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)
Model Growth in US Auto Industry
400
350
# of Models
Average of 5 new models per year
300
250
200
150
1974
1976
1978
1980
1982
1984
1986
Year
1988
1990
1992
1994
1996
1998
Model Growth in US Auto Industry
400
Model Growth in Mountain Bike Industry
350
4000
300
3500
200
150
1974
# of Models
250
1976
3000
2500
1978
1980
1982
1984
2000
1986
1988
1990
1992
1994
1996
1998
Growth from 50 to nearly 1600 mountain bikes
1500
1000
500
0
1985
1987
1989
1991
Year
1993
1995
1997
Model Growth in Mountain Bike Industry
Model Growth in US Auto Industry
4000
400
Model Growth in Mutual Fund Industry
3500
350
3000
3,000
2500
300
2000
250
1500
2,500
1000
150
# of Models in 10,000s
200
1974
Over 200,000 mutual funds to choose from in 2000
500
2,000
1976
1978
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
1985
1987
1989
1991
1993
1995
1997
1,500
1,000
500
0
1971
1973
1975
1977
1979
1981
1983
1985
Year
1987
1989
1991
1993
1995
1997
1999
Model Growth in Mountain Bike Industry
Model Growth in US Auto Industry
4000
Model Growth in PC Industry
400
3500
350
3000
800
2500
300
2000
700
250
1500
1000
600
200
150
# of Models
500
1974
5001978
1976
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
1985
1987
1989
1991
1993
1995
1997
Over 350 PCs to choose from by 1996.
400
300
Model Growth in Mutual Fund Industry
3,000
200
2,500
2,000
100
1,500
0
1,000
1980
1982
1984
1986
1988
Year
500
0
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
1990
1992
1994
1996
Increase in variety across 4 industries at different stages of
product life cycle.
Model Growth in Mountain Bike Industry
Model Growth in US Auto Industry
4000
400
3500
350
3000
2500
300
2000
250
1500
1000
200
500
0
150
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1985
1998
1987
1989
Model Growth in Mutual Fund Industry
1991
1993
1995
1997
Model Growth in PC Industry
3,000
800
700
2,500
600
2,000
500
400
1,500
300
1,000
200
500
100
0
0
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
1980
1982
1984
1986
1988
1990
1992
1994
1996
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
-
Model Growth and Sales Per Model in US Auto Industry
Unit sales per model decrease
from 4000 to 2500 per year.
400
# of Models and Sales per Model
350
300
250
200
150
1974
1976
1978
1980
1982
1984
1986
Year
1988
1990
1992
1994
1996
1998
Model Growth and Sales Per Model in US Auto Industry
Model Growth and Sales Per Model in Mountain Bike Industry
400
350
Unit sales decrease
from 4000 to 1000
per year
4000
250
200
150
# of Models and Sales per
Model
300
1974
1976
3500
3000
2500
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
1500
1000
500
0
1985
1987
1989
1991
Year
1993
1995
1997
Model Growth and Sales Per Model in Mountain Bike Industry
Model Growth and Sales Per Model in US Auto Industry
Mutual Fund Accounts and Net Assets Per Account
4000
400
3500
350
3000
3,000
2500
300
2000
200
150
# of Models and Sales per Model
250
1974
Net assets per account
increase by over $700
per year.
2,500
1500
1000
500
2,000
1976
1978
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1985
1998
1987
1989
1991
1993
1995
1997
1,500
1,000
500
0
1971
1973
1975
1977
1979
1981
1983
1985
Year
1987
1989
1991
1993
1995
1997
1999
Model Growth and Sales Per Model in Mountain Bike Industry
Model Growth and Sales Per Model in US Auto Industry
Model Growth and Sales Per Model in PC Industry
4000
400
3500
350
3000
800
Sales growth per model
increase over $2.6
million per year.
2500
250
200
150
# of Models and Sales per
Model
300
1974
3,000
2,500
2,000
1976
2000
700
1500
600
1000
500
500
1978
1,500
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
1985
1986
1988
1989
1991
1993
1995
1997
400
300
Mutual
Fund Accounts and Net Assets Per Account
200
100
0
1980
1,000
1982
1984
Year
500
0
1971
1987
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
1990
1992
1994
1996
Decreasing sales per model in autos and bicycles…
Increasing sales per model in mutual funds and PCs
Model Growth and Sales Per Model in Mountain Bike Industry
Model Growth and Sales Per Model in US Auto Industry
4000
400
3500
350
3000
2500
300
2000
250
1500
1000
200
500
0
150
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
1985
1987
1989
1991
1993
1995
1997
Model Growth and Sales Per Model in PC Industry
Mutual Fund Accounts and Net Assets Per Account
800
3,000
700
2,500
600
2,000
500
400
1,500
300
1,000
200
500
100
0
0
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
1980
1982
1984
1986
1988
1990
1992
1994
1996
Bankruptcy Risk and Product Variety in the Bicycle Industry
20
#Models per Firm and Odds
18
Increase in probability of
bankruptcy if you continue to proliferate!
16
14
12
10
8
6
4
2
0
1985
1987
1989
1991
1993
1995
1997
Year
Models per Firm
Increase In Probability of Bankruptcy Associated with Average Product Line
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.
Sales Growth - Variety Growth in Auto Industry
0.04
0.03
0.03
0.02
0.02
0.01
0.01
0.00
-0.01
Toyota,
Honda,
Ford
Top 3
Performers
GM,
Nissan,
Chrysler
Industry
Average
Bottom 3
Performers
Sales Growth - Model Growth in Mountain Bike
Industry
Bridgestone,
Miyata,
Mountain
Goat
0.30
0.20
0.10
Diamond
Back,
Trek,
GT,
0.00
-0.10
-0.20
-0.30
-0.40
Top 3
Performers
Industry
Average
Bottom 3
Performers
Observation 2:
At successful firms, sales growth and variety
growth move in lock-step.
Honda moves in lock-step
50
45
40
Correlation = .94
35
30
25
20
15
10
5
0
1974
1979
1984
Models
1989
1994
1999
1994
1999
Unit Sales x20,000
GM does not
90
80
Correlation = -.33
70
60
50
40
30
20
10
0
1974
1979
1984
Models
1989
Unit Sales x100,000
Auto Industry Models/Sales Correlation
0.6
0.5
0.4
0.3
Toyota,
Honda,
Ford
GM,
Nissan,
Chrysler
0.2
0.1
0
Top 3
Performers
Industry
Average
Bottom 3
Performers
Mountain Bike Industry Models/Sales
Correlation
0.90
0.80
0.70
Diamond
Back,
Trek,
GT,
Bridgestone,
Miyata,
Mountain
Goat
0.60
0.50
Top 3
Performers
Industry
Average
Bottom 3
Performers
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
Models
Cannondale
Specialized
110
134
VooDoo
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
Specialized
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
Models
VooDoo
In bicycles, companies optimize around attributes.
National
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 etc.
Production (batch) related costs
Production technology choice
Market
Mediation
Costs
Costs of making supply meet demand:
Mark-down costs
Excess inventory
Increased safety stock
Product
variety
+
Differences in Production and Market Mediation Costs
Across Product Attributes
Production Cost
Mediation Cost
(tooling investment)
(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.
Product Variety at 4 Successful Mountain Bike Companies
Cannondale
Specialized
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
Models
Core Asset
Flexible Welding
Alliances
VooDoo
Configuration
National
Color System
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
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.
50
45
40
35
30
25
20
15
10
5
0
1974
1979
1984
Models
1989
Unit Sales x20,000
1994
1999
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.
Cannondale
Specialized
VooDoo
National
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
Models
Core Asset
Flexible Welding
Alliances
Configuration
Color System
Honda expanded product lines using platforms.
Accord
Platform:
Chassis of a car
Civic
Odyssey
Who offers the most variety?
Cannondale Specialized
VooDoo
National
End Items
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
1.25
1.25
1
104
Colors per model**
*A frame is a material/geometry combination
**A model is a frame/component combination
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.
Promote
Design New
Products
Component Fab
Cut Tubes
Weld Frame
Paint Frame
Assemble
Display
Fit
Transport
Deliver
Frame Fabrication
Strategic Decisions
(every 5-10 product cycles)
Tactical De cis ions
(every product cycle)
Dimensions of variety
Number of levels of attributes
Nature of customer interf ace and distribution channel
Bundling of combinations
Vertical integration of production
Parts sharing
Production process technology
Lot sizing
Location of decouple point
Inventory policy
Product architecture
Production scheduling
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 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.
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
Slot and Tab Detail
Simple Fixture Provides
Locating Forces
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
Summary of Variety Strategies
Key Dimensions of Variety
Customer Interface and
Distribution Channel
Vertical Integration
Cannondale
Specialized
VooDoo
National
Frame Geometry
Frame Material
Component Group
Color
Select from retailer stock
Select from retailer stock Order through retailer
Order through retailer
End Items Enumerated
End Items Enumerated
"Ingredient Menu"
"Ingredient Menu"
Frame fabrication and
some component
fabrication integrated
Outsource entire bicycle
production
Outsource frame
production
Frame fabrication and
assembly integrated
Assembly Integrated
Process Technology
Laser cutting
Conventional dies and
fixtures at supplier
Conventional dies and
fixtures at supplier
Robotic frame painting
Retailer Stock
Assembly
Frame Fabrication/
painting
Frame Fabrication/
painting
Slot and tab fixturing
Decouple Point
end customer perspective
retailer perspective
Product Architecture
Retailer Stock
Frame painting or
Specialized finished
Cannondale finished goods goods inventory
inventory
Assembly
Integral front suspension Modular front suspension Modular front suspension Modular front suspension
Substantial geometric
Minor or no geometric
Minor or no geometric
Minor or no geometric
differences among different differences among sizes differences among sizes differences among sizes
sizes
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 2x2 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
Team RBK
7
6
5
Cost
4
3
2
1
0
-1
1
2
3
4
5
6
Productivity
Cost/Unit
Time
Lost Sales
7
8
Team Colgate
8
7
6
Cost
5
4
3
2
1
0
-1
1
2
3
4
5
6
Time
Lost Sales
Productivity
Cost/Unit
7
8
Changes in Productivity - Cook for Congress
4.5
4
Productivity
3.5
3
2.5
2
1.5
New Product
Introduction
1
0.5
0
1
2
3
4
5
6
7
Time Period
8
9
10
11
Lost Sales - U of U
8
Lost Sales
7
New Product Introduction
6
5
4
3
2
1
0
1
2
3
4
5
6
7
Time Period
8
9
10
11