Offshoring Versus “Spackling”

The burgeoning trend of sending manufacturing to cheaper offshore locales often conflicts with increasing demands for speed and customization. Companies with a niche in producing both mass-customized and standard model products may encounter a problem — while they need a domestic facility to respond to custom orders quickly, the lower costs of manufacturing abroad create an incentive to use an offshore facility for standard units —and such a division may generate diseconomies of scale. In particular, having a domestic facility solely devoted to filling custom orders may raise expenses and force producers to keep custom prices higher than desired. Do firms have an option to profitably retain domestic production? Must flexibility and speed be sacrificed for cost savings? Our research asserts that both goals are possible: A domestic facility focused on filling custom orders can employ a technique called “spackling” — filling in gaps in the custom order schedule with noncustomized orders that might otherwise be manufactured overseas — thus keeping a domestic facility viable, while maintaining custom manufacturing responsiveness.

In our April 2004 UCLA working paper, Spackling: Smoothing Make-to-Order Production of Customer Products With Make-to-Stock Production of Standard Items, we evaluated the benefits of having flexible domestic manufacturing resources at Timbuk2 Designs Inc., a manufacturer of bicycle messenger bags based in San Francisco. In order to determine what manufacturing strategy Timbuk2 should use, we developed an analytic model to compare the profitability of a focused strategy (a flexible domestic facility focused on making custom products and an efficient offshore facility focused on producing standard products) with the profitability of a spackling strategy (using flexible domestic capacity to produce both custom and standard products). This model was structured to consider both operations (fixed and variable costs for each type of capacity) and marketing (pricing of custom and standard products). The model was designed to determine whether a focused production strategy or a spackling strategy would be optimal, and for the preferred strategy, it determined the amount of capacity the company should acquire. In applying the model to the case of Timbuk2, we used as inputs for the model the results of a conjoint survey involving roughly 300 MIT students (who configured bags, purchased them and then filled out a questionnaire). The results of the survey were used to determine what customers were willing to pay for and how much they were willing to pay. This in turn determined pricing and, ultimately, impacted both the choice of strategy (focus or spackling) and the quantities to be produced domestically or offshore.

Spackling, a term derived from construction, is used to describe this mass-customization strategy. When you spackle, you fill in the cracks and holes in plaster before painting; a spackling production strategy makes schedules smoother and allows full utilization of personnel, equipment and facilities. Under a spackling strategy, a domestic production facility concentrates on manufacturing customized goods for quick delivery but smoothes the production schedule with standardized goods that might otherwise be made overseas. On any given day, the spackling strategy dictates that a domestic plant first fills its custom orders, and any remaining capacity is filled by producing standard products, keeping the plant running smoothly and efficiently at full utilization. The firm profits from its custom orders but also competitively manufactures standard products in its domestic plant, using free capacity that would otherwise go unused.

Timbuk2, a company with a strong desire to both control costs and maintain a local presence in San Francisco, is a prime example of a company employing this strategy. Timbuk2’s customers can configure and order customized bags through a Web site, and in order to facilitate quick delivery, the company needed a more flexible domestic factory; for standard bags sold in retail outlets, they could explore a less expensive offshore option. As a result, Timbuk2 began producing both custom and standard units in their flexible domestic factory but soon determined that they could outsource the standard units to an offshore supplier at a cost approximately 20% lower per unit than possible in San Francisco. They were concerned, however, that moving all standard manufacturing offshore would adversely affect the cost structure of the custom bags being produced domestically.

With spackling, Timbuk2 could keep a domestic production facility in operation, allowing them to easily fill custom orders without a great loss in profits. The model indicated that the spackling benefits would offset an approximately 15% cost difference from the more efficient use of domestic capacity. Given that they could save 20% overseas, the spackling benefits did not entirely compensate for the cost difference; however, when Timbuk2 considered other intangible benefits, such as a more prominent local presence — which in turn might improve the firm’s relationship with the local community and perhaps even their brand image — retaining some domestic production of standard units to smooth gaps in the schedule was deemed strategically desirable. Essentially, if Timbuk2 chose to outsource all standard units, the 20% reduction in costs for the standard units would be substantially offset by an increase in costs for custom units, which would no longer benefit from spackling. Timbuk2 management decided that the spackling benefits, along with the other intangibles, justified using the spackling method to produce both custom and some standard models domestically.

Other companies like Dell Inc. are already using similar strategies in markets where speed and customization are a necessity. Overall, the use of spackling can help companies balance the trade-off between flexibility and efficiency by smoothing production in spite of volatile order streams. Further, it may lead firms to conclude that it is more profitable to keep at least some production locally instead of pursuing offshore manufacturing exclusively.