The Right Stuff: America's Move to Mass Customization

Policy Reports | Economy

No. 225
Tuesday, June 01, 1999
by W. Michael Cox & Richard Alm

Executive Summary

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. And just as mass production was the hallmark of yesterday's Industrial Age, mass customization promises to dominate the modern stage of America's economic evolution-the Information Age. From computers to clothing to cars, we're getting more personalization at mass-production prices.

  • Dell Computer proved that complex manufactured products could be built to order. Using the telephone or the Internet, customers describe the exact computer they want, choosing the speed of the microprocessor, the capacity of the hard drive, etc. The number of possible combinations is staggering - almost 16 million for desktop models alone. No wonder Michael Dell has been lauded as the Henry Ford of mass customization.
  • Connecticut's InterActive Custom Clothes sells jeans over the Internet, allowing customers to specify hip size, leg and seat room, fabric, color, thread accents, leg silhouette, fly design, pocket style, etc. At the factory, computerized fabric cutters enable expert garment workers to sew one unique pair for each individual buyer.
  • Ford's move to mass customization includes a new web site that allows buyers to specify exactly what they want. The site offers six models of the Explorer - each with choices for power train, exterior, interior, audio, wheels, etc. All told, there are more than 2.5 million possible combinations for the vehicle.

We're moving toward mass customization as businesses work not to produce just more stuff, but the right stuff. 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. 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.

As mass customization becomes part of our everyday lives, most Americans will intuitively understand how it represents and improvement over mass production, yet it may be hard to assess how much better off we are. The benefits of mass customization, however, are hard to quantify, especially with the rudimentary economic yardsticks now available. Conceived in an era of mass production, the nation's gross domestic product and productivity statistics may ably count more stuff, but they give little credit for right stuff.

GDP is a statistic designed for mass production. It's a simple counting-the number of units made. Economic research shows it falls short in measuring intangible benefits like consumers' gains from better quality and new products. Mass customization introduces a similiar bias, one tied to the fact that we can measure production but not consumers' satisfaction.

GDP accurately measures the gains in society's living standards when technological progress is of the type that lowers marginal production costs. But GDP undercounts - indeed, totally ignores - the gains in living standards when new technologies cut fixed production costs. GDP at best understates today's progress when innovations such as the microchip, the personal computer, the Internet and fiber optics make possible an era of mass customization.

Our statistics are a rearview mirror, looking back at the past. We need to focus on the economy that's emerging rather than the one that has been. Tomorrow's progress can't be judged with yesterday's gauges. After all, output and productivity aren't the goals of the economy. Consumer satisfaction is.

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