Supply chain contracts and mass customization

So here is an interesting business model that leads to a nice supply chain contracting story (from Finnish shoe firm pays lifetime royalties, Oct 12, Globe and Mail). Pomarfin, a Finnish shoemaker, was facing increased competition from cheaper firms manufacturing in Asia and was forced to look for ways to differentiate its products. It seemed to find an answer in mass customization.

Not wanting to walk away from its manufacturing roots, Pomarfin decided to compete in the emerging world of mass customization by making made-to-measure shoes for well-off men who hate shopping for shoes and want a perfect fit. Pomarfin envisioned installing a foot scanner in retail stores that sold its shoes. Clerks would scan the customer’s foot, and the image would be uploaded to a server in Pomarfin’s manufacturing plant, which would create and ship the customer a pair of shoes for his unique feet.

Pomarfin named its new made-to-order brand “LeftFoot.” Once a customer scanned his foot with a LeftFoot machine, he could reorder a custom shoe through the website, cutting out the need to visit a retail store.

That last point was both a strength and weakness of Pomarfin’s new business. On the positive side, one measurement could lock the customer in for years. Assuming that they valued the custom fit, they would have every reason to come back to Pomarfin. On the other hand, getting that custom fit required help from a retailer but what retailer would want hand over a customer to a supplier? If the LeftFoot program really works, the customers never have to come back to the store.

The solution lay in the contract that Pomarfin offered the retailers. Not only would they earn a commission on the first sale, but they would earn commissions on all future sale. Retailers were not just selling a pair of shoes, they were potentially getting an annuity that would pay off over the years as customers kept coming back to Pomarfin for custom shoes.

This is a nice example of how a simple (if somewhat obvious) contract can solve an incentive conflict in a supply chain. The article doesn’t have details on how the contracts are structured but it is interesting to think about how best to vary the commission rate over time. To some extent, it might be appealing to offer a slightly higher commission on the first follow-on order. That would give the retailer an incentive to both get the first measurement right (so the customer has a good experience with the product) and to talk up additional web orders.