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Introduction to Product Variety The Problem and Basic Concepts. Course Outline. Monday Introduction Strategic Decisions. Tuesday Costs of Variety Cost Tools. Wednesday Decouple Points Customer Interface. Thursday Platform Development. Friday Final Case Due 15:00. Grading:

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Presentation Transcript
slide2

Course Outline

Monday

Introduction

Strategic Decisions

Tuesday

Costs of Variety

Cost Tools

Wednesday

Decouple Points

Customer Interface

Thursday

Platform

Development

Friday

Final Case

Due 15:00

Grading:

Group Assignments 30%

Class Participation 20%

Final Case 50%

slide3

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.
slide4

Variety manifests itself at different levels in an organization

Toy Inc.

Product

Category

(Division)

Blocks

Dolls

Model

SKU

(Stock Keeping Unit)

slide6

Variety is introduced over time

Timing Strategy

Asynchronous

Synchronous

Matched

or

One-to-one

Replacement

Strategy

Unmatched

(Computers, Automobiles, Bicycles)

(Consumer Packaged Goods)

slide12

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

slide13

Product Variety and Profit

Revenue

+

+

Profit

Variety

Costs

-

+

slide18

Decreasing sales per model in autos and bicycles…

Increasing sales per model in mutual funds and PCs

slide19

Increase in probability of

bankruptcy if you continue to proliferate!

slide20

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

slide22

Observation 1:

At successful firms, sales growth exceeds

variety growth.

slide23

Toyota, Honda, Ford

GM, Nissan, Chrysler

Bridgestone, Miyata, Mountain Goat

Diamond Back, Trek, GT,

slide24

Observation 2:

At successful firms, sales growth and variety

growth move in lock-step.

slide25

Honda moves in lock-step

Correlation = .94

GM does not

Correlation = -.33

slide26

Toyota, Honda, Ford

GM, Nissan, Chrysler

Diamond Back, Trek, GT,

Bridgestone, Miyata, Mountain Goat

slide27

Observation 3:

Successful firms expand product lines along

dimensions that leverage existing supply chain

assets, product architectures, and production

processes.

slide28

Product Variety at 4 Successful Mountain Bike Companies

Cannondale Specialized VooDoo National

Models 110 134 1728 6240

Which company offers the most variety?

slide29

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

slide30

Product Variety at 4 Successful Mountain Bike Companies

Cannondale Specialized VooDoo National

Models 110 134 1728 6240

Frame Geometries 12 6 2 3

Materials 1 6 (3 basic) 3 2

Components per frame 2 1.4 48 6

Colors per model 1.25 1 1 104

In bicycles, companies optimize around attributes.

slide31

Not All Attributes Should be Managed the Same

Quality

Fit

Taste

Individual

Preference

Function

XS S M L XL XXL

16 kg 12 kg 8 kg

Frame Weight

Frame Size

Frame Color

Population

Preference

Function

16 kg 12 kg 8 kg

XS S M L XL XXL

Frame Color

Frame Weight

Frame Size

Meet Changing

Tastes

(Service)

Customization

and

Service

Competitive

Emphasis

More Quality

for Less Money

slide32

Effect of product variety on costs(occurs at the attribute level)

Production

Costs

Incremental production costs :

Fixed investments in tooling, dies etc.

Production (batch) related costs

Production technology choice

+

Product

variety

+

Costs of making supply meet demand:

Mark-down costs

Excess inventory

Increased safety stock

Market

Mediation

Costs

slide33

Differences in Production and Market Mediation Costs

Across Product Attributes

Production Cost

(tooling investment)

Mediation Cost

(forecast difficulty)

Materials US$ 2,000,000 Low

Geometry/Size US$ 10,000 Medium

Colors US$ 1,000 High

Components US$ 0 Medium

Materials is a “production dominant” attribute.

Geometry/Size, colors and components are “mediation dominant” attributes.

slide34

Product Variety at 4 Successful Mountain Bike Companies

Cannondale Specialized VooDoo National

Models 110 134 1728 6240

Frame Geometries 12 6 2 3

Materials 1 6 (3 basic) 3 2

Components per frame 2 1.4 48 6

Colors per model 1.25 1 1 104

Core Asset Flexible Welding Alliances Configuration Color System

slide35

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

slide36

Toolkit of Vital Variety Statistics

Test 2: Test of Coordinated Efforts

Company Correlation

  • 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.
slide37

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.
slide38

Honda expanded product lines using platforms.

Accord

Platform:

Chassis of a car

Civic

Odyssey

slide39

Who offers the most variety?

Model level analysis hides true differences in variety

slide40

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.
slide41

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.

slide43

Product Variety and Profit

Revenue

+

+

Profit

Variety

Costs

-

+

slide44

Vertical Integration

Motive to outsourceMotive to insource

Lower Costs vs. More Control

Helps production costs Helps mediation costs

slide45

Implications of Vertical Integration

Supply chain structure = distance of production from target market,

degree of scale economies

slide46

The supply chain structure will have an effect on production and market mediation costs.

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.

slide47

Supply Chain Structure and Product Variety

High Production-Dominant

Variety

Low Mediation-Dominant

Variety

Low Variety

Distant

Distance of production from target market

High Production-Dominant

Variety

and

High Mediation-Dominant

Variety

Low Production-Dominant

Variety

High Mediation-Dominant

Variety

Local

Scale Inefficient

Scale Efficient

Degree of Scale in Production

slide48

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)

slide53

Decouple Points in Bicycles

Asia

U.S

Frame

Fabrication

Painting

Assembly

slide54

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.
slide57

Understanding Production and Mediation CostsMolde College Banner Exercise

Banner

Cutting

Painting

String

Cutting

Assembly

slide58

Materials per Team

2 straight scissors

2 patterned scissors

1 ream of paper

4 markers 2x2 colors

1 tape dispenser

1 spool of string

2 shape templates (circle and triangle)

Record Sheets.

slide59

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

slide62

New Product

Introduction