Offshoring Versus “Spackling”

How a textile manufacturer balances cost cutting with mass customization in its domestic facility.

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.

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