Introduction to Product Variety The Problem and Basic
Introduction to Product Variety The Problem and Basic Concepts
Course Outline Monday Tuesday Wednesday Thursday Friday Introduction Strategic Decisions Costs of Variety Cost Tools Decouple Points Customer Interface Platform Development Final Case Due 15: 00 Grading: Group Assignments Class Participation Final Case 30% 20% 50%
Why offer more variety? Higher revenues come from variety through many mechanisms. • Enter new market segments - Toyota entry into luxury autos. • Stimulate demand - ice cream flavors • Deter price competition - mattress sales • Deter channel competition - Laser jet printers • Deter market entry - Breakfast cereal • Shelf space - Tooth paste • Value capture with pricing - bicycle product lines • Better technology attracts more customers - Technological change.
Variety manifests itself at different levels in an organization Toy Inc. Product Category (Division) Model SKU (Stock Keeping Unit) Blocks Dolls
Product variety conveys competitive position
Variety is introduced over time Timing Strategy Synchronous Asynchronous Matched or One-to-one Replacement Strategy Unmatched (Computers, Automobiles, Bicycles) (Consumer Packaged Goods)
Average of 5 new models per year
Growth from 50 to nearly 1600 mountain bikes
Over 200, 000 mutual funds to choose from in 2000
Over 350 PCs to choose from by 1996.
Increase in variety across 4 industries at different stages of product life cycle.
The variety increase will payoff only if costs are balanced against revenues. Complex economic relationships make this a non-trivial balance! R&D Production investment Tooling Inventory obsolesence Marketing costs Price Quantity Revenue Costs Profit
Product Variety and Profit + Revenue + Profit Variety + Costs -
Unit sales per model decrease from 4000 to 2500 per year.
Unit sales decrease from 4000 to 1000 per year
Net assets per account increase by over $700 per year.
Sales growth per model increase over $2. 6 million per year.
Decreasing sales per model in autos and bicycles… Increasing sales per model in mutual funds and PCs
Increase in probability of bankruptcy if you continue to proliferate!
How did successful companies manage variety? Success in Autos defined by stock price performance. Successful: Toyota, Honda, Ford Unsuccessful: GM, Nissan, Chrysler Success in Bicycles defined by market share and no bankruptcy. Successful: GT, Trek, Diamond Back Unsuccessful: Bridgestone, Mountain Goat, Miyata
Auto Industry Returns (1974 -1999) Toyota Honda Ford
Observation 1: At successful firms, sales growth exceeds variety growth.
Toyota, Honda, Ford Diamond Back, Trek, GT, GM, Nissan, Chrysler Bridgestone, Miyata, Mountain Goat
Observation 2: At successful firms, sales growth and variety growth move in lock-step.
Honda moves in lock-step Correlation =. 94 GM does not Correlation = -. 33
Toyota, Honda, Ford Diamond Back, Trek, GT, GM, Nissan, Chrysler Bridgestone, Miyata, Mountain Goat
Observation 3: Successful firms expand product lines along dimensions that leverage existing supply chain assets, product architectures, and production processes.
Product Variety at 4 Successful Mountain Bike Companies Cannondale Models 110 Specialized 134 Voo. Doo 1728 Which company offers the most variety? National 6240
Basic Mountain Bike Attributes Model level variety is created by changing the level of each attribute Frame Material - Carbon Fiber Frame Geometry/size - Softtail, Grande Color - Burnished Black Component group - Shimano LX, P-bone front shock
Product Variety at 4 Successful Mountain Bike Companies Cannondale Models Specialized 110 134 Frame Geometries 12 Materials 1 Components per frame 2 Colors per model 1. 25 Voo. Doo National 1728 6 6240 2 6 (3 basic) 1. 4 3 48 1 In bicycles, companies optimize around attributes. 6 1
Not All Attributes Should be Managed the Same Quality Fit Taste Individual Preference Function 16 kg 12 kg 8 kg Frame Weight XS S M L XL XXL Frame Size Frame Color Population Preference Function 16 kg 12 kg 8 kg Frame Weight Competitive Emphasis More Quality for Less Money XS S M L XL XXL Frame Size Customization and Service Frame Color Meet Changing Tastes (Service)
Effect of product variety on costs (occurs at the attribute level) + Production Costs Incremental production costs : Fixed investments in tooling, dies et Production (batch) related costs Production technology choice Market Mediation Costs of making supply meet dem Mark-down costs Excess inventory Increased safety stock Product variety +
Differences in Production and Market Mediation Costs Across Product Attributes Materials Production Cost Mediation Cost (tooling investment) (forecast difficulty) US$ 2, 000 Geometry/Size US$ Low 10, 000 Colors US$ 1, 000 Components US$ 0 Medi High Medium Materials is a “production dominant” attribute. Geometry/Size, colors and components are “mediation dominant” attributes.
Product Variety at 4 Successful Mountain Bike Companies Cannondale Models Specialized 110 134 Frame Geometries 12 Materials 1 Components per frame 2 Colors per model 1. 25 Core Asset Voo. Doo National 1728 6 6240 2 6 (3 basic) 1. 4 3 48 1 Flexible Welding Alliances 6 1 Configuration
Toolkit of Vital Variety Statistics Test 1: Test of Market Acceptance • Statistic: Determine the difference between sales growth and model growth. • Diagnosis: Difference should be positive. If negative indicates lack of return on variety. (Sales²-Sales¹)/Sales¹ (Models²-Models¹)/Models¹
Toolkit of Vital Variety Statistics Test 2: Test of Coordinated Efforts • Statistic: Determine the correlation between sales and models over time. • Diagnosis: The correlation should be close to 1. If significantly less than 1 or negative indicates lack of coordinated efforts in managing variety. Company Correlation
Toolkit of Vital Variety Statistics Test 3: Test of Leveraged Resources • Statistics: Decompose product line into attributes and tie attributes to core assets. • Diagnosis: Clear link between variety and assets indicates coherent leveraging of existing assets. No pattern indicates wasted variety related assets.
Honda expanded product lines using platforms. Accord Platform: Chassis of a car Civic Odyssey
Who offers the most variety? Model level analysis hides true differences in variety
6 Strategic Variety Decisions • The dimension of variety offered to the market • The degree of vertical integration • The nature of the customer interface/distribution channel • The process technology • The location of the decouple point in the supply chain • The product architecture.
Critical Elements of Variety Strategies 1. Dimension of variety must offer perceived value to consumer. 2. Variety strategies are distinct. 3. Product architecture and distribution system minimizes the costs of the chosen dimension of variety. 4. Firm possesses the capabilities to support dimension of variety. 5. Strategy exploits the unique context and resources of the firm.
Product Variety and Profit + Revenue + Profit Variety + Costs -
Vertical Integration Motive to outsource Lower Costs Helps production costs vs. Motive to insource More Control Helps mediation costs
Implications of Vertical Integration Supply chain structure = distance of production from target market, degree of scale economies
The supply chain structure will have an effect on production and market media Higher production costs due to scale inefficiency, but low mediation costs attributed to shorter lead times. Low production costs due to scale economies, but high mediation costs attributed to longer lead times.
Distance of production from target market Supply Chain Structure and Product Variety Distant Local Low Variety Low Production-Dominant Variety High Mediation-Dominant Variety Scale Inefficient High Production-Dominant Variety Low Mediation-Dominant Variety High Production-Dominant Variety and High Mediation-Dominant Variety Scale Efficient Degree of Scale in Production
Customer Interface Au Bon Pain Lee’s Hoagie House Select a Bread Hoagie Roll Croissant Bagel Whole wheat Select a Meat Turkey Ham Roastbeef Select Toppings Lettuce Tomato Pickle Onion Peppers Mayonaise El Grande $3. 50 (Turkey, Ham, Roastbeef lettuce, tomato, onion on a hoagie roll) The Varden $5. 60 (Ham, Pickle, Onion, Peppers on Whole wheat) The Molde $7. 75 (Turkey on a bagel)
Frame geometries of 4 bicycle companies
Tub cutting options
Traditional Welding Fixture
Cannondale Slot and Tab System
Decouple Points in Bicycles Asia Frame Fabrication Painting U. S Assembly
Principles of Decouple Points • Understand who the customer is (end user vs. retailer) • Variety fan-out after the decouple point. • Variety fan-out after long leadtimes. • Variety fan-out after capacity intensive production processes. • Variety fan-out after high value added production processes. Watch out for exceptions.
Modular vs. Integral Architecture
Understanding Production and Mediation Costs Molde College Banner Exercise Banner Cutting Painting String Cutting Assembly
Materials per Team 2 straight scissors 2 patterned scissors 1 ream of paper 4 markers 2 x 2 colors 1 tape dispenser 1 spool of string 2 shape templates (circle and triangle) Record Sheets.
Performance Metrics Production Cost Measure: Productivity = units of output in 1. 5 minute intervals/# of people Market Mediation Cost Measures: Inventory = Ending and Work in Process Inventories at end of each 1. 5 minute interval Lost Sales = # orders unable to fill during 1. 5 minute interval Total Cost Per Unit = [(avg inventory x 1) + (# lost sales x 2) + (# people in production x 1)]/units sold
New Product Introduction
New Product Introduction
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