Mass Customization through Value Adding ...

3rd  Intersciplinary  World  Congress  for  Mass  Customization  and  Personalization,  September  18-­21  2005,  Hong  Kong,  China                                                                                                                                                                    http://smartcustomization.mit.edu/images/MCPC_2005/Home.pdf

Mass Customization through Value Adding Communities A. Tsigkas Production Management and Engineering Democritus University of Thrace, Greece Senior Consultant, Leonardo Group AG, Switzerland

Abstract The paper discusses special characteristics and proposes the design of innovative management models of supply networks in a mass customised environment. These models promote the requirement of the close collaboration and adaptability as well as flexibility of ad-hoc structures throughout the supply network of such products or services. Structures of this type should respect principles that differ from the classical models of organising and managing companies today, and should evolve towards more flexible and self managing entities. This type of structures will be organised, so that they provide flexible interfaces for plugging and adapting fairly quickly into other ad-hoc cooperations for the purpose of providing customised and   personalised   products   and   services.   Once   the   purpose   for   which   this   “Virtual   Integration”   has   taken place, has been served, integration can be abandoned partially or completely and other structures can be formed in order to continue offering customised and individualised products or services in a new form. Keywords: Mass Customization, Supply Chains, Knowledge Management

1 INTRODUCTION Mass Customisation of services or products requires the design of Supply Networks that have special characteristics with respect to normal Supply Chains that serve more or less standard products and services. In this paper it is expressed the belief that in the future, markets will be more and more oriented towards individualised products and services and these products and services cannot be offered from only one company or a number of them forming long term partnerships. These structures are too rigid for responding to the new challenges of the globalised markets and therefore new forms of organisation and management structures are necessary to emerge. This paper makes an effort to respond to this requirement in proposing possible models of organisation and management structures. Therefore, in this case mass customisation addresses the way individual professional teams should be structured, managed and evolved in order to form integrated systems that their purpose is to function as mass customised supply networks (MCSN). These MCSN are neither vertically integrated companies nor they are long term partnerships, they are ad-hoc collaborations that have defined characteristics to serve the mass customised and personalisation market. The paper is structured in three sections: Section A: describes the need for different organisation and management structures for responding to the mass customisation market requirements: Why is MCP different Section B: describes the characteristics of these new organisation and management structures for mass customisation and personalisation: MetaCapitalism Section C: addresses further research and studies around the issues of how Supply Networks should be designed taking advantage from this new form of organisation and management structures in order to form MCSN: The Proposal

2 WHY IS MCP DIFFERENT Mass Customisation is part of a paradigm shift in the way services and products are developed, produced and delivered. From the moment of industrial revolution until today a long transformation has taken place, in the way products are produced. It is not our intention to expand on the historical, social and economic conditions that have facilitated such an evolution. However, it is appropriate to account on the characteristics of the paradigm shifts that have taken place from the initiation of the industrial revolution until today. Basically, it is our conviction that the highly   praised   “Knowledge   or   Information  Society”  is  a  myth. Knowledge was always a production factor even in the so called agricultural society. The differentiation factor of each era, with respect to knowledge is the ownership of the knowledge and not the importance of the knowledge itself. Of course with the progress of science, the content of knowledge in the society has been increased and is increased continuously. Progress in fact, is achieved with the gaining and increase of the quantity and the quality of knowledge, both technical and scientific. Therefore knowledge   was   the   major   “production”   factor   in the past, it is in the presence and will be in the future. The  word  “production”  should  not  be  seen  in  the  narrow   meaning  of  “manufacturing”  but  in  general  of  the  process   of creating new knowledge and the way this knowledge has been exploited into satisfying social and economical needs. Kuhn in his legendary book on the Structure of Scientific Revolutions [1] writes “…each   scientific   revolution alters the historical perspective of the community that experience it…” The industrial revolution came, as known, with the rise of capitalism. Poulantzas [2] writes   “…the capitalistic production relationships, the organisation of the whole of the work process is subordinated to the demand of the capital”. 1

To treat human resources as if they are capital with the invention of the word “Human Capital” is absurd. The effort that is currently undertaken at the level of European Union (EU) to evaluate in terms of money the so called Human Capital is even more absurd. Absurd because, human values cannot be measured in money and therefore it cannot be a line in the P&L (profit and loss) statement. Today EU funds go into research programmes that are dealing with evaluating “Human   Capital”   and   with   ways   as   to   how   to   incorporate   these values   into   “accounting   principles”.   But   a   new   way   for   evaluating tangible and non-tangible assets of a company cannot have any de facto influence upon their competitiveness in the market if not a new way of production is not introduced. In other words, whether it is accounted for   “Human   Capital”   in   this   or another way, competition will obviously not care. What is needed are different ways of organising companies or in general value   adding   communities   and   not   different   “accounting   principles”.  Accounting principles are not drivers for any change. In this sense, the  focus  on  “Human  Capital”  and   its importance for the future of the industrialised society, does pronounce indirectly a different need. It verbalises the  need  for  a  different  “production  system”,  a production system that will be more responsive to human needs and values and will define new working relationships. Research programmes should concentrate on this need and not spend the product of human effort into how to further isolate ownership and control better human knowledge [3]. Can the capitalistic system in its present state respond to these more individualised and more human oriented needs? We believe, it does not. Within the context of new production system, production relationships will probably have to be reviewed and redefined. The major characteristic of this revision will have to be the reintegration of labour and intellectual work that capitalism has dissolved for the needs of mass production. In this context, knowledge is converted into a factor of production independent from labour and is subordinated in the service of capital. The competitiveness of business in the future will strongly depend on the reintegration of labour and intellectual work. Ownership and control of the means of production will not play the role today plays in this present state of capitalism, because in the new production system, means of production owned by the companies that build them can be made available, only for use, to producers or to brand owners. Added value will come from the value of products and services offered to the market that will respond to more individualised needs, and not through accumulation of capital as it is today the case with mass production. Competition will be played at this level of differentiation and variety increasingly and less at the level of standard products, mass produced, with very little knowledge content and density. The value of such products depends on knowledge content and density of new products and services. It increases with the level of individuality and the time to market. The conception, design and production of such products and services differ radically from the conception, design and production of mass produced products and services. Mass production products and services lose their value with the time being in the market, mainly because these can be copied very quickly from other competitors that enter the market usually with lower prices (disconnected from cost) in order to gain market share. Individualised products have a very basic characteristic. It is very difficult to copy them due to the individual nature of the product and additionally due to the fact that the supply chain that is needed to conceive, design and produce them is totally different from the mass produced products. Mass production is the relict of the capitalistic 2

model, now showing signs of deterioration and disintegration, with the pressure on the companies not reduce cost, but accept less profit. Individualised products do not fall on this category since the pressure (a nice to have) is on the level of increasing value. This can be realised if the capitalistic model of the production system changes. We have already signs that this model is changing. In our opinion these examples that we will talk about are not only good business cases, but they signalise a paradigm   shift   in   “production”.   We   enter   the   era of Metacapitalism. 3 METACAPITALISM There is a need to define MetaCapitalism. This term is coined first by Grady Means and David Schneider [4]. Both Means and Schneider are senior level consultants with PricewaterhouseCoopers. We will borrow the term, since the way this is used in their book is strictly technological and not at all socio-political, something we believe we cannot exclude any more from future work, when talking about models of the new and old economy. Although technology plays a key role in our model, technology should serve social needs and not vice versa. MetaCapitalism for Means and Schneider is a worldwide economic transformation that will lead into a dramatic economic growth. This transformation has started with the introduction of new technologies that have allowed businesses to integrate and maximise the changes   that   took   place   in   the   decade   of   ´90,   like   the   restructuring, the standartisation of business processes, ERP systems, the integration of globalised markets and the focus to the core skills and subcontracting. As traditional business models become useless, there is a movement towards development of external networking communities. Financial markets have already started to reward businesses that reorient themselves away from managing production and large internal capital intensive base and move towards the needs of the consumer along with the advantages that relate to a networked business model. MetaCapitalism is a massive business revolution that will sweep the world as a tidal wave and will transform business worldwide. For them MetaCapitalism means change of the industrial process. Many of their industrial customers with a strictly vertically organised production have already made a decisive step towards decapitalisation and the use of external networks, and have eventually departed from the logic to own all the means of production. This happens in a series of industries, like financial services, or energy, or water supply services, consumer goods, education and the public sector. Traditionally companies like Ford in the beginning of the 20st century, in their factory at River Rouge, were inserting steel and leather on one side and taking the model T on the other side. The idea was to have a huge company, with many factories and a very big capital intensive base. Businesses like this could control all stages of production and to do what they wanted with level of productivity and reduced cost. Today on the other hand companies have exhausted all the possibilities of increased productivity they could achieve. Now car manufacturers that worked on behalf of others started becoming themselves owners of brand names. They started outsourcing the manufacturing of components and found out that in many cases they could give in subcontracting the whole car. MetaCapitalism brings subcontracting into a different level, which they call Added Value Communities (VAC). A VAC is an external network that covers the supply chain and its processes, like the financial accounting and the human resource management. There are already being established many specialised businesses

for the delivery of such services. In PricewaterhouseCoopers, have already examples of such customers that make use of such networks that can be more effective in the delivery of services than the customers themselves. They believe that the initiative for such VAC will take leading companies in the industry, who will decide what such a community will need for the supply of components for their products. One company may need an external network in order to promote their products. In this case the company itself will create these external communities. The enterprise will use Internet technologies in order to allow suppliers to make their offer for the supply of components or services similar to the process of an auction. This environment will gather benefits and will allow the participants to achieve the best possible price. They know exactly what they need, when they need it and can use the technology in order to organise all their individual departments accordingly. Going back to the car industry a subcontracting company for example, could build the wheels of the car, another one would build the engine, another the seats and a further one the body. All these components flow through the VAC that the car manufacturing company has created. At the end, the car sales and marketing company as well as the final customer receive a better qualitatively product, that has been delivered exactly to the time requested and in a better price. Moreover, the commercial company can respond to their customer much quicker than before. In MetaCapitalism meta-markets will be created that are sets of VACs that represent the natural direction of development in this environment. Furthermore, they believe that because of the appearance of stabilising trends in these markets, enormous advantages will occur from the synergies of these networks that they name Value Adding Networks (VAN). Therefore, they estimate that there can be room for only five to ten metamarkets worldwide, which means that these markets will be very strong. Although we basically agree with the general idea of this model, nevertheless, there is no major difference from the model that exists today. Still the flexibility needed in performing businesses for responding at the needs of the modern society or at least of the society we want to live in, is limited dramatically. This is the case because in this model all initiatives are left to be conducted by the big companies, therefore preserving accumulation of power of the monopolistic capital with the complete subordination of the non-monopolistic capital. This is against flexibility and pluralism in the way companies should be operating in the world market. Mass Customisation demands an economic environment that favours mobility and self-determination in all aspects economic as well as socio-political. The model of MetaCapitalism may be used to be applied in this environment undergoing a drastic lifting and adaptation to the new environment in the globalised markets. We have tried to give our own perspective in this matter. Poulantzas [2] writes in 1974 very clearly and almost as a prophet the following in relation to the principle of multiple subcontracting – “…The   non-monopolistic capital does not have its own power, with respect to the use of the means of work and the disposition of its own business   resources…”   and   continues   “…In   reality   besides what happens with the financial control, the fact that we see today is that even the management and the supervision of the working process that takes place in a business of the non-monopolistic capital escapes gradually from its control to the advantage of the monopolistic capital. A drift of powers or part of them is seen that results from this control towards the

monopolistic capital. This follows many ways: the standardisation of the basic products and the principles of the organisation of work, imposed to the total of the working processes from the monopolistic capital, the technological dependency of the non-monopolistic from the monopolistic capital (patents, licenses of exploitation of an invention), the subordination to a social division that squeezes it to a great extend into sectors of low productivity and with inferior technology etc. On the other hand is needless to insist on the fact that the narrow margins of self-finance of the non-monopolistic capital, makes it – in the general framework of a necessary quick capital turnaround – to be extremely depended from the capital-money and its centralisation from the immense controls that impose on it the big banks in order  to  issue  credits”. 4 THE PROPOSAL A value adding community (VAC) is a supply chain of organisation structures self-sufficient and autonomous, which offer products or services. The composition of the VAC depends every time on the market needs and may change if market needs change. Participants in the VAC may be not only enterprises but any entity that fulfils the interfacing requirements needed and described below. Since response time is the key issue here, ad-hoc synergies can only be achieved if the participants in the VAC are structured and comply with certain agreed standards that are set and improved by the community. Therefore for more agility to respond to market needs it is necessary that VAC internally exhibits a cellular structure. These cellular structures share certain design characteristics that make the structure reusable, reconfigurable and scalable. Rick Dove [5] was the first to use these expressions in his remarkable book “Response   Ability”   in   order   to   define   an organisational structure   of   an   enterprise   he   names   “Agile   Enterprise”.   We borrow his expressions and definitions in order to define chains with flexible structures in order to respond to the mass customisation and personalisation needs. Cells that need to cooperate and form each time a new VAC needs to comply with certain organisational principles that make the ad-hoc communication possible with the least time and energy loss [6]. These principles form a certain framework that is known as the collaboration framework, which is accepted from the participants in VAC. This framework does not need to be negotiated and re-negotiated every time a new VAC or a chain of VAC needs to be formed. It is well known that cooperation and collaboration negotiations consume today a great deal of effort, time and energy on both sides in a bilateral relationship. Even more in a multilateral relationship effort, time, energy and therefore cost grow exponentially. This reality makes collaboration agreements practically impossible. The VAC framework targets on the other hand, in alleviating this major constraint towards forming ad-hoc structures. These principles are stated but not discussed in detail below. It is proposed to the mass customisation community aiming at initiating a discussion that should lead to the determination of a collaboration framework for the creation of VACs for mass customised products and services. Self-Contained units Components of a flexible structure are distinct, separable, self-sufficient units cooperating toward a shared common purpose The sense of a unit and component carries some specific additional meaning with the words self contained 3

beyond that of just a separable item. In essence what a component can do is known, but how it carries out its tasks should not be known, or at least should not be interfered with or taken advantage of by another component. This is very important for a flexible organisation because it permits internal change without unintended side effects rippling throughout the rest of the system. An example of such an organisation is a unit of special forces in a mission, where every one knows which is the objective, which is his own role and the role of the others on the team. They do not sit down and interrogate each other to decide about individual trustworthiness and competency. They do not have a debate on the moral or ethical position of dispatching the objective. The team leader may in fact choose the tactical targets, but the task expert will decide how to accomplish the task. And any one of them could have been any one of many others. Interfacing compatibility Components of a flexible structure share defined interactions and interface standards and they are easily inserted or removed. Plug compatibility for a flexible organisation means more than a physical interface match between a component and its place in the system, for example of a new team member in a product development group within a VAC. The typical or formal qualifications of such a member will not be enough for the incorporation of such a member in a cell of the VAC. The individual candidate will have to fulfil certain standards with respect to the values that he or she will have to have acquired in order to assure compatibility within a VAC. These standards have to be previously defined and will be used as criteria for selecting members in the VAC in order to achieving the changing objectives of the flexible organisation. An effort should be made in order to define one set of standards. The problem in many cases in management is not the standard, but the multiplicity of them. With respect to the replacement of a unit or component within a flexible organisation, what should be avoided is a total integration of the components or the units in the final scheme. The total integration of a member within a team may on one hand have advantages in the operation of a team, it may on the other hand have negative effects when this unit or member must be replaced. The objective is here to be able to adjust in a speedy manner the value creating process of the VAC in order to adapt quicker to market changing needs. As an example it is referred the integration of the suppliers in the production in the end of the 90s that exhibited very good results when operated properly. When on the other hand something goes wrong, these suppliers are so close connected with the system that replacement became extremely difficult. Flat Interactions / Interactions without hierarchy Components of a flexible structure communicate directly on a peer-to-peer relationship and parallel rather than sequential relationships are favoured. This is a special and very important feature for every supply chain. This principle is the base on which a flexible organisation of the metacapitalistic era is based. While for practical and organisational reasons there will be a commonly accepted operational structure, this principle is compulsory and also self understood for the members of the VAC. Formal and non formal communications are obvious within the VAC. Gatekeepers that select, approve, censure or otherwise gate the communications of a system component are stealth members of the 4

system [5]. For example, many businesses went through a strong process reengineering focus in the 1990s. A lot of that effort was directed at changing sequential processes into cell or parallel processes. In many areas of manufacturing, the concept of cellular processes took favour over sequential processes, partly because the processes that created the problem had the ability to attend to it immediately and directly. Deferred Commitment Components of a flexible structure are transient when possible, decisions and fixed bindings are postponed until immediately necessary and relationships are scheduled and bound in real time. Deferred commitment basically keeps existing options open as long as possible. The underlying wisdom here says to not take a decision until it is necessary, knowing that more information arrives with time and decisions should take advantage of that flow. Distributed control and Information Components of a flexible structure are directed by objective rather than method. Decisions are made at point of maximum knowledge and information is associated locally, accessible globally and freely disseminated. Empowerment at the team and the individual level is the classic example when people and organisations are involved. The use of this principle in the design of the VAC facilitates immensely system design since it decreases the need of communication between self sufficient, decentralised units to a minimum possible. Distributed information is often a reinforcement of the self contained unit principle. Elastic Capacity The number of components of a flexible structure may be increased and decreased widely within the existing framework. This principle allows the flexible organisation like a VAC to increase and decrease capacity in order to adjust to the changing demand. For example, when outsourcing became a strategic discussion point in the early 1990s, the focus was generally on core competence issues. Concentration on strategic differentiations and farming out the rest to others who make a competency from what you consider to be supporting functions. That was maybe the objective, but this concept found its real implementation push from companies that needed rapid capacity fluctuations. VACs should be capable to adjust their response ability to the market by downsizing and upsizing as necessary to accommodate demand changes. Redundancy and Diversity Duplicate components are employed in flexible structures to provide capacity right-sizing options and fail-soft tolerance and diversity among similar components employing different methods is exploited. As it is obvious this principle overthrows the approach of the single optimal solution, since it requires that sometimes is better to get a task done rather than relying on a single optimal approach. LSI Logic maintains a pool of resources capable of fabricating semiconductor wafers; some are wholly owned and some are qualified outsources. When an order arrives, a production chain can be assembled immediately from these pooled resources without waiting for some single

resource or some resource with a unique capability that must finish its current commitment. Frequently it is more useful to have multipurpose people than dedicated experts. Cross training in teams is often justified by the need to always have someone covering every need, regardless of who is absent for whatever reason. This obvious point is violated more often than not, especially in control cultures, where single-point approvals steal momentum, stop activities or put the customer on hold while the gatekeeper is not available for whatever reason (i.e. vacation, out to lunch, ill e.t.c.). Collaborative learning and collaborative work have better results in a group with mixed backgrounds and mixed points of view. Self-organisation Components relationships in flexible structure are selfdetermined and components interaction is self-adjusting or negotiated. Self-organisation is typically related to natural system such as ecologies, societies and beehives, where seemingly intelligent, or at least purposeful behaviour emerges from the total system though no central direction or control is evident. At the level of the VAC organisation, empowerment, teaming, listening to the voice of the customer, organisational learning and other concepts are extremely important. The principle of selforganisation basically means that the components of VAC have some discretion in deciding how to accomplish the goals established for them: what processes to employ, what priorities to set, and when to use which resources. In more advanced levels of VACs, the component can choose what to do, and with whom to do it. Facilitated reuse Components of a flexible structure are reusable or replicable and responsibilities for ready reuse/replication and for management, maintenance and upgrade of existing components are specifically designated. Can a duplicate of an existing component be readily created if another is needed? Can a necessary component be readily deployed when a new system must be constructed? Since within the VAC we are concerned within effective response to dynamic needs, some one or some mechanism is specifically charged with the responsibility for each activity involved. Attempts at formalised knowledge management are actually classical examples of facilitated reusability. However reusability of knowledge is not sufficient. Knowledge, when created, should be made promptly available to all members of the VAC and to other VAC that may need it. This point is important since knowledge creation should be made with the least possible energy dissipation. The objective in the metacapitalistic market is to allow knowledge to achieve a high turnover in order to have real growth. It is therefore necessary to remove barriers that put obstacle in the free dissemination of knowledge. Competitiveness will not be gained through knowledge retention but on the contrary how quickly new knowledge can be produced, disseminated and not accumulated and preserved as if it is a scarce resource [7]. It is therefore necessary to review the protection rules of the intellectual rights, towards a gradual abolishment of the property rights for inventions. We know that this idea will face strong opposition from many if not all parts of the scientific and non-scientific world. But this proposition has many benefits that will be discussed in a separate publication.

Evolving standards Frameworks of flexible structures standardize intercomponent communication and interaction, define component compatibility and are monitored or updated to accommodate old, current and new components. The purpose of the VAC framework is to facilitate reconfiguration, reuse and scalability. A framework should both constrain and enable these characteristics, bounding the set of potential configurations of an acceptable VAC system while encouraging full exploitation of the possibilities. It is the framework where all other principles described above find their right for existence and coexist in a dialectical interaction. 5 FURTHER RESEARCH The above principles are definitely not the only ones that may govern the structure of organising VAC, but are fundamental in our opinion as key principles for defining a Framework of cooperation. We do not wish to enter at this point in a detailed design of VAC, just because we do not believe that there should not be only one way of designing them. We envisage that there can be different forms and structures of VAC depending on the markets it is being addressed every time. Important is to stress the fact that further research should be performed on this issue. It is the intention of this work to animate the Mass Customisation Community on the benefits of these structures in order to meet the special and individualised needs of the markets that ask for more customisation and personalisation on the level of products and services. At least this is what we believe will give the competitive edge of our industrialised society in the meta-capitalistic era. 6 REFERENCES [1] Thomas S. Kuhn, 1996, The Structure of Scientific Revolutions, third edition, The University of Chicago Press. [2] Nikos A. Poulantzas, 1974, The social classes in contemporary capitalism, Editions Themelio, pp181-182. [3] Manufacturing Vision 2020, 2004, Assuring the future of Manufacturing in Europe, Report of the High-Level Group, The European Union, http:/europa.eu.int/comm/research/industrial_techn ologies/pdf/manufuture_vision_en.pdf. [4] Grady Means & David Schneider, 2000, MetaCapitalism: The e-business revolution and the design of 21st-Century Companies and Markets, John Wiley and Sons Inc. [5] Rick Dove, 2001, Response Ability – The language Structure and Culture of the Agile Enterprise, John Wiley and Sons Inc. [6] Alexander Tsigkas, 2004, For a new society of citizen: the state, the citizen, the market and the value of knowledge in the MetaCapitalism, (unpublished book written in Greek) [7] Alexander Tsigkas, Agis Papantoniou, Vassili Loumos, 2003, Towards Knowledge Based Mass Customization: a Framework for an Demand Design (ODD), 2nd Interdiciplinary World Congress on Mass Customization and Personalization, TU Munich, 2003

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