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Flexible Production and Supply Chain Systems

Generating Value through Effective Customisation


Vinzenz Schwegmann, Gernot Strube, Peter Willats, Jochen Linck, Arndt Boenigk

Author contacs:

Dr. Vinzenz Schwegmann
McKinsey & Company, Inc.
Kurfrstendamm185
10707 Berlin
Germany
Tel: +49 (0)30 88 45 2190
vinzenz_schwegmann@mckinsey.com

Dr. Gernot Strube
McKinsey & Company, Inc.
Prinzregentenstrasse 22
80539 Munich
Germany
Tel: +49 (0)89 55 94 8340
gernot_strube@mckinsey.com

Peter Willats
McKinsey & Company, Inc.
No. 1 Jermyn Street
London SW1Y 4UH
United Kingdom
Tel: +44 (0)20 78 39 8040
peter_willats@mckinsey.com


Abstract: In the changing world of customization and personalization, production and
supply chain management is a strategic lever of utmost importance. Being able to fulfill
specific customer needs without accepting tradeoffs in cost, quality and lead time is key
to success.
In this paper, we propose five key levers to create a "make-to-customised order"
production system. The levers are derived from client case studies of superior
companies from the industrial goods sector who deliver highly customised products in
the most effective and efficient way. Furthermore, the paper discusses a 5-step
process towards implementing the proposed production system.

Dr. Jochen Linck
McKinsey & Company, Inc
Am Sandtorkai 77
20457 Hamburg
Tel: ++49 - (0)40 3612 1322
jochen_linck@mckinsey.com
Arndt Boenigk
McKinsey & Company, Inc.
Prinzregentenstrasse 22
80539 Munich
Germany
Tel: +49 (0)89 55 94 8814
arndt_boenigk@mckinsey.com
1. Introduction and guiding principles of a production system suitable to
mass customisation
Customising products may unlock substantial customer and shareholder value.
However, the potential revenue increase generated by customised products may not
be offset by increased costs (Piller, Ihl, 2002; Zipkin 2001). Thus, managing both
revenues and costs are critical for succeeding in mass customisation markets as
illustrated in Figure 1.
Revenues**
0
50
100
Costs
Lever 1:
Manage revenues
Lever 2:
Manage costs
Production/Supply Chain
[Global] Network (e.g.,
plants, suppliers)
Site layout
Technology (e.g.,
degree of automation)
Planning, scheduling,
executional and control
processes
Employee qualification,
mindsets & behaviours
Product Design
Purchasing
Other processes
Understand customer
needs
Market-/Customer-
Segments
Willingness to pay
Maximum customer
waiting time
Design products that fit to
the need
Implement production and
supply chain fulfilling
customer demands in
quality, lead time, etc.
Develop and implement
superior marketing and
sales concept

Figure 1: Two main levers to improve profitability in mass customisation

With the rise of "Mass Customisation and Personalisation" in both business-to-
customer and business-to-business markets, specific challenges emerged for the value
chain of manufacturing companies:
Increased variety of parts: Product variety and new product introductions
are exploding. For example, the number of coffee variants offered in the US
has been multiplied by 35 over the last twenty years and the number of
vehicle models has nearly doubled since 1970 (Cox, 1999). Even with clear
platform strategies in place to modularize products, reality shows that
complexity of parts is still growing. For example, producers of special
machines or customised commercial vehicles often deal with as many as
100.000 SKUs.
Shorter life cycles, volatile demand and change of orders: It is in the nature
of customisation that reaction times and planning horizons are shrinking
dramatically. Managing permanent innovation or seasonal volume changes
of more than 30% per month is as much daily business as short-term
changes in order specifications.
Highly complex order management processes: In the world of customisation
it is not enough to coordinate production with logistics and other operating
processes. Rather, a seamless integration with sales, engineering, and
product development is demanded.
Reduced affect of economies-of-scale: Manufacturers entering the market
of customised products cannot rely on traditional economies of scale. With
production volumes down to one they have find new ways of flexible
production including superior leveling, changeover effectiveness or one-
piece-flow material handling.
Without a fundamental change in production and supply chain systems the above
challenges will lead to enormous extra costs, e.g. increased inventory, high proportion
of non-value activities. And customers are not necessarily willing to pay higher prices
for mass customised products (Federal Reserve Bank of Dallas, 1998; PTW, McKinsey
2003), nor do they accept tradeoffs in, e.g., lead times.
With the importance of superior production and supply chain management being
undoubted, it is often not the consumer goods industry to learn from (Lampel,
Mintzberg, 1996; Piller, 2003). Although public attention focuses mainly on mass-
customisation start-ups from this sector, we recommend to take a closer look at long-
life goods and B2B-industries as a role model how to design and implement production
and supply chain systems that deal with the challenges of mass customisation and
personalisation (see Figure 2).
There are best-practice examples that represent role-models for successful
customisation - like Japanese Toyota Home, a Toyota subsidiary producing
customised prefabricated houses, but also European and US-based manufacturers
from, e.g., the High-Tech or commercial vehicle sector. Although located in the long-life
or B2B-sector, their operating systems can serve as benchmarks also for traditional
consumer goods industries.

B2Cmarkets of MC still with lots of
question marks
Sustainable success not yet proven
Lots of failures*
No mature cases
Size often small ("by-product of core
non-customized segments")
B2C businesses sometimes masking
issues on mfg. and supply chain
low percentage of mfg./logistics
costs leads to underestimating its
impact on customer satisfaction**
Only few customer goods comp.
known as benchmarks in mfg.
Long-life goods and B2B-industry
may serve as role model
Customization is daily business
Decade-long experience
Customisation goes up to
individual engineering (e.g.,
heavy trucks, printing machines,
special steel)
Customising long-life goods and
B2B-companies take advantage
of mass and lean production
Volumes up to 100.000 allow
taking advantage of scale
Systematic adaption of lean
manufacturing secure flexible
and efficient processes without
tradeoffs
?
?
?
?
?
?
?
?
?
?
?
?
!
!
!
!
!
!
!
!
* 20-25% of all MC companies founded between 1994 and 2002 have already disappeard
** e.g., via lead time and quality

Figure 2: Why learn from long-life goods and B2B businesses for mass customsation
The ideal state for a mass customisation production and supply chain system is a full
make-to-order process independent of forecasts and the need to produce to stock.
Obviously, in most industrials environment this approach may rarely be realised to its
full extent (Figure 3). The critical point in the value chain ("pacemaker") that defines the
transition point from make-to-order to make-to-stock or -forecast is when the
customer's accepted lead-time exceeds the internal order throughput time (Holweg, Pil,
2001). In other words, make-to-order is possible if the manufacturer has a clear
understanding of how long the customer is willing to wait for a customised product.

Make to-order
possible
Make-to-stock /
make-to-forecast
Accepted customer wait time
Pacemaker
Exotic parts; long
replacement time
Forecast data
Parts
Parts
Preassembly
Preassembly Customer
Finishing Distribution
2 days
3 days 3 days D-9 D-10 D-11 D-12 D-13 D-14
Final
assembly

Figure 3: Make-to- (customized) order as overall role model for production and supply
chain management

Based on this general concept, five key levers have been identified in order to
implement a "make-to-customised order" production system:
1. Superior segmentation of customer base
2. Synchronisation and standardisation of supply chain
3. Implementation of lean production system
4. Modularisation of production layout and application of new technologies
5. Implementation of flexible work organisation
The following paragraphs will describe each lever and provide industry examples.
2. Key levers for make-to- (customised) order production system
2.1. Superior segementation of customer base
Figure 4 shows an example from the machinery industry. Make-to-order (MTO) has
already been possible for all orders that exceeded the current lead-time of 6 weeks.
Improvements of the existing production system could shorten the lead-time to 3
weeks, which allowed serving almost 50% of the customers with MTO. In addition, the
company managed to apply at least a make-to-assembly-process for another 40% of
its customer base. Reducing the lead-time to less than a week has neither been
technically possible nor would it have been economically reasonable as only about 5%
of the customers required such short delivery times.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0 1 2 3 4 5 6 7 8 9 10
Total lead
time (weeks)
Percent of
customers
satisfied with
delivery lead
time
MTO already possible
Future
lead time
Current
lead time
MTO partly possible (e.g.,
Make-to-final assembly)
MTO after improvement
possible
Improvement

Figure 4: Make-to-order decisions based on customer segments - machinery example

2.2. Synchronisation and standardisation of supply chain
With make-to- (customised) order being the proposed targeted end state, compressing
the overall order lead-time is essential. As examples from different assembly and
process industries show, more than two thirds of the period between order entry and
distribution is about order checking and scheduling (Holweg, Pil, 2001). A superior
synchronising and standardising of the supply chain can cut lead times by half. This
includes, among others, the separation of complex material and information flows, and
the synchronisation of order management, logistics and production between an OEM
and its critical suppliers.
Convincing examples from both commercial vehicle and machining industries show
how a set of clear rules, together with modern communication technology, helps
stabilising the supply chain processes from program planning, order checking, logistics
planning and production scheduling, so that the typical "bull-whip effects" resulting in
high inventory, rework, and long lead times can be avoided.
2.3. Implementation of lean production system
One of the most convincing examples of make-to-order production is Toyota Home
(Figure 5). Toyota Home has thoroughly streamlined the entire production process by
adapting the Toyota production system ("Lean Production") to the manufacturing of
pre-fabricated houses. With a total order lead time of six months, a plant throughput
time of only one day, and only two defects per house they are able to manage an
extremely high degree of customisation in a cost-effective, high quality manner.
Make-to-order production Full customization
10-13 containers/ house
Free design, e.g., kitchen
3,577 units in 2002
Stable production plan
Two weeks freeze points
Central order sequencing,
decentral work levelling
Short lead times
Overall: 6 months*
Production: 2 shifts
High quality
2 defects per house
Construction
12
Takt: 5'45''
Variation of
work content/
order: 4' - 43'
Fitting
out
6 / 7
Welding
1
Painting
2
Assembly
3
Wood work
5
Exterior wall
4
Construction
12
Takt: 5'45''
Variation of
work content/
order: 4' - 43'
Fitting
out
6 / 7
Welding
1
Painting
2
Assembly
3
Wood work
5
Exterior wall
4
* Sign of contract to move-in

Figure 5: Toyota home (Toyota, 2003)

The example also shows that the basic essence of lean manufacturing - rigid reduction
of non-value added work ("waste"), relentless pursuit of quality, customer-back
production planning, and no tradeoffs between quality, delivery time and costs to
mention a few - also serves as a role model for production systems in the mass-
customisation world.
2.4. Modularisation of production layout and application of new technologies
Within their plants companies can reduce throughput time and increase flexibility with
the help of modular production layout and the selective use of new production
technologies. For example, when designing a new plant for customised busses,
traditional "steel-and-iron-assembly belts" could have been avoided in favor of a semi-
manual, but highly flexible (and cost-efficient) solution that nevertheless follows the
strict customer takt principle as it is a guiding principle in lean production.
Most highly automated production systems lack flexibility due to the fact that their
production systems are too interlinked. Industry examples such as the one discussed
above also show that, e.g., by relocating work contents into preassembly areas and by
dedicated production lines throughput times can be cut significantly.
New technologies may also significantly reduce throughput time and enhance flexibility.
In the tool industry new technologies offer the opportunity to increase the tool
complexity and accuracy. One example from the tool industry showed that the use of
laser finishing technology could decrease the throughput time by more than 50% and
improve process stability significantly. The tool was intended to make plastic parts with
a leather-structure surface as often found on steering wheels and dash-boards in cars.
Lead-time is a critical factor for the industry, as customers tend to make design
changes late in the process without delaying the start of production. Thus, reducing the
throughput time was an important lever to potentially gain market share.
The future of production layout and technology still has open questions. For example, it
is yet not fully decided whether a higher degree of customisation will lead to even more
dedicated production lines or whether highly-flexible single lines may be able to
manage completely different models without losing efficiency. However, current
examples by Toyota indicate that the profitable bandwidth of one-line-multi-modeling
may increase significantly.
2.5. Implementation of flexible work organisation
The idea of flexible work organisation is usually connected to flexible work hours,
indeed an important backbone. However, organisational efforts should not be limited to
that. Successful companies differ from their competitors in having established other
levers as well, for example:
Cross-functional work organisations: Especially in an environment of
customised products it is crucial to foster cross-functional groups including
production, supply chain management, sales, and product development. For
example, seamless design-for-manufacture processes that secure an early
integration of production issues into product development help reducing
variants and production complexity.
Standardised work procedures: At first sight it sounds like a contradiction,
but standardising work procedures help avoiding non-value added activities
and reducing lead times, and they free up capacity for further improvement of
production processes.
Working on mindsets and behaviors: Successful companies do not only
focus on the "technical" aspects of production, but also care for changing
mindsets and behavior. A superior training, clear performance management
processes, and clear roles and responsibilities help to increase both
capabilities and motivation of operators and management.
Overall, it is the smart adoption and combination of organisational levers that lead to
significant improvements. Implementation Process
Assuming that a company has been able to prove a significant positive value of
customisation, we propose a rigid 5-step implementation process towards a mass
customisation production and supply chain system (Figure 6).
It starts with identifying the key issues around specific customer requirements and
production capabilities. Regarding the market side it is critical to understand the
required degree of customisation and the accepted lead-time by different customer
segments as a signpost for all operational processes. With the help of proven standard
assessment tools a company can then diagnose its key performance indicators,
material and information flows, and root cause problems to estimate what it takes to
transform production and supply chain towards a make-to-order model.
As a second step, a company should derive the ideal production and supply chain
system. Since the transformation towards mass customisation is not a continuous
improvement process but a step change for most operational process, it is
recommended to design an ideal "greenfield" system as benchmark and role model.
Although it will probably not be implemented as such, it has proven to be more
successful to start with a "perfect production and supply chain picture" that is later been
adapted to reality than to compromise early on by only improving the current situation.
To derive the target system out of the ideal model - i.e., making the "greenfield" a
"brownfield" - means drafting the blueprint the future as a soon-to-be-reality. It includes
all material and information flows, layout, supplier and order management, and many
others. This is - together with the implementation phase - typically the most critical
phase in transforming the production and supply chain system. It will be followed by a
detailed implementation roadmap.
The full implementation of the drafted system may take anytime between a few months
and several years, depending on the size of the supply chain system. This is the phase
where the rubber meets the road and top management involvement is absolutely
necessary. As in many other transformation exercises, it is recommended to do
regional or product specific pilots first.

Identify key
issues
Assess actual
material and
information flow
Document actual
key performance
indicators
Identify key
operational issues
and root cause
problems
Derive
ideal flow
Identify ideal
costs, quality,
throughput times
Do best-of-best
benchmarking
Design
"greenfield"
material and
information flow
Derive future
(target) flow
Check ideal state
vs. lacks within
company (skills,
resources, )
Design "brownfield"
material and
information flow
Agree on
aspirational, but
realistic targets
for KPIs
Develop
implementation
roadmap
Generate tactical
implementation
plan
Stabilization
Flow
Takt
Pull
Derive time plan /
development path
Implement
Use improvement
levers according to
time plan /
development path

Figure 6: Five-step implementation process
3. Summary
Mass Customisation and Personalisation will find its way into a sustainable, mature
business model - if it is able to deal with its challenges in production and supply chain.
Here, a close look at best-practices from the long-life goods and B2B-sectors help to
develop a world-class production and supply chain system. Derived from the overall
role model of make-to-customised order, five key levers show the way. They include a
sound customer segmentation, the synchronisation and standardisation of supply
chains, the rigid adoption of lean manufacturing principles, flexible layout and new
production technology, and, last not least, the right operational organisation.

References
Cox, W. Michael (1999): Mass Customization, Federal Reserve Bank of Dallas Expand
Your Insight, September 1, http://www.dallasfed.org/eyi/tech/9909custom.html
Federal Reserve Bank of Dallas (1998): The Right Stuff, 1998 Annual Report
Holweg, Matthias; Pil, Frits K. (2001): Start with the customer, MIT Sloan management
review, Fall 2001
Holweg, Matthias; Pil, Frits, Successful Build-to-Order Strategies Start With the
Customer, Sloan Management Review, Fall 2001, Volume 43, Number 1, pp. 74-83
Lampel, Joseph; Mintzberg, Henry: Customizing Customization, Sloan Management
Review, fall 1996, Volume 38, Number 1, pp. 21-30
Piller, Frank Thomas (2003): Mass Customization, 3
rd
Edition, Deutscher Universitts-
Verlag
Piller, Frank Thomas; Ihl, Christoph (08/2002): Mythos Mass Customization,
Arbeitsbericht Nr. 32 des Lehrstuhls fr Allgemeine und Industrielle
Betriebswirtschaftslehre der TU Mnchen
PTW, McKinsey (2003), Endbericht Projekt Herausforderung Automobile
Wertschpfungskette, PTW TU-Darmstadt, McKinsey & Comp. Inc., 2003
Toyota (2003): official Website
Zipkin, Paul (2001): The Limits of Mass Customization, Sloan Management Review,
Spring 2001, Volume 42, Number 3, pp. 81-87