The Right Stuff
America's Move to Mass Customization

A Letter from the President When I use my remote key to unlock Big Red, it automatically adjusts the seat and mirrors for me. When my wife, Suzanne, uses her remote, it does the same for her. Is this a great country or what? Somehow we were able to get by before this convenience, but life is surely sweeter now. We may save only 10 or 15 seconds, but, hey, those seconds add up. The old way met our needs, but the new way meets them better. That's what our annual report essay is about this year: the power of new technology to customize our products. Things used to be made to order and made to fit. But they were labor-intensive and expensive. Mass production came along and made things more affordable, but at a cost—the cost of sameness, the cost of one-size-fits-all. Technology is beginning to let us have it both ways. Increasingly, we're getting more personalization at mass-production prices. We're moving toward mass customization. That's the message of our essay. I hope you enjoy it. The economy just finished another remarkable year of rapid growth, falling unemployment and declining inflation. Don't say I didn't tell you so. Here's what I said in this space last year: Our optimism about the American economy was well placed last year [1997]. Real GDP grew almost 4 percent, employment was up 3.2 million, unemployment fell to 4.7 percent and the Consumer Price Index increased only 1.7 percent. The best performance in years in both unemployment and inflation left many less optimistic souls scratching their heads. We, however, expect more of the same in 1998. How close was I to the mark? Well, real GDP grew over 4 percent last year, employment was up 2.8 million, unemployment fell to 4.3 percent and the Consumer Price Index rose only 1.6 percent. Once again, a stellar performance. Less optimistic souls are still scratching their heads. Dare I predict more of the same for 1999? Why not? As Tom Wolfe might have me say, let's let the red dog off the leash. I expect real growth in 1999 to benefit again from technology-driven improvements in productivity, which rose more than 2 percent last year. I also expect the global deflationary environment to combine with strong growth in productivity and real output to hold down inflation. I'm not saying that inflation will remain low despite strong real growth; I'm saying it will remain low in part because of strong real growth. If inflation results from too much money chasing too few goods, more goods will help as much as slower money growth. The bottom line will be real growth in the 3-4 percent range, with inflation remaining below 2 percent. I don't believe in speed limits on the economy or a stable NAIRU (nonaccelerating inflation rate of unemployment). And I'm certainly not a Phillips curver who believes inflation and unemployment are on a seesaw where one goes down only when the other goes up. I can't support my optimism with sophisticated models, but I do offer as evidence the economy itself. As Yogi Berra has said, "You can observe a lot just by watching." I'm also reminded of an old Richard Pryor line: "Who are you going to believe? Me or your own lying eyes?" For the past three years the economy I've been watching has grown at what most models would consider unsustainable rates while inflation has declined rather than increased. I think a fourth year like the last three is possible, but we do face some unpleasant employment arithmetic. The past three years have benefited from growth in both productivity (more output per hour worked) and the labor supply (more hours worked). Declining unemployment during those years means we were drawing down the available labor pool. With unemployment at 4.3 percent, with labor-force participation over 67 percent and discouraged workers (people who'd like a job if they thought it possible) at a record low, we may finally run out of slack in the labor market. If so, productivity will have to increase even faster for the recent growth rate to continue. Of course, productivity growth and the number of available workers are related, since much of the consolidation and downsizing undertaken to make companies more efficient frees up labor for other uses. Congress could help make my optimistic scenario a reality by taking two easy steps to bolster our workforce. My first recommendation is to abolish the earnings test on Social Security benefits to make part-time work more attractive for experienced retirees. My other suggestion is to ease limits on immigration of foreign workers with the education and skills to be productive immediately. We need more good people. While we're at full employment is the time to do it. The U.S. economy performed well last year despite the Asian financial crisis. In fact, until the Russian default in August, large parts of our economy benefited from the flight of capital to the United States. That changed after the Russian default, however, and our financial markets became unsettled in September and early October, prompting the Fed to ease policy in three small steps. Financial markets returned to near normal, and the overall U.S. economy not only remained robust but picked up strength in the fourth quarter. Although the U.S. economy has done well for several years, the Eleventh District has done even better, as measured by employment growth. During 1998, however, District employment growth slowed to the national rate in the face of head winds spawned by low oil prices—which affected both producers and exports to Mexico-and by depressed computer chip prices. Agriculture also was hard hit. In recent years, an influx of workers helped keep regional employment growth above the national pace, but tight labor markets nationwide narrowed this advantage during 1998. Banks in the District remain well capitalized, liquid and profitable. Loan demand has remained strong. Texas bankers were saddened at the loss of our friend Bob Harris, president of the Texas Bankers Association. We miss him very much. Demand for the Dallas Fed's financial services continues to be strong overall. 1998 saw increases in check and cash volume as well as automated clearinghouse and funds transfer volume. These gains helped us improve productivity and efficiency. We recovered the cost of our priced services during 1998. The Dallas Fed devoted considerable attention to Y2K last year. By midyear the Fed's critical systems were Y2K compliant, and banks began testing their electronic interfaces with us. All milestones are being met. As testing continues in 1999, we will also finalize our contingency plans. In addition to our own systems and electronic connections to financial institutions, our examiners have been overseeing the Y2K preparations of the banks and holding companies under our jurisdiction. Virtually all are meeting their milestones and are on track. If there are significant problems with the century rollover, we don't expect them to originate in the banking system. — Robert D. McTeer, Jr.   President and Chief Executive Officer

The Right Stuff
America's Move to Mass Customization

Henry Ford's first great contribution to America was the Model T, which rolled off the assembly lines at his Highland Park, Michigan, plant at the rate of one every 24 seconds. At the time, it was an amazing display of industrial efficiency. By streamlining automation in his factories, Ford advanced an era of mass production that built his fortune and brought the automobile within reach of an emerging middle class. But while the miracle of mass production delivered the goods, it didn't adapt easily, so all Model T's looked alike. Ford's approach can be summed up in what he said about the car's exterior: "The consumer can have any color he wants so long as it's black."

Ford's take-it-or-leave-it attitude wouldn't cut it in today's economy. Americans are blessed—some might say overwhelmed—by an ever-expanding variety of goods and services. (See Exhibits 1 and 2.) Just since the early 1970s, there's been an explosion of choice in the marketplace—the assortment of new vehicle models has risen from 140 to 260, soft drinks from 20 to more than 87, TV channels from 5 to 185, over-the-counter pain relievers from 17 to 141. The U.S. market offers 7,563 prescription drugs, 3,000 beers, 1,174 amusement parks, 340 kinds of breakfast cereal, 50 brands of bottled water. Whole milk sits on the supermarket shelf beside skim milk, half-percent, 1 percent, 2 percent, lactose-reduced, hormone-free, chocolate, buttermilk and milk with a shelf life of six months. Today's consumers have access to more book titles, more movies and more magazines. Ford's company still makes black cars for buyers who want them, but it also offers a palette of 46 other colors—toreador red, jalapeño green, Atlantic blue, mocha frost, autumn orange, teal and more.

This proliferation of products, models and styles isn't capitalism run amok. Variety shouldn't be dismissed as a trivial extravagance. It's a wealthy, sophisticated society's way of improving the lot of consumers. The more choices, the better. A wide selection of goods and services increases the chance each of us will find, somewhere among all the shelves and showrooms, products that meet our requirements. (See Exhibits 3, 4 and 5.)

Over time, the American economy has been giving us more of what we want. Just look at what's happened in automobile design since Ford made his declaration about the color of cars. Until 1914, Model T's were available in red, blue, green, gray and black. The move to all black was a concession to mass production that made the car a commodity of sorts, but standardization wasn't a winning strategy in the long run. By 1927, competition forced Ford to rethink variety. The Model A came in several body styles and an array of colors. With each decade, Ford gave consumers more choices, so that by 1955 the company offered five model series: mainline, customline, Fairlane, station wagon and the two-passenger Thunderbird convertible. Buyers could select upholstery and optional equipment.

The possibilities for doing a better job of meeting consumers' wants still weren't exhausted. Ford and other automakers started designing products for market niches. In 1964, Ford introduced the Mustang, an inexpensive, sporty vehicle for young drivers. The 1980s brought the Taurus and Sable, cars for middle- and upper-middle-income families. As Ford prepares for the next millennium, it's introducing custom ordering, which allows buyers to specify what they want. Ford's Internet site offers six models of the Explorer—each with choices for power train, exterior, interior, audio, wheels, tires and other options. All told, there are more than 2.5 million possible combinations for the vehicle.

The trend toward customization isn't confined to the automobile industry. From clothing to computers, businesses are working to become more consumer friendly. They do it to gain new sales and stay competitive. They do it because pleasing the customer isn't just about producing more stuff. It's about producing the right stuff.

Just what is the right stuff? It's more of what we do want and less of what we don't want. The economy provides more of what we do want by customizing products to our particular tastes. It eliminates what we don't want through preventive products. Vaccines, childproof caps, safety gear on cars and antipollution devices are valuable for the misfortunes they avert. Preventive goods and services are often taken for granted—until they're needed. They raise living standards by replacing treatment with immunity, repair with safer design, helping protect consumers from some of life's tragedies.

The rich have always enjoyed the luxury of custom-made products. Now, though, personalized goods and services are increasingly within the budgets of middle-class consumers. Computers, the Internet, DNA research and other technologies are forging a whole new paradigm that makes possible the delivery of custom-designed products to the masses—at ever lower prices. The descriptive phrase for the phenomenon is mass customization. "Once you know exactly what you want, you'll be able to get it just that way," says Bill Gates, founder of software giant Microsoft. "Computers will enable goods that today are mass produced to be both mass produced and custom-made for particular customers."

The economy's progression to customization isn't a fad. It arises from the free market's relentless drive to bring what we buy closer to what we want. What we buy yields a lot more utility when it exactly matches our needs, and Americans are reaping enormous benefits as new tools help business cater to markets of one. We're getting more for less, helping keep inflation in check.

There's just one glitch in this otherwise serendipitous story: traditional measures of the economy may not reflect how much our living standards are improving. Conceived in an era of mass production, the nation's GDP and productivity statistics may ably count more stuff, but they give little credit for right stuff. Mass customization and prevention—just like variety—deliver their gains in important but subtle ways, so gross domestic product and productivity statistics fail to capture the extent of our progress.

For the Future, the Best of the Past
Just as mass production was the hallmark of yesterday's Industrial Age, mass customization promises to dominate the modern stage of America's economic evolution—the Information Age. New eras, of course, don't arrive overnight. They emerge slowly and incrementally as they overlap with the old, taking years and even decades to transform the economy. Even so, we're already seeing noteworthy moves to mass customization.

Computers. Dell Computer of Round Rock, Texas, has proven that complex manufactured products can be made to order. Using the telephone or the Internet, customers describe the computer they want, the shape of the cabinet and size of the monitor screen, the speed of the microprocessor, the capacity of the hard drive. Other choices involve keyboards, mouses, video cards, modems, speakers, data-storage systems and software. The number of possible combinations is staggering—almost 16 million for desktop models alone. Dell begins assembling a computer only after it receives an order and then ships the finished product directly to the customer's home or business within a few days. Gateway 2000, Micron Technology and Compaq Computer also make computers to customers' exact specifications.

Clothing. Off-the-rack apparel has always come in many sizes, styles and colors, but mass customization promises a perfect match for each buyer's fit and taste. Connecticut's InterActive Custom Clothes sells jeans over the Internet, allowing customers to specify hip size, leg and seat room, fabric, color, thread accents, leg silhouette, fly design, pocket style, buttons, rivets and even label. The pants are produced to exact specifications at a New York factory. Digitoe, a Washington company, uses a scanner to measure every millimeter of customers' feet for custom-made shoes. Using his computerized mobile fitting unit, Alan Zerobnick digitizes each foot's dimensions—no matter the size or shape—and builds a three-dimensional shoe last around which any style can be molded for a perfect fit. Orders are shipped in three to four weeks. Reorders require only a phone call.

Entertainment and information. Music buffs who wanted to hear their favorite songs once had to buy dozens of compact discs. Now, CDuctive, a New York company, maintains an Internet site with sound bites from about 10,000 titles. Customers select a dozen cuts to be burned onto a CD and shipped to their door.

In the age of mass media, the goal was to create newspapers and television stations that reached a broad audience. The Internet changes all that. NewsEdge Corp. gathers a profile of each customer's interests, then scans almost 700 news sources to deliver regular reports on current events, sports, weather and finance, all geared to the individual reader. Broadcast.com, a 5-year-old Dallas company, operates a web site that transforms computers into the most powerful radio receivers ever, allowing listeners to pick up stations from Turkey, Argentina, South Africa, Sweden or anywhere else in the world.

Health care. Advances in biotechnology—most important, the ongoing process of cracking the DNA code—now allow doctors to individualize drugs and other treatments. Affymetrix, a Santa Clara, California, company, has produced the first biochip, a dense grid of molecular tweezers that extracts individuals' DNA. The biochip can analyze thousands of genes at once—in effect, speed-reading the cells' DNA codes. Although the Human Genome Project has been mapping genes since 1990, biochips make the process personal. They give doctors information on each patient's medical condition.

Philadelphia's Acumin sells capsules customized with specific vitamins and dosages for each customer, cutting the number of pills some people swallow in a day. Advances in cloning technology are allowing doctors to take a skin sample and reproduce a patient's own collagen cells. Injections of the cells can smooth wrinkles and scars without risk of allergic reaction.

In one industry after another, companies are customizing for the mass market. They're doing it because new technologies make it practical and competition makes it imperative. Futurist Alvin Toffler, who predicted the coming of mass customization in the 1970s, recently issued a stern warning to producers who aren't yet on board: "I'd say if you have a company and you're not moving toward automation on demand, you'll have a competitor one day soon who will put you out of business."

Whether companies are seeking to expand sales or just stay in business, mass customization enables producers to snare buyers by offering extra value. It's no surprise that consumer satisfaction lies at the core of this phenomenon; what consumers want always shapes market economies. Econ 101 professors have taught this straightforward notion since Adam Smith published The Wealth of Nations in 1776. Markets serve as complex information machines that collect and communicate buyers' needs, tastes, desires and whims. Producers that do the best job of catering to consumers gain market share and make greater profits. Burger King got it right in its advertising slogan: Have it your way!

Companies prosper by delivering what customers want. This conventional view of consumer sovereignty is correct—as far as it goes. What's missing is a description of how meeting buyers' needs and wants evolves over time. (See Exhibit 6.) Americans have always preferred customized products, but they couldn't always afford them. Now, companies are finding ways to deliver exactly what we want at prices competitive with those of mass production.

Until the Industrial Revolution, producers catered to consumers one at a time. Sophisticated machine tools hadn't been invented, so every product had to be handmade. A tailor, for example, would measure each customer and ask about style, fabric and fit, then stitch a suit or dress to the exact pattern. When shoes, furniture and all other goods were made to order, customers could always buy just what they wanted—if they could afford it. The drawback of production by artisans was high cost. The typical American was lucky to possess one suit of clothes and one pair of shoes.

Industrialization changed that. Machines began to make our clothes, shoes, furniture, kitchen utensils and an array of new products, sweeping America into an era of mass production. Producer and consumer rarely came into contact. Goods were made in factories, shipped over great distances and sold in department stores. Mass production dictated large runs of identical products. Consumers sacrificed the luxury of personal attention for affordability. Taking what came off the shelf, though it might not be a perfect fit, was the best choice because it was cheap. The Industrial Age brought lower prices. Just as important, each worker produced more, justifying a bigger paycheck. Today, just about all U.S. households possess cars, television sets, telephones and plenty of other everyday conveniences—all made possible by mass production.

What's increasingly shaping today's economy isn't the raw power of machines but the subtle power of knowledge. Information Age technology—primarily the computer—has erased yesterday's edict that customization must carry a high price. Mass customization offers consumers the best of both worlds. It embodies the good qualities from the era of hand production—custom design and individualized service. And it retains the most significant gain from the era of mass production—low cost.

Mass production was about producing more stuff. Mass customization is about producing the right stuff.

Customization for the mass market isn't just economists' jargon for variety. The difference lies in which side of the market calls the shots. Variety represents producers' best guess about what consumers will buy. Companies tweak their designs, hoping what they offer is close enough. Even when companies rely on market research, they're still aiming at broad groups of consumers. Variety has delivered great benefits in recent decades, but it is mass production's response to the fact that everybody's tastes differ. (See Exhibit 7.) Even at its best, variety is an imperfect substitute for true customization, which eliminates the need for guesswork. Companies that customize don't make anything until they know precisely what the customer wants.

One size fits all? Not anymore. What served as a good slogan for mass production doesn't cut it in today's world.

Technology's Role: Driving Down Costs
Why have Americans had to wait until the tail end of the 20th century for mass customization? The simplest answer: until now, the country didn't have the know-how to customize at low cost. Today's technology, though, makes it possible.

If there's a signature tool of mass customization, it's the microprocessor. This tiny device is indispensable to many of today's "smart" tools—most notably, powerful computers that process, store and send information. The Internet moves vast amounts of information at the click of a button—not just words and numbers but pictures and sound as well. Search engines—software that brings order to the Internet's chaos—are key to customizing because they find and organize information based on users' profiles and inquiries. Lasers are used in bar-code scanners, measurement devices and fiber-optic cables that can transmit whole libraries in seconds. Artificial intelligence programs simplify the design of new products. Computer-controlled manufacturing makes it faster and cheaper to modify designs and assemble one-of-a-kind items. Breakthroughs in biotechnology are unlocking the secrets of individual cells. The leap from analog to digital greatly expands the capacity of all kinds of communications technologies to process and deliver that most precious of commodities—information.

The tools of the Information Age are indeed powerful. These technologies spawn mass customization by revolutionizing the calculus of production costs. Nearly all business expenses fall into two broad categories—fixed and marginal. Fixed costs include conceiving, designing and organizing the operation, setting up plants, installing equipment, bringing in utilities, hiring workers and slogging through the usual morass of red tape. These costs are incurred before the first sale is made. Marginal costs, on the other hand, aren't incurred until an enterprise is up and running. They cover expenses for producing additional units of output, including wages, raw materials, electricity, marketing and distribution.

The interplay of fixed and marginal costs explains both mass production and mass customization. In the Industrial Age, electric motors, engines, winches, conveyor belts, machine tools and other advances reshaped the economy. They were the high technology of the times. These innovations allowed companies to turn out identical products cheaply. The order of the day was standardization—from nuts and bolts to accounting procedures and time zones. The world of mass production usually involved high fixed costs and low marginal costs. Producers made money by cranking out as many units as possible, driving down the average production cost by spreading the huge fixed cost over more and more units. That's precisely what Henry Ford and his successors did. Customers paid lower prices for automobiles, appliances, clothing and household goods, but companies could only bring a limited number of standardized models to the marketplace. With high fixed costs and low marginal costs, it's cheap to make the same product for everybody but expensive to produce a different product for each customer.

Industrial Age technology replaced muscle power with machine power, which ran the assembly lines. Information Age technology complements machine power with brain power, enabling us to recognize each consumer's preferences and deliver what they want at a reasonable price. (See Exhibit 8.) Once again, the key is costs. Mass customization becomes optimal when both fixed and marginal costs—particularly fixed—are low. If producers can change designs quickly and inexpensively, they'll win customers by targeting individual tastes and preferences. Average costs decline even without long production runs, permitting low prices along with the bonus of getting exactly what we want.

Mass production was the by-product of Industrial Age tools. Mass customization is the dividend of Information Age tools.

Modern technologies slash fixed costs in three areas: information, production and distribution. By making it easy to supply information, the Internet gives consumers a cheap and easy way to find out what goods and services are on the market. Companies can display immense amounts of product information on their web pages and take orders from anywhere in the world. More important, the Internet frees producers from the expensive proposition of paying firms to gather information on what buyers want. (See Exhibits 9 and 10.) They now find out electronically, at negligible cost. Both InterActive Custom Clothes, the jeans maker, and CDuctive, the producer of custom compact discs, compile consumers' preferences through the Internet. Amazon.com, the Internet bookseller, keeps track of readers' purchases, allowing the online vendor to recommend specific books to individual customers.

By making it cheaper to personalize during production, Information Age tools remove the last barriers to providing goods and services for individual customers. It's smart automation that allows CDuctive to personalize compact discs at the click of a button. Once an order arrives, computers retrieve the selections from a hard drive and burn them directly onto blank discs. InterActive Custom Clothes uses computerized fabric cutters that are quick, precise and inexpensive. Even assembly lines are no longer limited to endless iterations of the same product. Computer-aided designs are replacing costly prototypes. (See Exhibit 11.) Computer-guided machinery allows production to shift from one style to another with a few lines of computer code. At Motorola's pager factory in Boynton Beach, Florida, the specifications for each order arrive in a direct transmission from sales representatives' laptop computers. Within minutes, these specs are translated into bar-code instructions for the assembly process. In theory, the factory could produce 29 million different pagers on the same line, one right after another, without the time and expense of retooling.

Improvements in distribution, made possible by such technologies as lasers and computers, reduce the fixed costs of getting products to consumers. Bar-code scanners allow Federal Express and other overnight shippers to improve speed and accuracy while reducing outlays for a global system to pick up, sort, track and deliver packages. As the Internet spreads into more homes and businesses, it makes the delivery of information products relatively inexpensive. What does it cost NewsEdge Corp. to personalize news reports? Next to nothing. Fidelity Investments and other brokerages offer web sites that allow investors to track their portfolios in real time. DirecTV, capitalizing on the increased capacity of satellite television systems, incurs no added expense by offering the entire National Football League schedule every Sunday, so sports fans can choose which games they want to watch.

Michael Dell started his $16 billion computer business in a University of Texas dorm room in 1983 on the basis of low fixed cost. Dell's masterstroke: build to order and do it quickly. Customization would lose its value if customers had to wait months for their computers. The Internet allows Dell to find out what each customer wants, instantly and cheaply. Continuous-flow manufacturing cuts the cost of customizing: 35 cargo doors line both ends of Dell's new Round Rock manufacturing facility. On one side, suppliers deliver components throughout the day. On the other, workers load finished products onto trucks. Actual assembly takes five minutes. Even adding time for loading software and testing for quality, the whole process takes just four hours. By economizing on spare parts, product inventory, delivery and every other step of the process, the company provides a customized product at a competitive price. No wonder Michael Dell has been lauded as the Henry Ford of mass customization. (See Exhibit 12.)

Information Age technology thrusts our economy toward mass customization, but other factors also contribute. The globalization of commerce, for example, makes goods and services more widely available, especially as cutting-edge electronic media reduce the time and expense involved in gathering information. Access to products from around the world also makes us more sophisticated consumers, so that even in the home market we demand the nuances of Italian suits or German beer.

Just as mass customization couldn't take root in an isolated society, it couldn't emerge in a poor one. Low-income countries are still dominated by mass production. That's to be expected, because producing quantity is the quickest way out of poverty. Once a nation becomes wealthy, most families' basic needs are satisfied. As they move up the economic ladder, consumers typically move down a list of wants from food, clothing and shelter to luxuries. All of us desire the luxury of goods and services that embody our own tastes and preferences. It's money in the pocket, though, that makes it possible. We're becoming a society of mass customization because we can now afford it.

First we meet basic needs through mass production. Then we gratify individual wants through mass customization.

Right Stuff, Wrong Statistics
As mass customization becomes part of our everyday lives, most Americans will intuitively understand how it represents an improvement over mass production. Clothes will fit better. Entertainment will be more enjoyable. Doctors and hospitals will have individualized tools to make us healthier.

Yet it may be hard for many Americans to assess how much better off we are. The problem lies in how we measure our economic progress. We tend to rely on a handful of well-publicized statistics—most notably, gross domestic product, the Consumer Price Index and productivity figures. The benefits of mass customization, however, are hard to quantify, especially with the rudimentary economic yardsticks now available.

GDP is a statistic designed for mass production. It's a simple counting—the number of units made. It falls short in measuring intangible benefits. Economic research demonstrates that GDP often fails to capture consumers' gains from better quality and new products. Mass customization introduces a similar bias, one tied to the fact that we can measure production but not consumers' satisfaction. They aren't the same, even though many commentators casually link them. (See Exhibit 13.)

Nobody ever said quantity was the spice of life. GDP statistics tell the same tale whether a business executive owns 12 identical suits or if he possesses a dozen in an array of fabrics and styles. Is it really the same? No individual would think so; that's why our closets are filled with a variety of garments. Will 100 copies of The Catcher in the Rye offer as much reading pleasure as one copy of 100 different novels? GDP says so. Most consumers would say no. And just as variety has produced gains for America that have eluded the GDP and productivity statistics, mass customization will produce even more.

Preventive production proves just as slippery for GDP accounting. (See Exhibit 14.) If electronic sensors in roads and vehicles can prevent accidents, Americans will have undamaged cars. Without the technology, they might be involved in more collisions, spending money on repairs. Either way, they have the same thing—a car without dents. The first costs less, so GDP accounting would suggest we're worse off, not better off. Similarly, scientists are developing vaccines that will eliminate tooth decay. We will benefit from improved dental health, but the holes not drilled in teeth are net losses to GDP. A stitch in time may indeed save nine, but it also generates one-ninth the GDP.

Inflation-adjusted GDP puts economic growth at an annual average of 2.7 percent over the past two decades. GDP may be entirely accurate as a tally of how much our farms, factories and offices produce, but it's increasingly inadequate as a measure of how well the economy provides what we want—the satisfaction produced. As we grow wealthier, Americans are taking more of our progress in ways that aren't readily quantified. We're refining what we produce—making the right stuff, not just stuff.

If GDP can't detect the benefits of mass customization, it will also miss the mark on productivity, a number that derives straight from the GDP calculations. Some economists are disappointed in America's productivity performance over the past quarter century, a time of rapid spread of new technologies—most notably the computer. They see measured productivity slowing to 1 percent a year and worry that Information Age advances aren't delivering the same economic punch as Industrial Age inventions. It just isn't so. Our statistics don't recognize how the economy is making us better off by producing for us individually rather than en masse. (See Exhibit 15.)

Our statistics are a rearview mirror, looking back at the past. We need to focus on the economy that's emerging rather than the one that has been. Tomorrow's progress can't be judged with yesterday's gauges. What's needed are analytical tools that can capture the benefits of mass customization and preventive products.

After all, output and productivity aren't the goals of the economy. Consumer satisfaction is.
Mass customization is already making consumers better off by providing just what we want. And the best is yet to come. What's likely to arrive in coming years will be truly astounding. InterActive Custom Clothes produces jeans to order, but even more elaborate systems are reaching the prototype stage. A customer starts with a stroll through a body scanner, which uses lasers to take 50 measurements from head to toe, then saves the data on a wallet-sized smart card handy for shopping. When ready to buy a new suit, shirt or dress, the customer mixes and matches from among hundreds of fashion accents. At the touch of a button, the order will go to a factory, where computerized cutting and sewing machines will turn out clothing with the buyer's own label sewn inside.

In the field of medicine, Affymetrix already makes devices to decode individuals' DNA. The ability to quickly gather heretofore unknown information about patients is giving birth to a new discipline called pharmacogenomics. Using this distinct genetic portrait, pharmaceutical companies expect to offer drugs tailored to individuals' age, symptoms, condition and hereditary makeup. Personalized drugs will not only ensure correct dosage, they'll also curtail side effects.

Mass customization promises more marvels like these. Interactive television will give families the power, now held by network program directors, to determine the nightly lineup. Automakers are starting to design systems that will build cars to order. Textbooks, scents, electronic gadgets and just about everything else will someday bear our personal stamp.

We might not see faster growth rates or surges in productivity, but mass customization will pay off for America. Resources are wasted guessing what customers want. When more products are customized, we won't squander money on clothing that sits in the closet because it doesn't fit or compact discs with only one or two songs we really like. And goods won't languish on dealers' shelves. Achieving a higher standard of living with fewer demands on natural and labor resources will help ease price pressures and continue this decade's good news on inflation.

Two centuries of American economic progress have brought us a standard of living that's the envy of the world. We wouldn't have it so good without the immense variety provided as companies move from standardization to custom-made. Our economy offers a veritable feast for consumers. Mass customization will make it even better. An economy that's delivering more of what we want and less of what we don't is doing its job in raising living standards. As we enter the 21st century, the United States is moving into a new economic era, one where consumers will be better off than ever before—because we'll live in a world of our own design.

—W. Michael Cox and Richard Alm

(To view the Appendix, please see the PDF).

(To view the Exhibits, please see the PDF).

Acknowledgments "The Right Stuff: America's Move to Mass Customization" was written by W. Michael Cox and Richard Alm. The essay is based on research conducted by Cox, senior vice president and chief economist, Federal Reserve Bank of Dallas. Meredith Walker provided important research assistance throughout the course of the project. Thanks also go to Maria Coello, Gallin Fortunov, Charlene Howell, Sergei Polevikov and Stephen Stout. Selected References Barry, James P., Henry Ford and Mass Production (New York: Franklin Watts, 1973). Burness, Tad, Cars of the Early Twenties (Philadelphia: Chilton Book Co., 1968). Cox, W. Michael, and Roy J. Ruffin, "What Should Economists Measure? The Implications of Mass Production vs. Mass Customization," Federal Reserve Bank of Dallas, Working Paper no. 98-03 (July 1998). Dell, Michael, Direct from Dell (New York: HarperBusiness, 1999). Ford Motor Co. [off-site] Gates, Bill, The Road Ahead (New York: Viking, 1995). Gilmore, James H., and B. Joseph Pine II, "The Four Faces of Customization," Harvard Business Review, January–February 1997, pp. 91–101. Gordon, Robert J., "Monetary Policy in the Age of Information Technology: Computers and the Solow Paradox," prepared for the conference "Monetary Policy in a World of Knowledge-Based Growth, Quality Change and Uncertain Measurement," Bank of Japan, June 18–19, 1998. Greenspan, Alan, "Is There a New Economy?" remarks at the Haas Annual Business Faculty Research Dialogue, University of California at Berkeley, Sept. 4, 1998. Greenspan, Alan, "Problems of Price Measurement," remarks at the Center for Financial Studies, Frankfurt, Germany, Nov. 7, 1997. Krugman, Paul, "Scale Economies, Product Differentiation and the Pattern of Trade," Journal of Political Economy, December 1980, pp. 950–59. Lancaster, Kelvin J., Variety, Equity, and Efficiency (New York: Columbia University Press, 1979). Peppers and Rogers Group, Marketing 1 to 1 [off-site]. Pine, B. Joseph II, Mass Customization: The New Frontier in Business Competition (Boston: Harvard Business School Press, 1993). Schonfeld, Erick, "The Customized, Digitized, Have-It-Your Way Economy," Fortune, Sept. 28, 1998, pp. 114-21. Sears, Stephen W., The American Heritage History of the Automobile in America (New York: American Heritage Publishing, 1977). Solow, Robert M., "We'd Better Watch Out," New York Times, July 12, 1987, p. 36. Toffler, Alvin, The Third Wave (New York: Bantam Books, 1980). Toffler, Alvin, quoted in "Toffler: Change—or Else," Inc., May 1, 1998, p. 23. Exhibit Notes and Data Sources Page 4, More Choices Than Ever Data on product variety are scarce. The numbers in this table represent the authors' best estimates, using the sources listed below. Vehicle models: 1970, NADA Official Used Car Guide [off-site], January 1970; 1998, Ward's AutoInfoBank. Vehicle styles: 1970, NADA Official Used Car Guide [off-site], January 1970; 1998. SUV models: 1970, NADA Official Used Car Guide [off-site], January 1971; 1998, Ward's AutoInfoBank. SUV styles: 1970, NADA Official Used Car Guide [off-site], January 1971; 1998. Personal computer models: 1998, computers reviewed by CNET [off-site], as of Jan. 5, 1999. Software titles: 1998, number of files available in CNET's Shareware.com [off-site] software library, as of Jan. 4, 1999. Web sites: 1998, NetNames, as of Nov. 29, 1998. Movie releases, airports, magazine titles, new book titles, community colleges and amusement parks: see notes for Variety on the Rise. TV screen sizes: 1972, Popular Science, August 1972; 1998, number of screen sizes available at Best Buy. Houston TV channels: 1970, TV Guide, Southeast Texas Edition, Sept. 12-18, 1970; 1998, DirecTV. Radio broadcast stations: 1970 and 1998 (as of Nov. 30), Federal Communications Commission. McDonald's menu items: 1970 and 1998, McDonald's Corp. KFC menu items: 1970 and 1998, KFC. Frito-Lay chip varieties: 1970 and 1996, Frito-Lay Inc. Breakfast cereals: 1980 and mid-1990s, The Economics of New Goods (Chicago: University of Chicago Press for NBER, 1996). Pop-Tarts: 1970 and 1998, Kellogg Co. National soft drink brands: 1970, The Commercial and Financial Chronicle, Jan. 7, 1971; mid-1990s, Beverage World, April 1994; Beverage World, March 1995. Bottled water brands: 1970 and 1998, numerous industry web sites, including bottledwater.org [off-site] and bottledwaterweb.com [off-site] . Milk types: 1970 and 1998, numerous industry web sites, including whymilk.com [off-site] and milk.co [off-site] . Colgate toothpastes: 1970 and 1998, Colgate-Palmolive Co. Mouthwashes: 1970, numerous newspapers, including Wall Street Journal, Sept. 16, 1970; 1998, brands available at Dallas-area stores. Dental flosses: 1978, Mediamark Research Inc., product summary report; 1998, brands available at Dallas-area stores. Prescription drugs: 1978 and 1998, Physicians' Desk Reference (Montvale, N.J.: Medical Ecomomics Co., 1978 and 1998). Over-the-counter pain relievers: 1970 and 1998, numerous industry sources and Dallas-area stores. Levi's jean styles: spring 1972 and 1998, Levi Strauss & Co. Running shoe styles: 1970, numerous company and industry sources, including Runner's World, September 1970; 1998, Holabird Sports [off-site]. Women's hosiery styles: 1970 and 1998, National Association of Hosiery Manufacturers. Contact lens types: 1970 (note: soft lenses were introduced in 1971), Consumer Reports, May 1972; 1998 total reflects possible combinations of material, wear schedule, replacement schedule and correction modality, plus types of tinted lenses; numerous industry web sites consulted. Bicycle types: 1970 and 1998, Jay Townley & Associates, Lyndon Station, Wis. Page 5, Variety on the Rise: amusement parks, U.S. Bureau of the Census, County Business Patterns, various years; general and farm magazine titles, Magazine Publishers of America, from Audit Bureau of Circulations; new book titles, U.S. Bureau of the Census, Statistical Abstract of the United States, various years; airports, Federal Aviation Administration, Statistical Handbook of Aviation, various years; community colleges, National Center for Education Statistics; movies released, Motion Picture Association of America. Page 6, The More the Merrier: new product introductions of consumer packaged goods by number of new SKUs, Marketing Intelligence Service Ltd., New York. Page 7, Product Variety at U.S. Grocery Stores: average number of SKUs by type of store, Willard Bishop Consulting, Competitive Edge, May issues, 1990-98. Pages 8, 9, Food for Thought: average lunch prices reported by Dallas-area restaurants, phone survey, week of Jan. 17, 1999. Pages 10, 11, Providing What Consumers Want: Burness (1968). Page 12, Vehicle Models, 1980–97: Ward's AutoInfoBank, used by permission of Ward's Communications, Southfield, Mich. Page 15, Market Research in the United States: research spending in 1997 dollars, Marketing News, June 8, 1998. Page 21, An Ounce of Prevention: $107 billion in 1998 is the total of $37 billion in direct costs and $70 billion in indirect morbidity and mortality costs associated with cancer. American Cancer Society; National Cancer Institute; National Academy of Sciences Institute of Medicine; U.S. News and World Report, Nov. 23, 1998. Photo Credits Inside covers, Joe Scherschel/Life Magazine©Time Inc.; Page 4, Roderick F. Kasar, Euless, Texas (airplane); Contact Lenses Online, Inc. [off-site]; Pages 10, 11, 18, Courtesy of Ford Motor Company; Page 14, My Twinn Doll Company (1-800-469-8946); Andy Sperry (for Softplan); Page 16, Courtesy of shirtcreations.com [off-site] ; Page 17, Catherine Lash for Footmaxx; Page 19, Wyatt McSpadden. About the Dallas Fed The Federal Reserve Bank of Dallas is one of 12 regional Federal Reserve Banks in the United States. Together with the Board of Governors in Washington, D.C., these organizations form the Federal Reserve System and function as the nation's central bank. The System's basic purpose is to provide a flow of money and credit that will foster orderly economic growth and a stable dollar. In addition, Federal Reserve Banks supervise banks and bank holding companies and provide certain financial services to the banking industry, the federal government and the public. Since 1914, the Federal Reserve Bank of Dallas has served the financial institutions in the Eleventh District. The Eleventh District encompasses 350,000 square miles and comprises the state of Texas, northern Louisiana and southern New Mexico. The three branch offices of the Federal Reserve Bank of Dallas are in El Paso, Houston and San Antonio. Federal Reserve Bank of Dallas 2200 North Pearl Street Dallas, Texas 75201 (214) 922-6000 El Paso Branch 301 East Main Street El Paso, Texas 79901 (915) 544-4730 Houston Branch 1701 San Jacinto Street Houston, Texas 77002 (713) 659-4433 San Antonio Branch 126 East Nueva Street San Antonio, Texas 78204 (210) 978-1200