Mass Customization atIn many mass markets, companies are

facing a predicament. On the one hand, cus-tomers are demanding that their orders be fulfilledever more quickly. On the other hand, they are de-manding highly customized products and services.Even without trying to customize their products,most companies have found it difficult to fulfill or-ders swiftly and at an acceptable cost. Is it possible,then, to mass-customize products, deliver themrapidly, and at the same time reduce costs?

The Hewlett-Packard Company has confrontedthese pressures in many of its businesses, includ-ing computers, printers, and medical products. Ithas proved that companies indeed can deliver cus-tomized products quickly and at a low cost. Some

by Edward Feitzinger and Hau L. Lee

companies in such industries as apparel, paint, andconsumer electronics have had similar success:they have dramatically increased their product va-riety, slashed the time they require to fulfill cus-tomers' orders, and reduced costs. Other companieshave not; they have mass-customized only to seetheir costs soar out of control.

The key to mass-customizing effectively is post-poning the task of differentiating a product for aspecific customer until the latest possible point inthe supply network (a company's supply, manufac-turing, and distribution chain). Instead of takinga piecemeal approach, companies must rethink and

116 PHOTO BY TONY RINALDO

integrate the de-signs of their prod-ucts, the processesused to make and

deliver those products, and the configu-ration of the entire supply network. Byadopting such a comprehensive approach,companies can operate at maximum effi-ciency and quickly meet customers' orderswith a minimum amount of inventory.

Three organizational-design principlestogether form the hasic building blocks ofan effective mass-customization program:

D A product should be designed so it consists of in-dependent modules that can be assembled into dif-ferent forms of the produet easily and inexpensively.D Manufacturing processes should be designed sothat they, too, consist of independent modules thatcan be moved or rearranged easily to support differ-ent distribution-network designs,D The supply network-the positioning of invento-ry and the location, number, and structure of manu-facturing and distribution facilities-should be de-signed to provide two capabilities. First, it must beable to supply the basic product to the facilities per-forming the customization in a cost-effective man-ner. Second, it must have the flexibility and the re-sponsiveness to take individual customers' ordersand deliver the finished, eustomized goods quickly.

Modular Product DesignA product with a modular design provides a sup-

ply network with the flexibility that it requires tocustomize a product quickly and inexpensively.

Hewlett-Packard:

ture different modules at the same time, whichsignificantly shortens the total time required forproduction. Third, a company can more easily diag-nose production problems and isolate potentialquality problems.

Consider a component that is not standardized: adedicated power supply, or a power supply tbat can-not automatically convert voltage. In the globalelectronics market, building a dedicated power sup-ply into a product in the first stages of productionforces a manufacturer to commit to the product'scountry of destination. If a company has a long pro-duction process or delivery time from factory toend consumer, having this kind of power supplymakes it difficult to mass-customize efficiently.But a company could standardize components, de-signing or purehasing a single power supply thatwould work across an entire product family or, ide-ally, across many product families. Alternatively,the company could postpone the assembly of thepower supply until a later point in the productionprocess. Either approach would result in greaterflexibility and lower costs.

HP has successfully implemented a standardiza-tion strategy for the LaserJet printer tbat it sellsin Europe and North America. A partner in Japanmakes the printer's core engine, which then isshipped hy sea to the two markets. Before HP andits partner designed tbe LaserJet for mass cus-tomization, the printer had a dedicated power sup-ply of 110 volts and 220 volts, which forced thecompany to differentiate it hy end-customer mar-ket as soon as production hegan in Japan. Under theimproved design, a power supply that works in allcountries is huilt into the product. This universal

power supply allows HP to ship productsfrom one continent to another when a sig-nificant imhalance of supply and demandexists between the two regions. As a result

The Pov/er of PostponementSuch a designseparates thecompositionof end prod-ucts into parts or subassemblies, some of which arecommon to all product options, others of which arenot. A modular product design has three henefits.First, a company can maximize the number of stan-dard components it uses in all forms of the product,assemble those components for all product optionsin the earlier stages of the assembly process, andpostpone the addition of the components that dif-ferentiate the product until the later stages of theprocess. Second, a company can make the modulesof the product separately; in fact, it can manufac-

HARVARD BUSINESS REVIEW Ianuary-February 1997

of Standardizing the LaserJet, HP was able to re-duce the total costs of manufacturing, stocking,and delivering the finished product to the customerby 5% peryear.

Edward Feitzinger is a process-technology manager atthe Hewlett-Packard Company's strategic planning andmodeling unit in Palo Alto, California. Hau L. Lee is aprofessor of industrial engineering and engineering man-agement and the director of the Stanford Global Sup-ply Chain Management Center at Stanford Universityin Palo Alto.

117

Customization Costs Drop v/\\h theGeneric DeskJet Printer

Manufacturing costs

Freight and duty costs

Factory inventory costs

Distribution center andtronsit inventory costs

< B

Factory Distribution center

Where customization occurs

HP decided to take a different approach to cus-tomizing its DeskJet printers for the European andAsian markets. The company opted to customizethe printers at its local distrihution centers ratherthan at its factories. For example, instead of cus-tomizing the DeskJets at its factory in Singaporehefore shipping them to Europe, HP has its Euro-pean distrihution center near Stuttgart, Germany,perform this job. The company therefore designedthe printer with a country-specific external powersupply that the customer plugs in when setting upthe printer. The distribution center not only cus-tomizes the product hut also purchases the materi-als that differentiate it (the power supphes, pack-aging, and manuals). As a result of this redesign,manufacturing costs are slightly higher than whenthe factories customized the printers, but the to-tal manufacturing, shipping, and inventory costsdropped by 25%. (See the chart "Cus-tomization Costs Drop with the Gen-eric DeskJet Printer.")

Because the use of standardizedcomponents to support mass cus- 'tomization may increase the costof materials, companies must care-fully assess whether the benefits ofstandardization outweigh the addedcosts. HP learned that the value of common compo-nents depends on the uncertainty in product de-mand across its geographical markets, the lead timeto replenish its stocks of parts, the length of theproduct's life cycle, and the cost of shipping the fin-ished product. As uncertainty, lead time, and in-ventory and stock-out costs increase, so do the hen-efits of standardization. HP found that forecasting

the mix of options that customers want is most dif-ficult at the beginning and end of a product's lifecycle. Shorter life cycles, in particular, increase un-certainty and thus the benefits of standardization.

Making decisions like these is not easy. It in-volves people from at least five areas of a company:marketing, research and development, manufactur-ing, distribution, and finance. These five groupsmust play the following roles to support an effec-tive mass-customization program:n Marketing must determine the extent to whichmass customization is needed to fulfill customers'requirements.n Research and development must redesign theproduct so that it can be customized at the most ef-ficient point in the supply network.D Manufacturing and distribution must coordinateboth the supply and the redesign of materials andsituate manufacturing processes in the most effi-cient locations.a Finance must provide activity-based cost infor-mation and financial analyses of the alternatives.

Each group at any company bas its own measuresof performance. At HP, marketing is evaluated onrevenue growth, R&D on a product's functionalityand the cost of its components, and manufacturingand distribution on the cost of assembling and de-livering a product to the customer. The differentmeasures focus the groups on different objectives:marketing wants to offer as many product optionsas possible to attract more customers, R&D wantsto offer the product with the greatest possible func-tionality at the lowest possihle cost, and manufac-turing and distribution want to make one productat a stable volume.

If the groups are not properly coordinated, theirattempts to optimize their own performance mayhurt the company's ability to create the most cffi-

Clashing priorities makeit hard to create the

most efficient supply network.

cient supply network that can deliver a customizedproduct at the lowest cost. Therefore, negotiationsamong these groups are critical. At HP, the basis fornegotiations is an analysis of the supply networkthat numerically represents all of the groups' per-spectives and comes up with the best result for thecompany. In one instance, designers initially balkedat creating a generic DeskJet printer for both Mac

118 HARVARD BUSINESS REVIEW lanuary-February 1997

THE POWER OF POSTPONEMENT

and DOS users, because doing so would add to thecost of materials needed to make the product. (Theother option was continuing to produce two dis-tinct ink-jet printers.) The division conducted ananalysis that compared a generic printer's highercost of materials with its lower inventory costs. Itfound that although the cost of materials would in-crease, required inventories would drop hy 50%.(See the chart "Required Inventories Drop with theGeneric DeskJet Printer.") In addition, the genericprinter would enahle computer resellers and retail-ers to stock one model instead of two. This lasthenefit had a significant impact: a major retailerelected to sell HP's generic DeskJet in large part he-cause servicing both Mac and DOS customers withthe same stock of printers would reduce inventorycosts, shelf space, and associated overhead.

Modular Process Design

Breaking down the production process into in-dependent subprocesses provides companies withthe kind of flexibility that effective mass cus-tomization requires. Such an approach is based onthree principles: process postponement, process re-sequencing, and process standardization.

The way neighhorhood hardware and paint storesmateh paint colors on their premises is a good ex-ample of process postponement. Instead of makinga broad range of different paints to meet customers'specific requirements, factories make generic paintand a variety of color pigments, which hardwareand paint stores stock. The stores use a chromato-graph to analyze a customer's paint sample and todetermine the paint-and-pigment mixture that willmatch it. This innovative process provides cus-tomers with a virtually unlimited number of con-sistent choices and, at the same time, significantlyreduces the inventory of paint that stores need tostock in order to match every customer's desiredcolor on demand. The key to postponement wasseparating the paint-production process into twosuhprocesses-the production of the paint and themixing of the pigment and paint-and creating alow-cost chromatograph.

A modular process design also offers advantagesin the retail apparel industry. Most department-store outlets sell finished clothing with little or noprovision for customizing it to fit the customer'sbody and taste. Most cloth is dyed, cut, and sewn topredetermined dimensions, making low-eost masscustomization difficult if not impossihle. (Tailoredclothing is usually quite expensive.) An emergingtechnology in the fashion industry, however, effec-tively splits the production process into two modu-

HARVARD BUSINESS REVIEW lanuiiry-February 1997

lar subprocesses: tbe body-measurement processand the cut-and-sew process. A device uses com-puter and optical technology to take a customer'smeasurements at the store, much as a tailor does.The computer then sends the measurements to theclothing vendor, which cuts and sews the garmentwithin 48 hours. The result is a completely cus-tomized garment that costs about the same as anoff-the-shelf item.

Although the retail outlet has to buy and main-tain tbe measuring device, it can significantly im-prove sales per square foot with the purchase. Theoutlet needs to hold only samples of a specific gar-ment instead of stock in all sizes and colors. Andend-of-season discounts that retailers have to offerto clear out unsold goods become unnecessary. Giv-en tbe fact that a clothing retailer typically obtainsfull price for only 50% to 60% of its clothing inven-tory, eliminating such discounts can lead to a sub-stantial improvement in profits. In addition, themodular process design greatly reduces clothingmanufacturers' inventory risks. Instead of stockinghigh-cost finished goods that may or may not sell,manufacturers can stock relatively low-cost rawfabrics that are turned into finished products onlyin response to actual orders.

Once a company has divided the overall opera-tional process into modular suhprocesses, it canconsider resequencing the subprocesses. Benettondid just that in its sweater-manufaeturing opera-tions. Instead of first dyeing the yarn into differentcolors and then knitting it into finished garments,Benetton changed the order of the dyeing and knit-ting subprocesses. Tbe company dyed the uncol-ored sweaters either when it received an order orwhen it had a hetter idea of consumers' color tastesfor that season. By rearranging the subprocesses,Benetton effectively postponed the point of productdifferentiation and thereby saved millions of dol-lars in charges for obsolete inventory.

Required Inventories Drop with theGeneric DeskJet Printer

tory

5

> c.c 0)iZ '-'O CV) O

_ ^ —<D 3

Tota

l wat

dis

tri

' i . . . ^

Distinct Mac and Generic printerDOS printers

119

THE POWER OF POSTPONEMENT

Standardizing earlier portions of the productionprocess and postponing differentiation help im-prove the flexihility of the supply network. Consid-er HP's disk-drive division, whieh supplied AT&T,NeXX and HP with disk drives. It originally hadtrouble matching supply with demand hecause itscustomers often revised their orders at the lastminute, and its processes for testing disk drivesmade it difficult to aeeommodate those revisions.Under the old approach, the division inserted aprinted eireuit hoard prior to the lengthy testprocess. Each customer, however, usually requireda distinct circuit hoard. As a result, onee a boardwas inserted, the disk drive could be sold only tothat customer.

The division then found a way to eonduct most ofthe test process without inserting the final cus-

Hewlett-Packard's distributioncenters can deliver highlycustomized PCs moicheaply than competitors can.tomer-specific board. It separated the test processinto two subprocesses: the standard tests requiredfor all end products and the eustomized tests spe-cific to individual end products. The division ranall its disk drives through the standardized testprocess, then stocked the generic units until an or-der arrived. When it received an order, it added thecircuit board that the customer required, performedthe customized tests, and shipped the product. Bysuccessfully postponing the point of product differ-entiation, this approach greatly enhanced the divi-sion's flexihility and substantially lowered its in-ventory costs. HP recently closed the division forother business reasons, hut it still considers the di-vision's use of postponement a best praetice.

Agile Supply Networks

Determining the optimum number and locationof factories and distrihution centers is a eomplexdecision. It requires balancing such factors as re-sponse time to a customer's order, the marketingvalue of maintaining a local manufacturing pres-ence, local-content rules, duties, transportationtime and costs, local labor and occupancy costs, andthe replication of fixed assets. Centralized distribu-tion networks-using one depot or warehouse to

serve multiple regions-typically offer the advan-tage of low costs. Decentralized networks, how-ever, often allow a business to offer eustomersimproved service. By rethinking the design of thesupply network when redesigning products andprocesses for mass customization, a company canoptimize costs and provide fast, effective service.

For example, a company with many product op-tions benefits little from having many distributioncenters around the world if those centers performonly the tasks of warehousing and distribution. Theinvestments in inventory required to support allthe options would be enormous. The economicschange radically, however, if a company redesignsits products and processes into modules so that thefinal customization steps take place on reeeipt of acustomer's order. It then becomes cost effective to

have more distribution centers, eachof which stocks basic products andperforms the final steps in the cus-tomization process.

In addition, having distribution.. , -. centers perform such light manufac-

CfUlCK.lv a n d turing can help a company both com-^ '^ ply with the loeal-content rules that

are prevalent in emerging marketsand respond to customers who areunwilling to wait six weeks for a cus-

tomized product to be shipped from a factory in an-other region. In this way, a company enjoys the bestof hoth worlds: on the one hand, it can concentrateits manufacturing of critical parts in a few sitesaround the world so that it can achieve economiesof scale; on the other hand, it can maintain a localmanufacturing presence.

HP's success in personal computers demon-strates the power of integrating the designs of prod-ucts, processes, and supply networks. Today's desk-top personal computer is a highly customizedproduct-some manufacturers offer thousands ofdifferent permutations to their customers. The PCconsists of industry-standard, pretested compo-nents. Its product design is among the most modu-lar in the electronics industry. Its productionprocess also is extremely modular: a manufacturerhas many different choices of how and where tobuild PCs.

Following the assembly and distrihution modelsthat prevailed in the PC industry in 1994, mostmanufacturers built produet to stock. Problems as-sociated with stocking the right mix of products tomatch customers' demands plagued the system; in-ventory write-offs and clearance sales to get rid ofproducts at the end of their model lives oecurredfrequently.

120 HARVARD BUSINESS REVIEW January-February 19y7

In early 1994, HP conducted an analysis of its PCmanufacturing and distribution strategies. Ana-lysts discovered that the modular structure of theproduct and the production process would allowthe company to postpone all steps of the PC's finalassembly (integrating the PC hoard, processor,chassis, power supply, storage devices, and soft-ware). HP's distribution network then could huildthe product in locations close to customers only inresponse to their orders. In this way, the companywould save on transportation and duty costs andgreatly increase its return on assets. Abandoning itsprevious practice of stocking finished goods or par-tially completed units, HP implemented a huild-to-order approach at all its distribution centers in early1995. A Compaq executive lamented in the tradepress that HP was "light-years ahead of the compe-

tition" in its ability to deliver products quickly andat a low cost. As a result of its new strategy, HP didin fact deliver a highly customized product morequickly and cheaply than its competitors could.

Many of the success stories we have descrihed re-sulted from the collaborative efforts of manufactur-ing, engineering, distribution, and marketing orga-nizations within and, in some cases, outside HP.These successes show that tnass customizationdoes not have to he a financially risky strategy. Bycarefully applying the set of design principles wehave outlined, companies can mass-customize at alow cost. They no longer have to choose betweensatisfying their customers and increasing their prof-it margins. ^Reprint 97101 To oider reprints, see the Ust page of this issue.

"I'U go get him. He's on the net.

CARTOON BY S. GROSS 121