Manufacturing costs in production lines that accommodate multiple products are driven up by frequent plant changeovers, increased setup times, higher administrative costs, and increased capital investment. In service businesses, excess variety increases complexity costs in the form of overtaxed back-office processing procedures, too many unique processes, higher transaction errors, too many customer service centers, and too much staff training.
Manufacturers such as Boeing have been among the most enthusiastic adherents to the idea of separating common and custom product architecture. During the original design and development of the 777 aircraft frame, the aerospace giant went to extraordinary lengths to take a modular approach to airplane configuration. The intent was to create an acceptable series of options for the 777 that would meet customer requirements for variety and provide an inexpensive production system for most of the content of Boeing’s planes.
Board any 777 today and you’ll see the results. Where minimal configuration changes are involved — for example, color or seat choices — Boeing’s customers are encouraged to order from a selection of customizable designs offered by the company. But when a customization request increases the cost of manufacturing significantly because it is outside this tight range of options, the customer must pay more.
It could be said that credit card issuer Capital One — with its extensive use of statistical models to assess consumer lending profiles and predict the probability of default for specific customer segments — epitomizes a service organization’s version of separating the common from the unique and gaining value from each. By deeply analyzing credit models and examining the demographics of potential customers, the $10 billion company divides consumers into microsegments. It can customize lending rates to a person’s credit history, but it does this with one common cost-effective platform. In this way, Capital One appears to offer a wide array of rates and lending limits, which is an alluring feature for customers. Meanwhile, Capital One’s innovative and proprietary value architecture allows it to maximize market penetration and return on lending (increasing customer acquisition and retention while minimizing default risks) and improve the efficiency of its processing systems, back-office infrastructure, and call center.
The concept of tailored business streams (TBS) holds that 80 percent of customer demands are routine and can be industrialized, but more flexible (and more expensive) processes are needed to serve the remaining 20 percent. For manufacturers or service organizations, TBS drives down cost-to-serve, improves service levels, and preserves flexibility by allowing companies to achieve a high degree of differentiation without compromising economies of scale. Many companies segment their service delivery streams, but very few simplify the underlying delivery processes, which is where the use of TBS drives savings and performance improvements.
A North American automotive components manufacturer was able to reduce its operating costs by more than 25 percent by targeting the bulk of its manufacturing operations on its “runners and repeaters” (high-volume, relatively standard products) and consolidating production of its “cats and dogs” (low-volume, highly complex products) into a separate, centrally located facility. In doing this, the manufacturer improved customer service in the form of fewer out-of-stock items and faster shipments for both product lines, and also raised its revenue. Moreover, by reducing the number of stock keeping units produced at each plant by 80 percent and manufacturing products closer to the customers that needed them, this automotive company was able to trim capital costs and increase inventory turns. And by consolidating North American manufacturing operations for “cats and dogs” into another facility, the company was able to pay more attention to designing efficient, flexible factory operations for these lower-volume items.