Electronic Commerce

The focus of this paper is to discuss advantages and disadvantages of mass customisation of manufactured products. Additionally, the extent that E-commerce organisations are able to deliver mass customisation is also examined.

In many industry sectors, supply currently exceeds demand. Customers today wield considerable power and enjoy overwhelming choices of vendors. Consequently, customers can no longer be treated the same, but is increasingly segmented. Segmentation taken to the extreme caters to the individual customer's taste and needs for unique products and services.

Products such as fashion apparel, beauty care, shoes, bicycle, personal computer, communications components, mobile phones and commercial vehicles are highly suited for customisation. Digital products such as on-line news, magazines, journals, information databases, search engines, portals, music, video streaming can be readily customised for the individual customer.

Dell Computer has demonstrated the efficiencies of mass customisation and e-business. This PC maker revolutionized the computer industry by offering increased product variety. Customers can configure their personal computers by choosing from a menu of items pertaining to processor speed, memory, hard disk size, graphics cards, etc. with each option individually priced. Paradoxically, Dell Computer has managed to offer variety, but yet achieves the lowest cost of production of the entire industry. Its comparative advantage comes from leveraging the benefits of e-commerce and mass customisation in selling direct to the customers.

According to Piller et al. (2001), mass customization involves producing goods or services for a relatively large market that exactly meets the needs of every individual customer with regards to product characteristics at cost roughly corresponding to those of standard mass produced goods.

Tseng and Jiao (1998) proposed the three requirements of mass customisation are time to market (quick responsiveness), variety (customisation), and economies of scale (mass efficiency).

Professor Oren Harari (1997) states that competitive advantage in the emerging knowledge-based economy no longer depends on mass production, mass marketing, mass distribution, uniform policies and economies of scale. The key to business success lies in addressing each individual customer's unique idiosyncrasies.

Piller et al. (2001) pointed out that the concept of mass customisation has been discussed in literature since the late 1980s. However, practical implementation of this strategy in business only surfaced in recent years due to the developments of few key technologies.

Gradual improvements in manufacturing technology such as computer-aided design (CAD) and computer-aided manufacturing (CAM) and the extensive industrial automation have increased the efficiency and the flexibility of the modern factory.

More importantly, the technology to handle the increased flow of information from customers to manufacturer has somewhat mature recently. Previously, customised solutions to this information problem using EDI were too expensive, not very reliable and often limited to selected B2B customers only. The advent of the internet and intranet, with its low-cost and proven communication technologies, has greatly reduced the cost of acquiring information directly from customers and communicating it to manufacturing facilities and suppliers.

Electronic Resource Planning (ERP) is an information tool that utilise advances in computing and networking technologies to automate the tasks from the receipt of customer order, manufacture of products, shipping, billing and after-sales services. This innovation of the Mass Production age extends its reach across the entire value chain of the organisation. ERP also provides information links to the organisation's suppliers and intermediaries.

Having the right technological tools is insufficient to guarantee success. Mass customisation is a new paradigm that warrants extensive re-engineering of the organisation's work processes across its entire value chain. There is also a need to understand customers' behaviour, their tastes and preferences and the prevalent culture affecting them.

McLaughlin (1996) advocates the modularization of internal business processes. Processes must be standardized so that it can meet segments and aspects of potential customers' needs. This requires intimate knowledge of the organisation's internal processes as well as insights into the varied needs of its customers.

Mass customization will affect the workflow system in the manufacturing plant. Tam et al. (2003) suggest that a re-configurable workflow system that is based on standardised product definition scheme. This would enabled rapid product development based on customers' specifications.

Jiao and Tseng (2000) propose an ingenious strategy to handle the design complexity arising from the numerous product variations. Each family of products should have an underlying architecture or a common product design platform. Starting with this common platform, various product variants can be derived. In other words, a generic architecture is developed to capture and utilize commonality within the product variants.

When considering the economy as a whole, mass customisation utilise resources more efficiently than mass production. Unwanted and obsolete products, which are waste to our limited resources, are eliminated. Applying the concept of "build to order", no goods are actually made until a buyer is found.

Anderson (2003) postulates that widespread acceptance of mass customisation and "build-to-order" strategy has the potential of changing world trade patterns. In the never-ending bid to lower cost, mass production manufacturers frequently outsourced production of goods to distant developing countries with lower labour cost. Meanwhile, knowledge-based jobs such as strategic planning, basic research and product design are kept at home. Hence, developing countries often complain that despite the presence of modern manufacturing plants, transfer of critical technology to the indigenous workforce is slow. Workers in developed countries constantly worry of the migration of jobs overseas.

As mass customization incorporating "build-to-order" requires a very short lead time from the receipt of the customer's order to the delivery of the product, speedy response and perfect coordination of the entire value chain is vital. Therefore, it would be sensible for the company's functional departments such as procurement, manufacture, assembly and logistics to be localised to be near the customer.

Blue-collar workers in developed countries will benefit as more jobs return home. Manufacturers wanting to sell to large populations of developing countries will have ensured that their local subsidiaries are able to independently meet the needs of that market. Therefore, developing economies will also benefit as more knowledge-based jobs moved to their countries.

Anderson (2002) pointed out that there are many mass production based companies that offer hundreds or thousands product variations in their catalogues. This is to cater to the effects of local culture and government regulations that exist in each country. Additionally, due to increased competition and weaker demand in the broader market, companies are forced to compete in niche markets. Maintaining this variety slows down mass production and warehousing operations and makes them less efficient. Maintaining inventory of the full range of products is necessary to avoid "out-of-stock" situation. However, the drawbacks are the high cost of warehousing, working capital tied up as inventories and the risk of unsold products becoming obsolete.
By adopting mass customization and "build to order" strategies, products are only manufactured when a customer order is received. As nothing is produced until an order is received, there are huge savings to be reaped by eliminating inventories of unsold goods, goods in process and raw materials. In the case of Dell, payment is collected upfront when the customised order is received. Therefore, the company's cash flow position improves and financial risk is reduced.

However, up-front payment may not be an option for every industry as the competitive forces may force the company to collect payment upon or after delivery of the product. If this is the case, the mass customiser will bear higher risks as rejected customised products are more difficult to re-sell.

Tseng and Jiao (1996) pointed out that in high volume production; mass production shows an advantage due to the economy of scale. However, in low to medium volume production, where production quantity cannot justify and leverage the capital investment, customers are otherwise willing to pay more because their special needs are satisfied. Consequently, small and medium enterprises, that have difficulty achieving economy of scale, have the most to gain from mass customisation.

According to Gilmore and Pine (1997b), mass customisation automatically turns a good into a service. The intangible service is to help the customer figure out what they want and to satisfy that want. The offering of product-service package prevents the product from falling into the commodity trap. In the commodity trap, manufacturers are forced to compete solely on price as they fail to differentiate themselves sufficiently.

As competition intensifies in the broader market, niche markets offer opportunities for growth. Niche products generally offer better margins and have significantly less competition. When structured for mass customisation, the organisation can profit from niche markets. Having economies of scale due to the higher volumes of production, but with no significant costs for offering variety, the organisation has comparative advantage over other smaller niche market manufacturers.

In taking a customer order, intimate information about the customer's preferences is collected thus generating a profile of the customer. By maintaining profiles of all customers in a database, the company is able to design a "customised marketing" strategy for each individual customer. More importantly, knowledge of the customer's profile allows the company to better manage the relationship it has with the customer. An effective CRM system automates the entire process thus reducing cost.

A major concern of customers is whether there would be higher prices for customised product. The following reasons seem to show that in the short to medium term, pricing would likely be higher than mass produced goods. In the longer term, when mass customisers compete among themselves, prices are expected to fall.

A key disadvantage of customised goods is the difficulty in comparing between vendors. It is highly improbable that vendors would offer the same options for their goods. Therefore, some benefits of sharing information between customers are lost. Consequently, the lack of comparison and competition may result in higher prices for customised products compared to mass-produce ones.

Vendors are likely to adopt value-based pricing rather then cost-based pricing. In value-based pricing, price of each feature is set based on the perceived value the customer placed on the feature. In cost-based pricing, the price is set based on the actual cost of production plus an acceptable margin. However, this disadvantage to the customer is an advantage to the manufacturer who gains a higher margin on customised product.
As the customer is given multiple choices product configuration, identifying the actual cost of the customized product may prove difficult. When the number of product options increases, so does the complexity of cost estimation. To diffuse the risk of under costing, manufacturers may impose higher margins on all features of the products.

Lack of product knowledge by some customers may result in wrong configuration and unwanted products. There is also increased uncertainty about the performance of the customised product due to lack of comparison. Learning how to configure the products is an additional transactional cost.

Intrusion into the privacy of customers can be a major concern. Personal information is extracted during product configuration stage and tabulated in database and e-mailing list. The information is then sold to other vendors without prior consent of the customers.

Kotha (1994) said that mass customisation has drawn criticism as having the look and feel of a revolutionary paradigm, but without a coherent framework in its implementation. Although there is substantial research into the subject, there are very few actual successful organisations that a working framework can be modelled.

A key problem of mass customisation is deciding on the customisation options to offer to the customers. Gilmore and Pine (1997a) warned that customisation options should be restricted to dimensions where customers differ in needs or desires in order to avoid wasteful efforts. Another difficulty is to gauge the amount that the customer is willing to pay for a particular feature.

Mass production organisations contemplating mass customisation face the daunting task of changing their organisational structure and culture. When implemented wrongly, factory productivity and capacity planning can be seriously affected. The complexity of supporting multiple product variants can result in increased cost due to lower worker output, higher machinery cost, increased handling and tracking as well as higher inventories of goods in process and finished goods. Other concerns are constant re-training needs, production delays and product quality issues.

Substantial investment in information technology is required to create the close integration between all links of the organisation's value chain and external suppliers and intermediaries. As information technology becomes obsolete fairly quick, maintaining the information infrastructure can be a significant on-going cost.

The close integration between the organisation and its suppliers has another negative aspect to it. To achieve operational efficiency, the organisation has to increase its dependence on a few suppliers. Therefore, these suppliers are not easily substituted. Any crisis troubling these suppliers will affect the performance of the organisation. Additionally, suppliers may raise prices, as there is a lack of competitive forces.

The cost advantage of selling direct to the customers is undeniable. However, the e-commerce organisation faces a formidable task of building up a strong Internet presence. The spectacular failures of dotcoms serve to illustrate the high cost and high risk involved in doing business on the Internet. A substantial amount of dotcom investment goes into staffs' salaries as programmers and web specialists do not come cheap. These investments are not recoverable at all upon failure. Physical assets such as web servers are often sold off way below their initial purchase prices.

Fiore et al. (2001) warn that mass customisation increases complexity and costs for a company because a wider variety of products need to be produced, customer services have to be enhanced and unique retail experiences must be created to meet the various desires of the fragmented market.

Manufacturing for mass customization introduces multiple dimensions, including a drastic increase in variety, multiple product types manufactured simultaneously in small batches, product mixes that change dynamically to accommodate the random arrival of orders and the wide spread of due dates, and throughput that is minimally affected by transient disruptions in manufacturing processes such as breakdown of individual workstations.

Niche market players, whose strategy is to focus on small segment of the market, will be the biggest losers. Mass customisation organisations are able to enter all segments of the market, at mass production pricing. Niche market manufacturers that do not change will not survive. Ultimately, we may have a monopolistic situation, where the market is dominated by a few super efficient mass customisation organisations.

Reichwald et al.'s research revealed information as the critical success factor for mass customisation. Successful implementation requires integration of the information flow to all phases of the value chain. Therefore, e-commerce organisations reaping the benefits of the Internet, is the most likely to succeed in mass customisation. By dealing directly with the customer and cutting out intermediaries, e-commerce organisation has lowered the transaction cost as well increasing operational efficiency.

E-commerce on the Internet is the only viable channel in which an organisation can communicate effectively with each of its customers on an individual basis. Additionally, e-commerce automates the massive flow of information from the customer right down the value chain.

Information collected in not limited to the specifications of the ordered product, but includes personal information such address, e-mail address, vocation, interests, hobbies, product preferences, shopping habits, annual income, etc.

In order to implement build to order with shortest possible lead time, an e-commerce organisation has to be closely integrated with their suppliers and intermediaries. Information of the product ordered is channelled simultaneously to computerised systems in manufacturing, finance, logistics and also external suppliers for immediate action.

Personal information about the customer is streamed into the CRM database for analysis and classification. Based on the profile generated in the CRM database, the whole customer's experience such as customised web interface, e-mailed newsletters and telephone calls can be moulded to appeal to his individual taste. The use of customised marketing strategy increases the likelihood of repeat business and strengthens the relationship with the customer.

Reflect.com, which is backed by Proctor & Gamble, is a good example of how an organisation can leverage its presence to strengthen customer relations. Reflect.com customers answer a lengthy questionnaire about preferences regarding colour, scent, makeup, hair care, and more. The company uses this information to develop customized makeup, perfume, and hair-care and skin-care products, which are then shipped directly to the customer. To individualise the relationship with the customer, Reflect.com utilises information each customer provides to implement segmented e-mail marketing and real-time personalisation of the website. Highly personalised e-mail newsletters are sent to its customers. Additionally, when accessing Reflect.com, each customer is targeted with different information and products depending on their preferences.

The organisation websites can provide data for market research. Information about customer behaviour and product preferences enables R & D to develop sellable products.

Piller and Moslein (2002) said that mass customisation has the affect of integrating the customer into the value chain. Customer integration and interaction takes place when they participate in the product configuration stage. This process leads to increase customer loyalty to the organisation. However, customer integration and interaction is only possible due to the low transaction cost due e-commerce technologies. In traditional retail environment, the cost to allow customer configuration of the product will be prohibitively high.

The configuration or design of the customised product by the customer is a complicated procedure. Additionally, some customers may not be knowledgeable about the product, or they may not have a clear idea of what they want or need. However, a well-designed web interface must simplify this process and also educate the customers as well.

As an example, Nike's used a comprehensive web-based application named Nike iD Configurator to help customers customise their Nike iD personalised gear. Other than just helping the customer design his sneakers, the program also learn about the preferences of the customer. This information can be used to target the customer using segmented marketing strategy. The drawback, which is even acknowledge by Nike website, is that it can take quite a long time to download the configurator program.

Design information such as images, catalogues, product specifications and CAD/CAM drawings can be transmitted directly to customers' home computers. User-friendly web interface guides the customer step by step through the selection of features. In some case, a visual representation of the customised product can be displayed on the computer screen.

Barriers of geography or time do not hamper e-commerce organisations. Business can be conducted on the Internet from anywhere and at any time. For a comparatively low capital investment such as setting up a distribution centre, e-commerce organisation can move into a new region.

Mass customisation is poised to change the way business is conducted. The advantages to the economy is that there will be more efficient utilisation of resources. It may also lead to a more equitable distribution of jobs globally. Manufacturers adopting mass customisation will be more flexible and be more adept at satisfying the customer's changing needs. Due to direct interactions with the customers, manufacturers will have every opportunity to cultivate strong and loyal relationship with their customers. Manufacturers will also acquire the capability to penetrate smaller niches markets. The customer gains by having very personalised goods and services at an affordable price. There is also the stimulating experience of participating in the design of the product.

The main drawback to the customer is that of slightly higher prices compared to mass-produced goods. Presently there are very few vendors of mass customised goods. There is also no uniformity in terms of features offered by different vendors. Therefore, comparison of prices and information between customers are difficult. Manufacturers contemplating mass customisation face a daunting challenge of changing their organisational mindset, culture and structure.

E-commerce reduces the transaction cost of dealing directly with the customers. Information received from the customers can be automatically channelled to the entire organisation's value chain, including suppliers. A lesser known benefit of e-commerce is that it integrates the customer himself into the value chain. By participating in the configuration and the design of the product, customer loyalty is increased. The used of automated web applications simplifies the product configuration process. E-commerce also automates the management of customer relationship. In all their encounters with the organisation, customer are treated as individuals with due respect paid to their tastes and preferences.

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