on mass production of individually customized goods and services. Alvin Toffler first anticipated this capability in 1970 in "Future Shock." Seventeen years later, it was described by Stan Davis in "Future Perfect." The reality has exceeded both Toffler and Davis' expectations.

CUSTOMIZATION TECHNOLOGIES

The leaders of this new form of business competition are finding that variety can be achieved at prices that approach, and sometimes beat, those of mass producers. As Toffler and Davis predicted, new technologies are playing a key role. In manufacturing industries, Computer Numerical Control (CNC), Direct Numerical Control (DNC), and industrial robots greatly increase manufacturing flexibility by controlling parts manufacture through software programming. In addition, flexible manufacturing systems (FMS) ensure that all members of a family of parts can be manufactured at will and at random. Within a predetermined envelope of variety, there are no cost penalties for manufacturing one part instead of another. This yields a system that is very responsive to changes in demand.

Computer-Aided Design and Computer-Aided Manufacturing systems (CAD/CAM) allow design modifications and new designs to be developed quickly, with the manufacturing requirements automatically generated from the design specifications. And Computer Integrated Manufacturing (CIM) links all the disparate computer-controlled "islands of automation" into a single, integrated system that is fast, responsive, flexible, and inexpensive at high volumes.

Advances in the speed, capacity, efficiency, and usability of information and telecommunications technologies constantly lower the costs of increasing differentiation in service and manufacturing industries. The instant application of information throughout a firm's value chain allows it to react rapidly to changes in demand and design. Whole new classes of mass-customized products and services are underpinned by these advancing technologies: These products include computerized data bases that respond instantly to individual requests for information, and telephone and entertainment services that can be delivered to homes through fiber-optic wires. Nicholas Negroponte, director of the Media Lab at MIT, believes the day is coming when a thousand microprocessors in our homes will be used to design devices that act as our personal attendants. These devices will use techniques such as "fuzzy logic" to learn our lifestyles and furnish astonishingly individualized services. An artificial intelligence technique that responds to small variations in attributes and learns to provide desired results, fuzzy logic is already being used in consumer products, particularly those from Japan.

MANAGEMENT PRACTICES

Perhaps of greater importance in achieving mass customization are management advances. The development of just-in-time delivery, lead production techniques, early manufacturing involvement, time-based competition, cross-functional teams, and a host of other techniques has honed proces flexibility and responsiveness--and therefore optimized the ability to increase variety without significant jumps in costs. Four basic innovations have made this possible:

* Just-in-time delivery and processing of materials and components that eliminate process flaws and reduce inventory carrying costs.

* Reduced setup and changeover times that directly lower run size and the cost of variety.

* Shorter cycle times throughout all processes in the value chain that increase flexibility and responsiveness while reducing their costs.

* Production based on orders--instead of on forecasts. This aims to lower inventory costs, eliminate fire sales and write-offs, and provide the information necessary for individual customization.

It used to be axiomatic that higher levels of quality meant higher costs. We now know building not only quality but also variety into processes actually lowers costs.

As an illustration, consider changeover times. In mass-producing firms, changeover times comprise a significant portion of production and, therefore, lengthen production runs. The concept of "economic order quantity" (EOQ) was developed to determine the length of these runs. The EOQ is the point at which increasing handling and storage costs begin to outweigh decreasing setup and run costs on a per-unit basis, yielding the lowest total cost per unit. However, when changeover costs are drastically reduced, the EOQ moves down the curve to a run size of one, resulting in greater variety at lower costs.

The upshot: Particularly when customer desires are fluctuating or demand is uncertain, eliminating changeover time can save a tremendous amount of money.

Although true "lot size of one" production is still uncommon, in both the manufacturing and service industries new technologies and new ways of managing are cutting the costs of customization. It is beside the point whether the product and process technologies and management techniques exist in every industry to mass produce customized goods and services. More important is the effectiveness with which firms use flexible technologies to create more responsive processes and management methods. Companies must also exploit the flexibility of their workers to develop new products and services that appeal to customers' individual tastes.

WHY CHANGE?

While flexible technologies and management practices enable firms to further mass customize, it is market turbulence that compels them to do so. Demand fragmentation, globalization, diminishing product life cycles, shifting customer desires, the rate of technological change, and other factors increase the instability of a firm's market environment. In response, successful firms do no just manage their turbulence but thrive on it, creating variety in their products and services.

LUTRON ELECTRONICS

Co-author Joel Spira heads one such firm, Coopersburg, PA-based Lutron Electronics, one of the first companies to achieve mass customization. Lutron designs and manufactures lighting controls--including switches, dimmers, and systems to control sets of lights--for homes and offices. Originally only one of many small companies in a relatively quiet business, in the late 1960s and early 1970s it hit severe market turbulence when a large company decided it wanted to capture the lion's share of the lighting control business.

Following the principles of mass production, this competitor cut prices on standardized products dramatically--ruthlessly--to increase economies of scale. Company after company lowered its prices in response but could not achieve the larger company's mass efficiency. Many left the business.

But Lutron did something different. Realizing it could not compete at the lower price level, it decided to differentiate its products. Lutron put style, fashion, and choice into its business, solidifying its reputation for innovation and quality. As a result, the company expanded its market share significantly. Today, the company is the market's leader.

Lutron manufactures over 11,000 different controls, 95 percent of which have annual shipments of less than 100 units. In its electronic lighting systems line--which creates "scenic effects" for conference rooms and ballrooms--it has never shipped the same system twice. Each system is customized to customer specifications but mass produced on a single assembly line from standard components. Lutron's engineers design a standardized new product line with only a few options. Then, by working with individual customers, they extend the line, in some cases to 100 models or more. Finally, engineering and production consolidate the product line into 15-20 modularized components that can be assembled to produce any of the models.

This process is governed within each function by a constant tension between order and chaos; between standard modules and creativity in engineering, between costs and customization in production, and between customer satisfaction and information overload in sales. Chaos increases new business; order increases profits.

At Lutron mass customization is an integral part of the corporate culture.

Four practices have keyed the company's success in mass customizing lighting controls over the past 25 years:

* Using common modular components across product lines.

* Making investments in people--both engineers and production workers--and stressing interaction with customers.

* Constantly widening the range of functions and features within both old and new product lines.

* Embedding the function within products with the help of microprocessors.

METHODS OF MASS CUSTOMIZATION

Modularization is one approach to customization--perhaps the best. But for companies providing standardized products, an easier way to start--one with an instant payback--is to customize services around existing products. The IBM business unit, Applications Business Systems in Rochester, MN, tailors Application System/400 computers before they leave the plant, installing operating systems with the latest revisions (more than 90 percent of the customers request this service). IBM also offers to add the applications and data from the customer's shop or from his business partners and connect any non-IBM equipment to his system. While these add-on services increase costs, IBM makes a profit by charging a small premium for them.

Customization services can focus the organization on fulfilling the needs of customers while providing development and production time to figure out a function-specific mass customization strategy. One of the ways R&D can do so--while providing a further time cushion for production--is to create products standardized for manufacturing but which can be customized for and by each purchaser. For example, Matsushita has introduced a "customizable" washing machine with optical sensors to determine the size and dirtiness of the load and microprocessors with fuzzy logic to select which of 600 cycles will best clean the clothes. The company could have segmented the "dirty clothes" market and filled its distribution channels with a variety of products to fit each segment. Instead, Matsushita created one product that automatically personalizes itself--not only to the user, but to each individual load of wash.

One way to mass customize in production is to put the process in the hands of the only true expert on market demand--the customer. Personics created a system to make personalized cassette tapes in music stores at the point of delivery. Using menus, customers choose a dozen or so selections from 4,000 to 5,000 individual songs. Ten minutes after a sales clerk enters the song, a cassette pops out--complete with a laser-printed label bearing the customer's name, cassette title, song titles, and copyright information.

Reducing style time is yet another approach to customization. It is the best way to integrate the organization into a focused team dedicated to serving the customer. The apparel industry is moving in this direction with its broad-based Quick Response program. The Limited, a leader of this movement, is shrinking from months to weeks to days its manufacture-to-retail replenishment cycle. This allows each store to keep fewer pieces of each style in stock, while providing more variety and avoiding fire sales of unwanted merchandise.

The Limited is also working to streamline its concept-to-market cycle. The goal: 1,000 hours between identifying the need for a new style and putting it in stores. With the constant influx of new styles, consumers would benefit from additional opportunities to personalize their wardrobes.

WHAT ABOUT SERVICES?

Although mass customization is typically associated with manufacturing industries, it also applies to service providers. For example, TWA Getaway Vacations purchases the various components of vacation tours--airline seats, hotel rooms, busses, and entertainment options--in bulk, then mixes and matches them to create tour packages that meet the needs of individual customers.

Hertz has customized services around its standard rental car business through its #1 Club Gold. Under the offering, Hertz tracks a customer's flight, pulls the car up to a weather-protected stall when he arrives, opens the trunk, places the keys in the ignition, and even starts the car to warm it up in cold weather (local law permitting). In addition, the company displays the customer's name and stall number on a computer-controlled directory board and places the completed rental agreement on the rearview mirror along with a customer satisfaction survey.

For service businesses, "customizable" means "self-service." For example, automatic teller machines pioneered by Citicorp allow patrons to choose where, when, and what banking services they want. But services remote from the customer can also take advantage of point-of-delivery customization. Photograph developing, shoe repair, printing and copying, and dry cleaning all used to be centralized, standardized, mass-produced services that took a few days to a few weeks or more. Today, by moving the process to retail outlets, these inherently individualized services can be provided in as little as a few minutes or an hour or two at convenient locations.

Service companies also can mass customize through Quick Response. For example, the United Services Automobile Association, which provides insurance for military and ex-military personnel, redesigned its policy services processes through information technology. It replaced paper files with computer images accessible by any service representative. USAA eliminated its paper inventory and paper waste, brought its cycle time down to its value-add time, and now works in lot sizes of one. Thus, customers get personalized service, and the process capabilities designed to sell and service insurance policies are used to micro-market consumer goods.

SUSTAINING THE ADVANTAGE

Despite its many benefits, mass customization is not a panacea. Companies that offer customization still must execute the basics.

Personics, for example, went into Chapter 11 in 1991 when copyright hassles with music companies made it nearly impossible to obtain current hits. Recently purchased by two major entertainment companies, Time Warner and Thorn EMI plc, Personics is now working its way out of bankruptcy.

Competitive advantage does not come from mass customizing any particular product or service. Rather, it is achieved by providing the most value for the least cost. Sustained advantage derives from constant innovation and value creation, and from investment not just in technology, but in the people whose experience and flexibility will be the backbone of the new competitive environment.

Joel S. Spira is chairman and CEO of Coopersburg, PA-based Lutron Electronics, the nation's largest provider of office and residential lighting controls.

Joe Pine, author of "Mass Customization" from Harvard Business School Press, is with IBM's Advanced Business Institute, in concert with the IBM Consulting Group.