New article: How BTO can Help Design Half-Cost Products
by Dr. David M. Anderson, P.E., CMC
Copyright © 2018 by David M. Anderson
Build-to-Order and Mass Customization have unique abilities to generate significant growth in four ways:1
(A) expansion of standard product sales
(B) niche market derivatives of standard products
(C) mass-customized products
(D) maintaining sales to existing customers by avoiding the commodity trap
Build-to-Order and Mass Customization are taught through Dr. Anderson's in-house BTO seminars and implemented through his leading-edge BTO consulting.
A. EXPANSION OF STANDARD PRODUCT SALES. Mass customization enables growth by expanding the sales of existing standard products to allow manufacturers to efficiently process smaller orders of compatible products. This is the "build-to-order" aspect of mass customization that enables the quick and efficient manufacture of standard products in any order quantity, even as low as one.
The flip side is that if companies don’t use an effective growth strategy, like mass customization, then growth pressures will push them to "take all orders." Expanding sales by "dipping lower into the barrel" for low-volume, unusual, or marginal products may appear to satisfy growth goals, at least for a while, but in reality, it will have four unpleasant effects:
Consequence #1: Marginal products usually have marginal or negative profits, thus lowering enterprise profitability. This is hard to realize since the vast majority of cost systems are totally inadequate at quantifying true profitability at an individual product basis.
Consequence #2. Bringing in many more low-volume, unusual products will raise overhead demands and thus overhead costs. Again, conventional cost systems fail to measure all the overhead costs inherent in the manufacture of unusual, low-volume products.
Consequence #3. This will, in turn, raise the overhead charges on the cash cows which will either make them less profitable (at the same price) or less competitive (at a higher price).
Consequence #4. Changing setups more frequent for low-volume products will slow production and deliveries of all products including the cash-cows. Plus, the increase in fire-drills need to produce the unusual products may draw attention away from standard products and possibly lower their quality.
By contrast, the product portfolio planning aspect of mass customization encourages focus of all resources on the most promising products that can grow the most, rather than diluting focus over all product.
(B) NICHE MARKET GROWTH. Mass customization can open new markets for niche market derivatives of standard products. Niche markets offer a significant growth opportunity for the mass-customizer because many niche markets are really just many "variations-of-a-theme" which mass customization can handle quickly and efficiently. However, attempting an expansion into niche markets with batch-oriented mass production factories will have all the problems of bringing in many low-volume products mentioned above. Even if margins are really satisfactory, costs are bound to be higher than projected (consequences 2), good products will subsidize the losers (consequence 3) and other production will be disrupted (consequence 4).
(C) NEW MARKETS FOR CUSTOMIZED PRODUCTS. Custom products offer significant growth opportunities for new markets. These may be (1) entirely new markets or (2) may replace current customer solutions that are slow and expensive.
(1) For new markets, mass-customized capabilities can enable manufacturers to be the first to offer mass-customized products with the obvious potential for early market domination. Higher sales will result when customized products satisfy customers better than the current customer choices, which may not be optimal in all respects.
(2) Mass-customized products that replace current customization practices have a huge potential for growth and profits, since the existing customizations are currently so sub-optimal, either coming from craft-based local suppliers or inefficient activities in customers’ factories or not-so-savvy suppliers. Mass-customized products have the dual benefit that they can be made much more efficiently and provide great value to customers by avoiding the cost, delays, and quality problems of their current practices. Thus, mass customized products offer high value to the customer at a low production cost to the manufacturer: this is a recipe for high profits and growth.
One note of caution on customized products. Sometimes mass production companies try to achieve growth by expanding into custom products with the following consequences: Costs often exceed revenues because (a) development costs are higher than expected on custom products if engineering is dealing with them on a ad hoc basis instead of through parametric templates where customer input is entered and product and process variables are automatically processed and sent to the factory, and (b) production costs often exceed projections because of the inefficiencies dealing with unusual and unfamiliar, not to mention troublesome, products and procedures. (c) The resulting losses must be paid for by cash-cow products, thus degrading their profitability or competitiveness. Such subsidies are common in most custom product programs. (d) Factory operations are disrupted by all of the above resulting in delays and possible quality problems on not only the custom products but standard products as well.
D. AVOIDING COMMODITY STATUS. Part of any growth strategy is to avoid situations in which growth programs will have to "swim upstream" to compensate for lost sales to existing customers as products fall into the commodity trap. The internet is enabling bidding to go on-line which will drive down prices, and probably profits, and allow industrial customers to easily switch suppliers. An ominous quote on the editorial page (p. 278) of the August 28 Business Week, in summarizing the issue’s focus on the 21st century corporation, predicts that the internet will commoditize all products:
" ‘Everything gets cheaper forever,’ according to John Chambers, CEO of Cisco Systems. The Net destroys corporate pricing power. It allows customers, suppliers, and partners to compare prices from 100 or 1000 sources, not just two or three, and erases market inefficiencies. It rapidly commoditizes all that is new, reducing prices fast. It quickly bids down prices toward marginal cost."
This kind of commoditization is a real danger in the many industries. Because of this, many legendary companies have exited the very markets they founded.
However, mass customization can differentiate products and avoid commodity status by providing the following:
1) Lower prices to customers by lowering all costs, including setup, inventory, and all other overhead costs.
2) Faster delivery approaching almost instantaneous response to customer "pull signals" in support of their programs to build mass-customized or standard products to-order. Ultimately, this may even manifest as supplier production lines in a customers facility, which would have the effect of locking in the customer.
3) 100% order-fulfilment rate by building products on-demand instead of shipping from forecasted inventory, thus eliminating out-of-stocks and expediting.
4) Development of supplier partnerships to optimize customers’ competitive positions, promote standardization, lower customers’ costs, and implement mass customization and spontaneous build-to-order throughout the supply chain. The value of these relationships to customers is far more important than any savings that come from the less effective approach of treating supplies as commodities and going with the low-bidder. Supplier partnerships are "learning relationships" that satisfy customers better with every transaction thus strengthening these relationships to keep customers forever. This, in turn, locks in customers since they will be several generations ahead with the mass-customizer than with any competitor.
1. David M. Anderson, "Build-to-Order & Mass Customization, the Ultimate Supply Chain and Lean Manufacturing Strategy for Low-Cost On-Demand Production without Forecasts or Inventory," (2004, 520 pages, CIM Press,1-805-924-0200; www.build-to-order-consulting.com/books.htm), Chapter 14, "The Business Case for Build-to-Order & Mass Customization."
Dr. Anderson is a California-based consultant specializing in training and consulting on build-to-order, mass customization, lean/flow production, design for manufacturability, and cost reduction. He is the author of "Build-to-Order & Mass Customization, The Ultimate Supply Chain Management and Lean Manufacturing Strategy for Low-Cost On-Demand Production without Forecasts or Inventory" (2008, 512 pages; CIM Press, 1-805-924-0200, www.build-to-order-consulting.com/books.htm) and "Design for Manufacturability & Concurrent Engineering; How to Design for Low Cost, Design in High Quality, Design for Lean Manufacture, and Design Quickly for Fast Production" (2008, 448 pages; CIM Press, 1-805-924-0200; www.design4manufacturability.com/books.htm). He can be reached at (805) 924-0100 or email@example.com; web-site: www.build-to-order-consulting.com.
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