Influences of supply chain finance on the mass customization program: risk attitudes and cash flow shortage

• DOI: http://doi.org/10.1111/itor.12708
• Date: 01 September 2020
• Published date: 01 September 2020

Intl. Trans. in Op. Res. 27 (2020) 2396–2421

DOI: 10.1111/itor.12708

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Influences of supply chain finance on the mass customization

program: risk attitudes and cash flow shortage

Shu Guoaand Na Liub,∗

aDepartment of Management School, Universityof Liverpool, Liverpool L69 7ZH, United Kingdom

bBusiness School, Beijing Institute of Fashion Technology, Beijing, China

E-mail: eunice77010@gmail.com [Guo]; sxyln@bift.edu.cn [Liu]

Received 7 January 2019; received in revised form 17 July 2019; accepted 20 July 2019

Abstract

In recent years, to satisfydiversified customer needs in the target market, an increasing number of brands have

launched mass customization(MC) programs as one of their core operations strategies.The production process

flexibility and personalization degree of customized products (i.e., the MC products) have thus become key to

the success of MC schemes. In the meantime, however, considering the high market uncertainty in consumer

preferences and the challenges from the productionprocess, there are plenty of risks in MC operations.Hence,

in this paper we develop a game-theoretic model consisting of an MC brand and an upstream manufacturer

to identify the influences of supply chain finance (SCF) on MC programs. The influences brought by the risk

attitudes of both MC brand and manufacturer are analyzed. Besides, an extra interest rate for raising the

working capital forproduction (e.g., from the bank) at the manufacturinglevel is also considered in this paper

to address the impact of cash flow shortage. We find that when the positive sensitivity of the market demand

with respect to the modularity level of the MC product is sufficiently high, the optimal product modularity

level of the MC product increases with the MC brand’s degree of risk averse. In addition, it can also be

observed that when both the market demand’s positive sensitivity to the modularity level of the MC product

and the MC brand’s opportunity cost rate for placing the advance order are sufficiently high, any increase in

the risk-averse degree of the MC brand or the manufacturer will lower the manufacturer’s optimal wholesale

price of the MC product as well as the MC brand’s optimal rate of the advanceorder. Furthermore, the higher

the interest that the manufacturer needs to pay (such as to the bank) for raising the working capital for the

MC production process, the lower the optimal wholesale price of each finished MC product will be to help

the manufacturer raise more money through the advance order placed by the MC brand. These observations

complete the findings in the extant literature and provide important managerial insights into managing MC

operations.

Keywords:supply chain finance; mass customization; cash flow shortage; risk attitudes

∗Corresponding author.

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Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main St, Malden, MA02148,

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S. Guo and N. Liu / Intl. Trans. in Op. Res. 27 (2020) 2396–2421 2397

1. Introduction

1.1. Background and motivation

Spurred by the growth of Internet and related technologies, mass customization (MC) has been

extensively deployed by many leading companies from various industries, which is a concept pro-

posed quite a few years ago. Toffler (1970) first proposed a creative idea in the book Future Shock.

According to the idea, MC is a kind of strategy that can help the firm fulfill the customers’

specified requirements, and at the same time, keep the cost very close to the mass production

(MP). Next, Davis (1989) named the concept of this mode as MC in “Future Perfect” and de-

scribes MC as “a world of paradox with very practical implications.” It is deemed to be the

creation of MC, and nowadays MC is widely known as a strategy based on the hybrid combina-

tion of both mass production and pure customization (PC). Some typical industry examples of

MC are automotive (Audi, Chryslers, and BMW), apparel (Brooks Brother,Benetton, Lands’ End,

and Second Skin Swimwear), footwear (NIKEiD, mi Adidas, Vans, and Custom Foot), luxury

(Cartier, Louis Vuitton, Burberry), computer (HP and Dell), consumer goods (Procter & Gamble),

food (M&M’s), and finance and insurance (MetaCapitalism) (Yeung et al., 2010; Liu et al., 2012,

2019).

In the MP process of MC, given the advantages of scale of economy (i.e., the large scale of

the production volume), the cost is usually relatively low. In the PC process, however, due to the

high product modularity level and the large variety of requirements of customization, the cost

is always much higher than the MP process, which correspondingly leads to a high overall cost

level of MC schemes (Mukhopadhyay and Setoputro, 2005; Liu et al., 2012). Besides, in real-

world practices, there are some chances that it may even require additional investment in the

operations of MC schemes. For instance, innovation in the production process may be emphasized

in the MC schemes (Reeves et al., 2011). In some cases, the body-scanning machines, which can

cost million dollars, may also be needed to support the sales activities in some shopping malls

(Kumar, 2004). A well-known instance for this kind of additional equipment investment is the

MC program in Adidas. Consequently, as we can also observe from the industry, an MC program

requires huge amount of investments such as the investments on various advanced technologies,

for example, computer-aided design, computer-aided manufacturing, big data, cloud computing,

flexible manufacturing system, customization platform, as well as other aspects such as human

resources. In practice, this requirement of huge amount of investments can be observed from the

MC companies, such as Kutesmart, which is an MC fashion company in China (Liu et al., 2019)

and has invested about 368 million RMB for the MC platform in 2018.1Therefore, it is obvious

that adopting MC requires substantial financial investments (Sandrin et al., 2018), which will be

used to purchase the advanced manufacturing systems such as the hot technology of virtual reality

and multimedia. In the meantime, although the latest IT developments sharply help increase the

efficiency and performance of the MC programs such as improving the manufacturing systems for

MC, a big barrier could be the requirementsof the huge amount of financial resources (Sandrin et al.,

2018). Consequently,some MC manufacturers with limited operations capital, especially small- and

medium-sized enterprises (SMEs) MC producers, may need to seek financial support from bank or

1See http://www.jimo.gov.cn/n3201/n3234/n3241/180109185709082231.html(accessed in 28 December 2018).

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2019 The Authors.

International Transactionsin Operational Research C

2019 International Federation of OperationalResearch Societies