How Digital Fulfillment Is Changing Manufacturing

Digital
Article
Operations
How Digital
Fulfillment Is
Changing
Manufacturing
by Matthias Holweg, Benn Lawson, and Frits K. Pil
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HBR / Digital Article / How Digital Fulfillment Is Changing Manufacturing
How Digital Fulfillment Is

Changing Manufacturing
by Matthias Holweg, Benn Lawson, and Frits K. Pil
Published on HBR.org / March 15, 2019 / Reprint H04U5M
Jorg Greuel/Getty Images
Many manufacturers that serve retailers are still hamstrung by pre-

digital production and supply chain processes, which make it difficult for
them to see for themselves what customers’ needs truly are so
they can offer them better choices. As one manufacturing executive
lamented to us about the way it supplies one of its major retail partners:
“It’s like delivering into a black hole.”
As a result of this lack of visibility into customer demand, manufacturers

struggle with the worst of both worlds: They end up with excess inventory
of goods that customers don’t want and must offer discounts to get rid of
Copyright © 2019 Harvard Business School Publishing Corporation. All rights reserved. 1
them, and they don’t supply retailers with sufficient quantities of the
products that customers do want, leading to stockouts at retailers. The rise
of omni-channel retailing has only exacerbated these challenges.
But it doesn’t have to be this way: Manufacturers can harness digital

fulfillment to deliver real customer choice, realign decision making with
customer needs, and realize the flexibility and insight that digitalization
makes possible.
Customers fundamentally make three choices when making a purchase

decision: Are my desired product attributes present? Is the price point
acceptable? How long until I receive the product? Rarely recognized by order
fulfillment systems is the customer’s unspoken decision heuristic: What
trade-offs can I make among attributes, price, and time?
Conventional fulfillment strategies restrict customers’ ability to fully

consider and make trade-offs among these dimensions. Discounts are
often driven by the need to clear excess stock, attribute selection is driven
by what’s in inventory, and capabilities to customize the product are never
realized because they are not shared with the customer. Making attribute-
price-time trade-offs visible to customers and giving them the ability to
make an informed selection across these is central to manufacturers’
realizing digital fulfillment’s potential. In our research with global
manufacturers in the automotive and consumer goods industries, we see
this approach play out as some firms exploit the potential of digital
technologies to redefine variability in customer preferences as an
opportunity for value creation, rather than a problem to be managed.
Towards Digital Fulfillment
Digital technologies open up the entire spectrum of fulfillment channels

from offline to online and from manufacturing to retail. They facilitate
choice and empower customers to make trade-offs that were previously
constrained by the order fulfillment system. In turn, visibility on the trade-
offs customers actually make informs important operational adjustments

and process improvements. We call this integration of fulfillment channels
digital fulfillment.
Adidas’s “storefactory” concept represents a microcosm of the potential

presented by information integration between retail and manufacturing.
The storefactory relies on a body scan to offer customers insight on their
clothing design options and fit, as well as the opportunity to have a custom
garment produced by an in-store automated knitting machine. While
Adidas intentionally does not vary price between custom-made garments
and off-the-shelf products, a direct integration of information from retail
through to manufacturing provides deep insight on customers’ attribute-
time preferences — insight not attainable by manufacturers via traditional
fulfillment channels. This information is key to informing capacity and
inventory strategies and to making better use of customization capabilities
that are languishing in many manufacturing operations.
Messenger bag manufacturer Timbuk2 takes the integration of

manufacturing-retail information a step further in the direction of
capturing customer trade-off decisions. In some retail stores, Timbuk2
provides kiosks where customers can order bespoke bags. When mass-
produced products in those same stores are out of stock, store staff offer
customers a discount if they order a bag through the kiosk (either the one
that is out of stock or another bespoke product). The store kiosk
information enables Timbuk2 to capture demand by exploiting previously
unobserved customer flexibility in lead times in a way that is agnostic to
the mode of production.
For manufacturers, integrating retail and manufacturing through digital

fulfillment surfaces novel opportunities for demand management and
optimizing the use of production capacity. An automotive producer we
studied discovered it could use build-to-order fulfillment strategies to
defer a portion of overall demand by offering those customers who were
willing to wait both a discount and the opportunity to obtain the precise
vehicle they wanted. This approach proved to be particularly powerful for

products that were in such high demand that manufacturing could not
keep up. Offering customers the flexibility to trade off customization,
price, and time allowed the company to lock in excess demand that might
otherwise have shifted to competing products.
Making It Happen
Here is what firms must do to implement digital fulfillment:
Rethink your order fulfillment strategy. Explore new technologies that

make it economical to manufacture variety in small quantities and, as a
result, rethink where manufacturing is performed — for example, in a
store or in a place that supplies several stores in a region instead of a
distant, large-scale factory. Recent advances in digital manufacturing such
as 3-D printing (also known as additive manufacturing) provide ample
opportunity to experiment with new manufacturing setups.
Rewire your supply chain. Many actors in your supply chain thrive on
the inefficiencies that allow them to direct customer choice, and the
presence of these actors may mask information about customer
preferences. In the auto sector, for example, car dealers often exploit their
customers’ lack of awareness regarding trade-offs among vehicle
attributes, price, and time to shift their aging stock. Overcoming this
challenge means aligning incentives and redefining the roles of actors
across the supply chain to enhance information flows, making the full
spectrum of choice visible to customers and capturing customer decision
processes.
Create visibility across channels. Establish a common data

infrastructure to integrate operational and financial information held
across manufacturing and retail operations. Opening the order pipeline
across all available fulfillment channels surfaces the opportunities and
costs associated with the firm’s key decisions. Integrating all factory- and
inventory-based fulfillment channels into one IT system enabled the global

auto manufacturer we studied to purposefully articulate price, time, and
product characteristic trade-offs to make better use of its customization
capabilities, reduce finished goods stocks, and entice customers to wait for
capacity availability.
Open up the solution space to customers. Expand the customer-choice

set to encompass a unified view of available attribute, price, and time
options as well as the tradeoffs among them — while taking into account
the effects on profitability. This requires simple configurators like those
that Timbuk2 and others rely on to guide customers through the cost and
time choices for the product variations they are considering. Information
on what customers do not want has great value yet is often ignored.
Information disconnects between manufacturing operations and the

customer interface restrict firms’ ability to fully understand and meet their
customers’ needs. Digital fulfillment provides a pathway for firms to
realize the full value of their investments in manufacturing flexibility and
information technology. In other settings (such as booking travel online),
customers have already come to expect this visibility on trade-offs among
price, attributes, and time. In turn, digital fulfillment will become the
expectation in manufacturing, rather than the exception.
Matthias Holweg is the American Standard Companies Professor of

Operations Management at Saïd Business School at the University of
Oxford, UK. He can be reached at matthias.holweg@sbs.ox.ac.uk.
Benn Lawson is an associate professor in operations management and

Director of the Centre for Process Excellence and Innovation at
Cambridge University’s Judge Business School.
Frits K. Pil is professor of organizations and entrepreneurship at the

University of Pittsburgh’s Katz Graduate School of Business and a
research scientist at the university’s Learning Research and
Development Center.

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Digital

How Digital Fulfillment Is

Jorg Greuel/Getty Images

Many manufacturers that serve retailers are still hamstrung by pre-

As a result of this lack of visibility into customer demand, manufacturers

But it doesn’t have to be this way: Manufacturers can harness digital

Customers fundamentally make three choices when making a purchase

Conventional fulfillment strategies restrict customers’ ability to fully

Towards Digital Fulfillment

Digital technologies open up the entire spectrum of fulfillment channels

offs customers actually make informs important operational adjustments

Adidas’s “storefactory” concept represents a microcosm of the potential

Messenger bag manufacturer Timbuk2 takes the integration of

For manufacturers, integrating retail and manufacturing through digital

vehicle they wanted. This approach proved to be particularly powerful for

Here is what firms must do to implement digital fulfillment:

Rethink your order fulfillment strategy. Explore new technologies that

Create visibility across channels. Establish a common data

inventory-based fulfillment channels into one IT system enabled the global

Open up the solution space to customers. Expand the customer-choice

Information disconnects between manufacturing operations and the

Matthias Holweg is the American Standard Companies Professor of

Benn Lawson is an associate professor in operations management and

Frits K. Pil is professor of organizations and entrepreneurship at the

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