Introduction to Product Variety The Problem and Basic Concepts

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Introduction to Product VarietyThe Problem and
Basic Concepts
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Course Outline
Monday Introduction Strategic Decisions
Tuesday Costs of Variety Cost Tools
Wednesday Decouple Points Customer Interface
Thursday Platform Development
Friday Final Case Due 1500
Grading Group Assignments 30 Class
Participation 20 Final Case 50
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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.

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Variety manifests itself at different levels in
an organization
Toy Inc.
Product Category (Division)
Blocks
Dolls
Model
SKU (Stock Keeping Unit)
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Product variety conveys competitive position
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Variety is introduced over time
Timing Strategy
Asynchronous
Synchronous
Matched or One-to-one
Replacement Strategy
Unmatched
(Computers, Automobiles, Bicycles)
(Consumer Packaged Goods)
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Average of 5 new models per year
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Growth from 50 to nearly 1600 mountain bikes
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Over 200,000 mutual funds to choose from in 2000
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Over 350 PCs to choose from by 1996.
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Increase in variety across 4 industries at
different stages of product life cycle.
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The variety increase will payoff only if costs
are balanced against revenues. Complex economic
relationships make this a non-trivial balance!
RD Production investment Tooling Inventory
obsolesence Marketing costs
Price Quantity
Revenue
Costs
Profit
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Product Variety and Profit
Revenue


Profit
Variety
Costs
-

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Unit sales per model decrease from 4000 to 2500
per year.
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Unit sales decrease from 4000 to 1000 per year
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Net assets per account increase by over 700 per
year.
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Sales growth per model increase over 2.6 million
per year.
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Decreasing sales per model in autos and
bicycles Increasing sales per model in mutual
funds and PCs
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Increase in probability of bankruptcy if you
continue to proliferate!
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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
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Auto Industry Returns (1974-1999)
Toyota
Honda
Ford
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Observation 1
At successful firms, sales growth exceeds variety
growth.
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Toyota, Honda, Ford
GM, Nissan, Chrysler
Bridgestone, Miyata, Mountain Goat
Diamond Back, Trek, GT,
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Observation 2
At successful firms, sales growth and
variety growth move in lock-step.
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Honda moves in lock-step
Correlation .94
GM does not
Correlation -.33
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Toyota, Honda, Ford
GM, Nissan, Chrysler
Diamond Back, Trek, GT,
Bridgestone, Miyata, Mountain Goat
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Observation 3
Successful firms expand product lines
along dimensions that leverage existing supply
chain assets, product architectures, and
production processes.
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Product Variety at 4 Successful Mountain Bike
Companies
Cannondale Specialized VooDoo
National Models 110 134
1728 6240
Which company offers the most variety?
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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
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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.
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Not All Attributes Should be Managed the Same
Fit
Quality
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
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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
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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.
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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
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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
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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.

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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.

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Honda expanded product lines using platforms.
Accord
Platform Chassis of a car
Civic
Odyssey
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Who offers the most variety?
Model level analysis hides true differences in
variety
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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.

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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.
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Product Variety and Profit
Revenue


Profit
Variety
Costs
-

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Vertical Integration
Motive to outsource
Motive to insource Lower Costs vs.
More Control Helps production costs
Helps mediation costs
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Implications of Vertical Integration
Supply chain structure distance of production
from target market,
degree of scale economies
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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.
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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
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Customer Interface
Au Bon Pain
Lees Hoagie House
Select a Bread Hoagie Roll Croissant Bagel Who
le wheat Select a Meat Turkey Ham Roastbeef Sel
ect Toppings Lettuce Tomato Pickle Onion Pepp
ers 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)
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Frame geometries of 4 bicycle companies
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Tub cutting options
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Traditional Welding Fixture
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Cannondale Slot and Tab System
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Decouple Points in Bicycles
Asia
U.S
Frame Fabrication
Painting
Assembly
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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.

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Modular vs. Integral Architecture
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Understanding Production and Mediation
CostsMolde College Banner Exercise
Banner Cutting
Assembly
Painting
String Cutting
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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.
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Performance Metrics
Production Cost Measure Productivity units
of output in 1.5 minute intervals/ of
people Market Mediation Cost Measures Inventor
y 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
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New Product Introduction
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New Product Introduction