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Economies of Scale vs Customization


Go to solution Solved by premkumar thirunavukkarasu,

Economies of Scale is the concept where increased production leads to reduction in per unit cost as the total cost is spread over a larger number of units.

 

Customization is a strategy that modifies or builds a product or a service as per the customer requirements, which may differ from customer to customer

 

An application-oriented question on the topic along with responses can be seen below. The best answer was provided by Premkumar T.

 

Applause for all the respondents - Aritra Das Gupta, Premkumar T.

 

Also review the answer provided by Mr Venugopal R, Benchmark Six Sigma's in-house expert.

Question

Q 294. Customers want customization, companies want economies of scale. Highlight some methods by which both objectives can be realized.

 

 

Note for website visitors - Two questions are asked every week on this platform. One on Tuesday and the other on Friday.

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To before getting in to the methods of how the objectives realized in Economies of scale Vs Customization, first will understand the concept Economies of scale & Customization…

Economies of scale:

Economies of scale are cost advantages of an organization experienced when production is efficient, as costs can be spread over a larger amount of goods.

Imagine only one car is produced in a car manufacturing plant with full resources, whether profit able to realize by the organization?

Exactly you are right, there will be no profit in the above case.

The profit will be realised only when mass quantity done in a car manufacturing plant.

Thus Economies of scale will be realised when product quantity exceeds to meet the profit.

The other key aspect of Economies of scale as follows:

-      Higher production levels

-      Business size is very related to the Economies of scale

-      There are both internal & external factors related to Economies of scale

 

Following are the main reasons for Economies of scale why leads to lower per-unit costs.

i)             Specialization of labour and more integrated technology boost production volumes.

ii)            Lower per-unit costs can come from bulk orders from suppliers / market / customer base or lower cost of capital.

iii)          Spreading internal function costs across mass units produced and its leads to reduce costs.

Let’s move to the other part of the bridge, “Customization” …

In brief, Customization is defined as to make or alter to individual or personal specifications.

The background of customization starts from the early stages of human history; customization is the another symbol of pride & sophistication.

There is always space (now in the competitive market with more) for customized product in the market and leads to growth of the business.

The key aspect of customization are:

-      Continuous business

-      Comparatively satisfied customer

-      Comparatively quite individualistic manufacturing process

 

Now it’s time to conclude, how we can realize the objective of both Economies of scale vs Customization?

Ø    Flexibility in Manufacturing:

Recently a leading car manufacturer converted their line conveyor method to flexible line to meet the supply immediately according to the changes in market requirement, by adapting a flexible manufacturing system able to meet the Economies of scale & Customization.

 

Ø    The other approaches (of course still evolving) in manufacturing which meets the both sides are Micro manufacturing, hyper-local manufacturing and additive manufacturing.

 

Ø    Mass customization is the another method to meet the objective of Economies of scale & Customization, it is the process of delivering market goods and services that are modified to satisfy a specific customer's needs. This is a marketing and manufacturing technique that combines the flexibility and personalization of custom-made products resulting in low unit costs because of mass production.

 

Ø    Further take the advantage of Artificial intelligence & Machine Learning analyse the market and understand the behaviour of market strive the business approach towards the same.

 

Ø    Other suggested solution is Minimum Viable Product approach, at the early stage of launch of product keep it in minimum performing (basic requirements of mass customer) then customize based on the individual requirements.

 

Ø    Finally, ensure the Me-Factor customize the things that will add a difference to your customer in other way know what matters to your customer and the deal breakers.


Apart from all the above approaches, further add two more real life views for thought process.

Once Henry Ford indicated “Your customer doesn’t know what he required so don’t ask your customer what he wants, instead of car may his view will need a cart to add more horse for increasing the speed of travel to complete the required distance”

Steve Jobs, introduced the iPhone at a stage where there is an unexpected market by combining three machines camera, MP3 Player and a personal computer.  In simple, a visionary thinking from customer point of view.

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A decade ago most of the companies believed in mass production which simply meant that the customers did not have a lot of customised choices and had to select out of the various product produced and had very less choices.

As times have changed the marked is no more a homogenised set of people but there are various segments and each have their individual need and requirement. The manufacturers also had to adapt to this and had to customise their product so that it meets customer requirements. This however can pose a greater threat as customers requirement keeps on changing and in case if they keep on adhering to customers need they can face huge losses. As it will be extremely difficult for any manufacturer to adapt to these changing requirement so quickly.

Companies have adopted mass customisation which results in providing unique product to the customers in a seamless manner. The 4 different methods of mass customisation are as follows :-

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1.    Transparent – This is best suited for those products or commodities which predictable and can easily be understood .Often there is no need to speak to the customer and understand their needs. The manufacturer does not make a lot of changes in his products . Eg – Chemical company who supplies to industry after supplying for 2 years or multiple time the manufacturer takes a stock of the same and tries to replenish the order every week without the manufacturer ordering every time. This results in a seamless delivery model where customers requirement is understood by the suppler and his requirements are fulfilled.

2.    Collaborative – This is best suited for customers who are unable to articulate their needs which results in the manufacturer unable to produce products which caters to the Customers requirement and hence they get frustrated and stop buying the product.  In collaborative customisation there is individual dialogue with the customer who state their need which is then customised so that it fits the customers requirements . Example – An eyewear retailer develops a software where customer walks in the store and he can click his image and can virtually choose the different frames that are available and see the image without manually trying the same. This saves his time and he can make the right decision and his stated and unstated needs are fulfilled.

3.    Adaptive – in this the manufacturer provides one product where the customer can make minor customisation to suit his requirement’s. Example a manufacturer creates a chair which can be stretched or can be converted to a stool when required 

4.    Cosmetic – The changes are at a very little and it’s the same product offered to different people in different ways. Example – A manufacturer changing the size of a edible product & selling the same so that different customer buy the product based on their requirements

Most of the companies combine there approaches so that they can offer as many customisation to the customers. 

For example a paint company may offer that customers can virtually choose as to which paint he should buy by some application which allows customer to upload the house which they want to paint and choose amongst the 10000 shades that are available .This is an example of collaborative customisation. At the same time they might have Cosmetic customisation where customers can choose amongst the various paint sizes that are available.

In today’s market the manufacturer gives the freedom to the customer to customise his product so that he is able to derive value for the money spent by the customer. This results in fulfilling the customers stated and unstated needs post buying the product and thus result in increase in the company’s profitability.

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Benchmark Six Sigma Expert View by Venugopal R

Customization and Economies of Scale are apparent contradictions. Economies of scale, as the term suggests, is possible only with high volume business. Traditionally, when we think of high volumes, we associate it with standardized products. However the modern customers are looking for customized products, services and solutions, thus posing the challenge to companies to find ways of addressing this contradiction.

 

I am discussing a few examples below, seen as efforts to address both these objectives:

 

1.     Flight passengers have different needs; some would like to carry check-in luggage, some would need food, entertainment, seat preference, access to WiFi and so on. In the past all passengers in the same class used to pay the same for a set of services, whether they need it or not. In today’s world, many flight operators charge the basic fare and depending upon the need of the passenger, they charge extra. This helps the airlines to accommodate many passengers at the same time, with varying needs to a certain extent.

 

2.     A manufacturing line for a consumer product or an automobile used to be setup for a particular product type to produce large volumes of the same product type. This could result in excess inventory of a particular product. On the other hand, if we subject the production line to frequent change-overs, it will result in inefficiency. Many companies use the concept of SMED for quick and frequent changeovers to accommodate frequent change of product types. Another method is to design a flexible production line to accommodate multiple product types together. This would require necessary multi-skilling of employees as well.

 

3.     Many restaurants and fast food outlets offer the customers the facility of ‘Making your own salad’ or ‘Making your own ice cream’. They display various ingredients and allow the customers to choose the ingredients and mix them to their liking. This is another approach to attract customers with customized requirements without compromising the scale.

 

4.     BPO businesses engaged in transaction processing used to sort out different types of documents to perform mass processing doc-type wise and obtain the advantage of scale. However the customers may want multiple doc types to be processed within a window of turn-around time. In order to satisfy this requirement, these companies have started using automated data capturing methods to process data from non-standardized formats and use Machine Learning methods to automatically identify different document types and classify them. This makes it possible to process multiple doc types in single flow.

 

5.     Banks are able to handle multiple needs of customers in a single counter or ATM by using appropriate technologies and multi-skilling.

 

6.     In the context of this topic, The ‘Kanban’ pull system approach needs to be mentioned since it  compliments many of the other methods used to handle customization, by ensuring a demand driven supply and production.

 

7.     Before the advent of the modern supermarkets, customers need to pick up their items, get them weighed for right payment and packed. In today’s world, commoditization has taken over, with pre-packed items of various requirements for the customer to just pick from. The check-out counter simply has to scan the pre-fixed barcode for any item, thus improving the economy of scale along with customization!

 

8.     One of the latest technological development is the additive manufacturing (also referred as 3D printing) which greatly reduces the need for standardized raw material parts and is able to produce required volumes with quick customization.

 

The above are just a few examples. We are sure to come across numerous applications of thoughts and technology to strike the balance between Customization and Economies of scale.

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Premkumar T is the winner for this question for describing both the concepts and also providing examples of how the contradiction between economies of scale and customization can be managed.

 

Also review the answer provided by Mr Venugopal R, Benchmark Six Sigma's in-house expert. 

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