AbstractsBusiness Management & Administration

Capture the value of customer indifference in product customization via flexible options

by Guohua Tang

Institution: Hong Kong University of Science and Technology
Year: 2016
Keywords: Flexible manufacturing systems; Economic aspects; Product management; Mathematical models
Posted: 02/05/2017
Record ID: 2123513
Full text PDF: http://dx.doi.org/10.14711/thesis-b1584477


Driven by increased diversification of customer needs, market fragmentation and fierce competition, manufacturers in many industries pursue a high product variety strategy to compete. A larger assortment enhances customer value due to better opportunity of fitting individual needs; meanwhile customers often find it a difficult and somewhat frustrating process to identify the ideal choice in a wide spectrum of choices. They exhibit choice indifference when faced by similar products. In the state of indifference, customers struggle to make a choice, and may end up with random selection or simply leaving without purchase due to unpleasant experience and poor decision quality. Product customization, as an approach to managing product variety, promises the delivery of customized products that meet individual needs with high efficiency. Various online configurators have been developed to facilitate the process. Asking customers to select the preferred choice for each customizable attribute, configurators escalate the issue of choice indifference simply due to increased number of decisions. If not managed well, it leads to poor customer satisfaction and potentially loss of sales. Nevertheless, it indicates customers’ preference flexibility in product specifications, which can provide flexibility for manufacturers to fulfil demand according to their supply chain convenience. This is an untapped value to be unlocked, and has not been explicitly studied in prior research. This research studies the problem of customer indifference in the context of product customization. To capture the value of customer indifference for the manufacturer, we introduce a mechanism termed flexible option. It is defined as a set of two or more specific alternatives that can be used to instantiate an attribute in product configuration. When a customer selects a flexible option, one alternative in the set will be assigned by the manufacturer to finalize the configuration after order placement. A flexible option could also be applied with price discount. By doing so, a win-win situation can be achieved: customers with choice indifference are relieved of decision burden while others still enjoy the variety of choices, and the manufacturer may induce more demand and gain operational flexibility for more efficient supply demand matching. The economic value of customer indifference can only be captured when flexible options are appropriately designed. This research aims to develop a theoretical foundation and methodology so that manufacturers can optimally design flexible options for their customized products. In a nutshell, flexible option design needs to identify the best combination of two parameters, namely the set of alternatives and price discount, with the incorporation of customer indifference. To do so, customer indifference is quantitatively characterized with the introduction of utility difference function and minimum perceived difference in Chapter 3. These are integrated into a holistic modeling structure that captures the…