Customization promises best fulfillment of customers’ individual-specific needs and has been adopted as a competitive strategy in many industries that are faced with increasingly fragmented market segments. This research views customization from the demand side and studies customers’ procurement decisions for customized products. Procuring customized products is significantly more complex than procuring standard products because product specifications become decision variables, which are coupled with other decisions like price, delivery lead time etc. Conceptually, it’s a contracting problem with an embedded design problem. Design is collaborative in nature and requires truthful exchange of need information and solution information. Contracting, on the other hand, is inherently competit...[ Read more ]

Customization promises best fulfillment of customers’ individual-specific needs and has been adopted as a competitive strategy in many industries that are faced with increasingly fragmented market segments. This research views customization from the demand side and studies customers’ procurement decisions for customized products. Procuring customized products is significantly more complex than procuring standard products because product specifications become decision variables, which are coupled with other decisions like price, delivery lead time etc. Conceptually, it’s a contracting problem with an embedded design problem. Design is collaborative in nature and requires truthful exchange of need information and solution information. Contracting, on the other hand, is inherently competitive and entices strategic withholding or misrepresentation of private information.

This research designs procurement mechanisms that reconcile the simultaneous need for design collaboration and contracting competition in procuring customized products. A decision framework based on the theory of axiomatic design and economics of information is constructed to characterize the essential decisions, information, and incentives involved in procuring customized products. Based on the framework, a Negotiation-Credit-Auction mechanism is designed to separate collaboration activities from competition activities into two stages and employ integrative negotiation and competitive auction, respectively. Bidding credits are introduced as an instrument to recognize quality difference among different customized solutions so as to provide right incentives for manufacturers to compete in searching for the most value-adding solutions.

The performance of the proposed mechanism is proved to be efficient under a base scenario and can be extended to handle more complicated scenarios where there is uncertainty in solution evaluation and there is significant transaction cost.

This research also develops collaborative design methodologies based on negotiation theory to overcome information asymmetry and stickiness in defining specifications of customized products between customers and manufacturers. The particular problem that has been addressed in this research is concerned with customers’ inability to accurately articulate needs. By treating customer requirements as either constraints or goals, two negotiation schemes are formulated based on constraint satisfaction and goal programming, respectively. Interactive problem solving procedures are developed correspondingly to implement the proposed negotiation schemes, and the negotiation-based design methodologies are illustrated with an example of customizing commercial refrigeration systems for supermarkets.

This research contributes to academic research by developing an interdisciplinary approach to integrate mechanism design in economics and product design in engineering in the context of procuring customized products. Decision makers’ economic incentives are taken into explicit consideration in collaborative design decision making. As application is concerned, the methodologies developed in this research can serve as a foundation to develop processes or systems for procuring customized products and to develop decision support systems or tools to facilitate collaborative design in a distributed environment.