Supply Chain Frontiers issue #1. Read all articles in this issue.
The road to the customer has a second lane thanks to the Internet. In addition to conventional bricks-and-mortar outlets, on-line services have become a heavily trafficked route to market. The two channels serve different needs but they can be complimentary - providing companies understand the nature of each channel.
"The Internet brings more intimacy," said Dr. Kai Jiang, Postdoc Researcher at the MIT Center for Transportation & Logistics. Jiang co-authored an analysis of the dual-channel supply chain with Dr. Hau L Lee of Stanford University. The intimacy of on-line commerce enables buyers and sellers to personalize products, opening up the market for mass customization.
Industries where the dual approach is more prevalent have customers that are pickier about the products they buy (e.g. buyers of golf clubs), low customization costs (e.g. software), and few conventional customers that are loyal to physical outlets (e.g. buyers of personal computers), according to the analysis.
Still, companies within the same industry can have markedly different experiences of double-channel selling. Levi Strauss abandoned its plan to sell individually tailored jeans through the Internet, yet catalog company Lands' End successfully sells customized product through its web site. The analysis suggests that Lands' End is more efficient at reducing associated costs, and its catalog customers more willing to switch to on-line buying.
The paired approach is particularly effective when it harnesses the advantages of both conventional and direct channels. Companies can use the traditional model to cater for mass-market customers who do not demand multiple product variations, but prefer to receive their purchases immediately. At the same time tailored products can be delivered to more finicky customers through web-based services. That is what Intuit does. The company sells pre-packaged accounting software through popular retailing outlets such as Staples, as well as personalized versions of the product via a direct channel.
The two-track strategy also offers some significant cost advantages. By using postponement - delaying final product configuration as late as possible in the supply chain - it is possible to mass produce a generic item that can subsequently be customized for on-line customers. That way companies capture the economies of scale of traditional production methods and the high margins that usually go with personalized purchases.
But to pull off this juggling act enterprises must have an intimate knowledge of the product designs that suit each channel. Setting the right prices for respective channels also is important. A single version of a product destined for physical outlets is generally sold at a uniform price; a customized product can have multiple prices according to each variant. In mass customization, where a generic product is configured for the direct channel, companies need to determine the appropriate prices of the products in both channels.
"Whether a company should transform its supply chain into a dual channel structure depends on the demand and supply environment of the company and its industry," the analysis said. Companies also should be aware that in two-channel operations product design is an integral part of supply chain design.
The ability to blend these approaches is becoming more important as companies use mass customization to pander to customers and create new business opportunities. There may be much broader pay offs as well. In the United States the loss of jobs to low-cost manufacturing centers is a national issue. U.S. companies could generate jobs by using their home market expertise to customize the products that are mass produced overseas. The old adage that "the customer is always right" may be more relevant than ever.
The MIT Center for Transportation & Logistics is carrying out a study of postponement and the implications for product customization and job creation. For more information contact: Yossi Sheffi, Director, CTL, tel: 617 253 5316, email: sheffi@mit.edu, or Ken Cottrill, Director of Global Communications, CTL, tel: 617 253 2082, email: kencott@mit.edu
For further information on a working paper of the analysis "Product Design and Pricing for Mass Customization in a Dual Channel Supply Chain" contact Kai Jiang, email: kaijiang@MIT.edu, tel: 617 253 5239