| RELATED
ARTICLE |
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| "The
Right Stuff: America's Move to Mass Customization,"
Annual Report, 1998 (Text
or PDF) |
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Technology
Mass
Customization
Dallas Fed Chief Economist W. Michael Cox
explores how cost-cutting Information Age technologies enable businesses
to enter an era of mass customization.
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Mass
Customization
Americans have always preferred customized products,
but they couldn't always afford them. Now, companies
are finding ways to deliver exactly what we want
at prices competitive with those of mass production.
Information Age technology—primarily the
computer—has erased yesterday's edict that
customization must carry a high price. Mass customization
offers consumers the best of both worlds. It embodies
the good qualities from the era of hand production—custom
design and individualized service. And it retains
the most significant gain from the era of mass
production—low cost.
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Things used
to be made to order and made to fit. But they were labor-intensive
and expensive. Mass production came along and made things more affordable,
but at a cost—the cost of sameness, the cost of one-size-fits-all.
Technology is
beginning to let us have it both ways. Increasingly, we're getting
more personalization at mass-production prices. We're moving toward
mass customization.
Why have Americans
had to wait until the tail end of the 20th century for mass customization?
The simplest answer: until now, the country didn't have the know-how
to customize at low cost. Information Age technologies spawn mass
customization by revolutionizing the calculus of production
costs.
The interplay
of fixed and marginal costs explains both mass production and mass
customization. In the Industrial Age, innovations such as conveyor
belts and machine tools allowed companies to turn out identical
products cheaply. Producers faced high fixed costs because the machines
and assembly plants were expensive, but standardization of parts
and products lowered marginal costs. Companies made money by cranking
out as many units as possible, driving down the average production
cost by spreading the huge fixed cost over more and more units.
Customers paid lower prices for automobiles, appliances, clothing
and household goods, but companies could only provide limited choices.
With high fixed costs and low marginal costs, it's cheap to make
the same product for everybody but expensive to produce a different
product for each customer.
 Mass
customization becomes optimal when both fixed and marginal costs—particularly
fixed—are low. If producers can change designs quickly and
inexpensively, they'll win customers by targeting individual tastes
and preferences. Average costs decline even without long production
runs, permitting low prices along with the bonus of providing exactly
what consumers want.
Modern technologies
slash fixed costs in three areas: information, production and distribution.
By making it easy to supply information, the Internet gives consumers
a cheap and easy way to find out what goods and services are on
the market. Companies can display immense amounts of product information
on their web pages and take orders from anywhere in the world. More
important, the Internet frees producers from the expensive proposition
of paying firms to gather information on what buyers want.
 By
making it cheaper to personalize during production, Information
Age tools remove the last barriers to providing goods and services
for individual customers. Even assembly lines are no longer limited
to endless iterations of the same product. Computer-aided designs
are replacing costly prototypes. Computer-guided machinery allows
production to shift from one style to another with a few lines of
computer code, eliminating the time and expense of retooling.
Improvements
in distribution reduce the fixed costs of getting products to consumers.
Bar-code scanners allow overnight shippers to improve speed and
accuracy while reducing outlays for a global system to pick up,
sort, track and deliver packages. As the Internet spreads into more
homes and businesses, the delivery of information products becomes
nearly cost-free.
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