Abstract

Two operational formats namely mass customization and mass production can be implemented to satisfy customer preference-based demand. The mass customization system consists of two stages: the initial build-to-stock phase and the final customize-to-order phase. The mass production system has a single stage: building products with pre-determined specifications to stock. In each case, the company makes decisions on the number of initial product variants, product specifications, production quantities and product pricing. Under a uniform customer preference distribution, the optimal number of base-product variants resembles the well known economic order quantity solution, and the optimal product specifications are equally spaced. We characterize three possible benefits of mass customization: (i) the gained surplus from offering each customer her ideal product; (ii) extra revenue from price discrimination; and (iii) reduced costs due to risk pooling under stochastic demand.

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