State of the Art
Mass customization has entered the business-to-business arena. With the right technology, even small companies can provide tailor-made goods and services affordably and fast
The product-development room at ChemStation, a $25-million company based in Dayton, Ohio, has the nerdy look of a high school chemistry lab. Bunsen burners, microscopes, and beakers full of rainbow-colored liquids crowd every square inch of the black countertops. But then there are what appear to be some very peculiar reagents: stacks of greasy train-engine parts, clouds of fluffy goose down, even gleaming piles of silver flutes. Kathy Hansen, a chemist, sits on a high stool in the midst of the clutter, applying droplets of a pale green fluid to one of the flutes. She wants to see if the customized detergent will clean the metal the way she hoped it would.
Hansen is one of three chemists employed by the 15-year-old industrial-detergent company to formulate cleaning products, one by one, for customers. Those customers run the gamut--everything from car-wash operations to the U.S. Air Force--and the concoctions Hansen and her colleagues come up with must be just as varied. Hence the wild backdrop: some customers actually send their cleaning problems to the lab to aid the chemists in their work.
Still, the chemists can't function alone. They must work closely with ChemStation's salespeople, who spend their time visiting customer sites to collect information about the various operations' cleaning needs. They must find out, for example, what kind of dirt customers are dealing with (say, mud in the case of a truck-cleaning service) and what properties--foamy or flat, gritty or smooth--they prefer in a soap.
All the information, from the lab and from the field, sits in a central customized database called the Tank Management System (TMS). The TMS is linked directly to both the lab and the company's 40 plants across the country, where computer-run machines invented by the company's CEO, George Homan, mix together each customer's special formula. The customer knows nothing about the flurry of communications between the lab and the salespeople or about the automation used to make its particular suds. All the customer knows is that ChemStation gives it exactly what it needs. And in turn, ChemStation has seen its profit margins soar to the double digits. "The money we've been able to save by doing things this way is mind-boggling," says Homan.
Mass customization, a popular trend in the area of consumer goods and services, is slowly making its way into the business-to-business arena. Even small companies like ChemStation are finding that with the latest in manufacturing and communications technology--everything from computer-aided design and manufacturing (CAD/CAM) equipment to actuarial software--they can provide customers with tailor-made goods and services as cheaply as, and in the same amount of time that it used to take to make, standardized ones.
While many dynamics are responsible for bringing mass customization to the business-to-business market, the one that stands out, says B. Joseph Pine II, author of Mass Customization: The New Frontier in Business Competition, is the total quality management (TQM) movement. "The TQM movement taught customers that they could get the quality they wanted at a price they wanted to pay," says Pine, "and this brought about a cross-industry snowball effect." In other words, customers started demanding the same attention they were getting in the consumer market in their business-to-business dealings. And little by little, companies started giving it to them in the way of special orders. Originally, of course, the cost and the manpower needed to whip up those special orders for the "masses" were prohibitive, says Pine. But then technology entered the picture.
Today small companies implement mass customization not necessarily in response to demanding customers but as a proactive business strategy. Many turn to it as a way to recapture market share in a mature industry. Others, like ChemStation, embrace it to increase margins. Still others use it to carve out a market niche. The payoffs can be great: it can allow companies to expand into new markets, to deepen customer relationships, and to gather valuable--and proprietary--customer information. Indeed, mass customization can make a company something a customer cannot do without.
Henry Fuignan implemented mass customization at Ross Controls, a manufacturer of pneumatic valves in Troy, Mich., for a simple reason: to turn the company around. When Duignan was brought in as chief operating officer, in 1986 (he has since retired), Ross was in a desperate state: the CEO had cancer, revenues were at an all-time low, and the company had more than $5 million in debt to pay with zero profit. "Nobody on the board of directors was under 150 years old," says Duignan. "You could hear the crackling of bones at the board meetings." But within six years of turning the company's plant in Lavonia, Ga., into a showcase of manufacturing technology, at a cost of $8 million, Ross had landed a $250-million client, and Duignan's mass-customization strategy had begun to pay off.
When salesman Dan Henman brought the client, Danly-Komatsu, into Ross/Flex, as the mass-customization program is known, he had his work cut out for him. For it is the salesperson who must act as the liaison between the customer and the company during the customization process.
First Henman met with the engineers of the Chicago-based press manufacturer to pick their brains about the project, asking questions about what pressure they wanted the valve system to operate at, what kind of lubricant they used on the presses, and so on. Then he and the engineers faxed schematics that met those criteria to the Ross/Flex engineers in Lavonia, who came up with a final design. Once it was approved, the Ross/Flex engineers turned to a CAD/CAM system from Intergraph, a 3-D modeling-and-manufacturing tool that they use both to design prototypes and to program the company's nine computer numerically controlled (CNC) multiaccess machining centers, which grind out the prototypes. The machining centers (five A-55 Plus machines from Leblond Makino and four MA-3's from Tsugami) are linked to the CAD/CAM system by a local area network.
Within two days, Ross had shipped a prototype to Danly-Komatsu's engineers. Because the system was a custom fit, the engineers were able to install it in their presses in less than half the time it would have taken to assemble and load up standard parts, and it took up far less space than the company's usual valve networks. Danly-Komatsu saved money, too: the entire process cost 50% less than it would have to buy individual standardized pieces and cobble them together into a system. For Ross, the sale meant a lifelong customer. "If you can find one maverick and get him involved in the design process," says Steve Demster, Ross's current president and chief operating officer, "it becomes his product, and he feels a deep sense of ownership."
Contrary to what the term mass customization implies (unique products for every customer), Ross carefully chooses whom it will offer custom work to in order to keep the load manageable and the efficiency rate high. It's not manufacturing time that's the problem. In fact, the technology allows Ross to make its custom products almost as fast as it makes its standard ones--sometimes in as little as 24 hours. (Before the technology investment, it took Ross at least six months to produce a custom system.) And with the latest version of the Intergraph CAD/CAM, which Ross installed in early 1997, the Ross/Flex engineers and salespeople can further speed the process by building on past designs, cutting and pasting new parts from and to the 3-D drawings as easily as they can cut and paste paragraphs in Microsoft Word.
What slow things down are the face-to-face meetings--at least several hours' worth--with the customer up front and the time needed to work with other vendors to integrate non-Ross products into the custom systems. So Ross admits into the program only those customers that have been dissatisfied with standard valves and that look like good long-term prospects.
A glass-bottling company called Owens-Brockway, based in Toledo, is a case in point. The company had been forced to do maintenance every three to six months on its valve system, which had been designed by a competitor, because the valves couldn't withstand the high temperatures required by the bottling machines to shape the glass. Ross solved the problem by designing a prototype especially suited to hot, dirty environments, like that inside the glass-blowing machines. Six months later the glass company hadn't made a single repair to the system.
Despite its benefits, the Ross/Flex program isn't always an easy sell. Customers can be reluctant to invest the up-front design time, and they sometimes fear getting locked into a custom-made system. One way Ross wins over hesitant prospects is by offering the initial prototype--sometimes worth up to $20,000--free. Usually, once customers have tested the prototype, they're hooked. As Duignan puts it, "If you're basically inventing the customers' ideas, of course they'll order the product at the end."
The numbers support the contention. Though the Ross/Flex program generated only about 1% of the company's North American sales in its first two years, it now accounts for roughly 25% of those sales. By the time Russell Cameron, the cancer-stricken CEO, died last year, the company's revenues--now at more than $50 million --were growing significantly faster than those of other companies in its industry. Steve Demster attributes the majority of the growth to the Ross/Flex program. In addition, the company's core business of standard parts has gained new products through Ross/Flex, most recently a pilot-operated check to turn off lifting machinery at a moment's notice. "The Ross/Flex program seems to keep us one generation ahead in product development," says Demster. "For the competition, it's like trying to hit a moving target."
Vincent Oliva, Paul Sanchez, and Joel Myers came at mass customization from the opposite direction of Henry Duignan: they had no company to turn around, just an idea for a start-up that they planned to build around the mass-customization concept in hopes of carving out a market niche.
Founded in May as a limited-liability company under Risk Capital Reinsurance, based in New York City, the independently run Capital Protection Insurance (CPI) Services grew out of the three men's frustration with the insurance industry's inflexibility. With 65 years of insurance-company experience among them, they'd seen too many would-be customers alienated and too many others not covered appropriately. So they set out to design an "underwriting management company," as Oliva, the executive vice-president, calls it, to sell businesses tailor-made strategies for managing risk. But they knew the idea could be realized only if the right technology were in place from the start: customized actuarial and statistical-modeling software running on their Compaq PCs.
The trio's business model works this way: Traditionally, companies seeking insurance have two not very good options: a standard policy that leaves them overinsured and paying too much, or one that leaves them underinsured and at risk. CPI Services, however, has no standard approach. Instead, the partners consider each customer's situation individually and draw up a company-specific risk-management plan. The appropriate plan could end up being a standard product-liability insurance policy, but it could just as easily include a fund that the customer collects dividends on when it has a risk-free year.
Take, for example, one of CPI Services' potential customers: a company that manufactures truck frames, which it sells to large automobile makers. The company assumes a certain amount of risk with each frame it sells. For instance, if someone driving a truck built by one of the large automakers gets hurt in an accident and sues, the final blame could end up on the truck frame and, by extension, on the company that made it. To protect itself, the company has always purchased standard product-liability insurance but in its 20 years of business has never had to use it. In fact, the company's owner is pretty sure he could handle the risk himself by putting money aside in case of a major lawsuit--if only he had a little help.
Which is where CPI Services comes in. For this customer, Oliva explains, CPI Services could design a plan in which it assumes, say, 60% of the risk, and the customer assumes the other 40%. Or CPI Services could assume 100% of the risk but put the customer's premium payments in a fund that accrues dividends. Then, if the customer goes for a predetermined amount of time with no losses, CPI Services would pay out the dividends--in other words, give the customer some of its money back.
Another type of plan CPI Services could set up would involve assuming a customer's past liabilities to free up funds. Consider a hospital that has self-insured for the past 15 years. The hospital would have to maintain a substantial "loss fund"--actuaries hired by the hospital would calculate how large--to cover lawsuits it has already lost but still must pay damages for and to protect against future lawsuits it may or may not lose. But now, strapped by the current upheaval in the health-care industry, the hospital wants to free up the money in that fund. CPI Services could step in and design a plan to assume the past liabilities and help the hospital transfer its funds to more needy areas of the balance sheet. The premium the hospital would pay CPI Services would be significantly less than the amount it had previously been paying into the loss fund.
To offer such customized risk-management plans, CPI Services must become intimate with the businesses it covers. To accomplish that, the three partners plan to do two things: work with the customer as well as the broker ("We want to get into the loop directly between them," says Sanchez) and invest up to $400,000 in software and hardware. The software, which is being developed by Seattle-based Milliman & Robertson, an insurance-consulting and actuarial firm, will allow CPI Services to tailor each policy starting from a standard plan and then deviating from it based on the customer's individual traits, such as its historical losses.
Without the software, analyzing each company separately would be not only prohibitively costly but also an administrative nightmare. The program that Milliman & Robertson ultimately builds, says Joy Schwartzman, a principal at the consulting firm, "will provide CPI Services with a consistent foundation." That way its various underwriters won't have to use nonobjective factors to evaluate clients, which can lead to errors and wildly divergent conclusions about customers' risks. "It's extremely important to us, since we're creating a plan around the customer, that they get exactly what was negotiated on the first try," says Oliva.
The software, which according to Schwartzman will be a customized program most likely based on a Lotus-type spreadsheet, will take months to develop. That's because there's so much information to accumulate. Milliman & Robertson will need to collect, for example, average liabilities for each of the industries CPI Services wants to serve, as well as other industry information like average profit margins and company valuations. After creating a database, the consultants will develop statistical models for CPI Services to use in assessing a company's risks. One of the models, says Schwartzman, will allow CPI Services to compare industry averages with an individual company's historical losses and quickly determine what that company's liabilities might be.
Of course, because CPI Services is so new, there is no hard evidence that its strategy will work. But Sanchez's projections show the company collecting about $60 million in premiums the first year. The real figures, says Sanchez, won't be in for another three to five years--and by then, he says, CPI Services should begin turning a profit. His prediction? A margin of 10%. Oliva echoes Sanchez's optimism about mass customizing a service like insurance. "We formed our company on the premise that we would be demand driven," says Oliva. "We wanted to close the gap between what customers need and what insurance companies have offered."
George Homan, CEO of ChemStation, didn't need to turn his company around (revenues had been growing by about 20% a year, and debt had been steadily dropping) or to carve out a market niche. What he did need to do was figure out how to decrease his expenditures when the recession of the early 1980s put a squeeze on profits.
When Homan incorporated the company, in 1983, it made sense to deliver each order of industrial detergent in its own 55-gallon drum. But as the price of plastic, gasoline, and drivers escalated, Homan found himself laying out more cash for packaging and shipping than for making the soap itself. He considered cutting costs by buying raw materials in huge quantities, but that would have created a new problem: the vats of finished soap would have taken up tons of space and also would have gone to waste if a mixture fell out of favor with customers.
So Homan decided to take a radical step: institute an entirely new delivery system--one centered on permanent, reusable containers. ChemStation would deliver a concentrated version of the soap in smaller containers, thus enabling it to ship more orders per truck and to combine delivery routes. The customer would then add the water on-site to reconstitute the product.
In the process of installing the permanent tanks, Homan learned something very interesting about his customers: because of variances in the environment, similar detergents weren't working equally well even for customers within the same industry. He realized then that if he wanted to give his customers the best value, he'd have to develop detergents geared to their individual cleaning needs. Making that happen, though, would require more than just changing formulas. He would have to make a serious commitment to technology to make up in efficiency what he'd be losing in not manufacturing in bulk. And he'd have to turn his salespeople into information machines.
Though Homan never called his strategy "mass customization," that's exactly what it was. It works this way: Initially, the salespeople take the lead. They ask potential customers about their cleaning tasks, making sure to find out things like whether the soap will be used in an area with a lot of people and how much the customer wants to spend. The information is fed--either over the salespeople's modem-equipped laptops or by the chemists who transcribe it from the salespeople's handwritten notes--into the Tank Management System, ChemStation's proprietary database.
Also kept in the TMS, which is written in a language called MAGIC, is every recipe ever used by a customer. "So if a salesperson is standing in front of a Budweiser bottling plant wondering what the heck they use in there to clean equipment, he or she can look up what our other Bud plants are using," says Homan. That way, the salesperson has a place to start from and can offer the customer a sample of a formula that's already been tested. The salespeople access the information in the TMS either through their laptops or by simply calling the lab and asking the chemists what kind of samples they should give to the customer. But that will all change soon: ChemStation is updating the system, and soon all salespeople will have laptops and access to a company intranet.
Once all the necessary information has been banked in the TMS, Kathy Hansen and her fellow chemists can begin brewing their recipes. When a recipe is finished and the customer is happy with it, the chemists enter it into the TMS and assign it a number. The ingredients list of the recipes reads more like an interior decorator's notes than a scientific document. Instead of chemical names, the ingredients are all color-coded. Navy, for example, could be a mixture of amine carboxylate and dodecyl benzene sulfonic acid. So a company's customized-soap recipe might look something like this: 5% navy, 20% plaid, 25% green, 50% H 20. Color coding keeps communication between the chemists and the sales force simple when they're puzzling out which ingredients from which samples to include in the finished soap.
The technology kicks in full force when it's time to manufacture the product. The TMS is linked by modem to the 40 machines around the country that make the detergent. Homan invented the computerized machines, called H-700s, with the help of an electrical-engineering professor and therefore paid only about $60,000 for each. The workers in the far-flung plants simply touch the number on the H-700 screen that corresponds to the recipe they need mixed, and--voilÃ--the machine's computerized cylinders, which are hooked to several tanks of raw materials, squeeze out the exact amount of each ingredient. "The technology allowed us to recapture the money we'd been losing doing things the old way," says Homan.
When the product is ready for delivery, a ChemStation employee drives the concentrated mixture to the customer site, where a reusable tank has been installed in an accessible location. The driver pumps the mixture from a container on the truck into the customer's tank and then leaves--the customer doesn't even know the driver has been there.
That "prescient delivery" system requires ChemStation to monitor its customers' usage patterns closely. A salesperson periodically visits each site to see how much of the product is left. He or she notes the soap level in the TMS and, when it's low, requests that a new batch be delivered. After a while a pattern emerges, and the salesperson doesn't have to check up on the levels any longer. For its customers with "critical usage" cleaning needs, such as food-processing plants, ChemStation hopes to implement a totally computerized system soon. The system will include a device installed directly in the customer's tank--actually the guts of a cellular phone attached to a float--that will automatically dial in to the TMS and set off an alarm when the detergent is running low.
Of course, catering to customers' every whim can have its drawbacks. Take, for example, the trouble a saleswoman recently had with a truck-cleaning service. The customer was so insistent on spending no more than $3.25 a gallon on soap--an almost impossibly low price to meet if you're talking about a top-quality product--that ChemStation saw its profit margin on the sale drop precipitously.
Overall, though, that's far from the case. Homan claims that about seven years after he began mass customizing, in 1985, his gross profit margin per customer jumped to nearly 50%. Moreover, ChemStation's cost per customer has fallen nearly 25%. That all adds up to some very impressive margins: of the $25 million in sales the company did last year, about 10% went toward straight profits.
Additionally, ChemStation has managed to lock out its competition when it comes to current customers. No one--not even the customer--knows what goes into each formula--except, of course, for the ChemStation chemists. Which makes it impossible for a customer to jump ship with the expectation that another manufacturer will be able to duplicate its beloved suds. Homan says some states do require the ingredients to be listed on the container, but even then the precise combination is kept under wraps. ChemStation will make an exception only for emergency situations. "Other than that, we tell them it's secret," says Homan. "We're not as protective as Coca-Cola, but we're close."
Still, perhaps the most remarkable outcome of the company's mass-customization efforts is its efficiency record. Today, thanks to Homan's technology investment (about $2.4 million), the company can make the custom soap and deliver it in the same amount of time it used to take to make huge batches up front and ship smaller quantities to the customer. All that, from a man who basically stumbled onto a concept that seemed antithetical to soap. "We were just trying to save money in the beginning," says Homan. "Mass customization was the furthest thing from my mind."
Sarah Schafer, a freelance writer based in Washington, D.C., was formerly a staff writer at Inc. Technology.