Tag: product substitution
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Does Your Inventory Look Like Jurrasic Park?
Does Your Inventory Look Like Jurrasic Park?
I was working with a industrial manufacturer who made construction equipment, such as diggers and backhoes. They had a beautiful park-like setting around their factory. Artfully placed on manicured lawns around the ponds and fountains were quite a few backhoes . It reminded me of Jurassic Park. We discovered later that these backhoes were a lot like the dinosaurs – they had failed to adapt.
The backhoes in the park, though attractively displayed, were really just inventory. Those particular backhoes were there because they hadn’t sold. We soon understood why. The backhoe had about 40 features that the customer could choose. One of these features was a cup holder for the driver’s cab. There were two options: a stationary cup holder and a rotating cup holder that could be stowed under the dashboard. If a customer order matched a unit on the lot EXACTLY, except for the cup holder, then their inventory control system treated the two configurations as different. A whole new backhoe was scheduled and built, while the one with the wrong cup holder continued to sit on the lot, exposed to wind and rain and interest charges. Now, probably they should not have had two different cup holders in the first place. But if they did, the cost of giving away a rotating cup holder instead of a stationary one (about $20) was much smaller than all of the costs involved in building a whole new backhoe. And if the customer wanted a rotating one, he could probably have been persuaded to accept a stationary one today instead of waiting 3 weeks to get exactly what he wanted.
Two different configurations of a complex product might be “almost the same”, or “very similar”, or “quite different”, or “far apart”. Can we quantify these common sense terms? Surely two configurations that differ only on a cup holder, out of 40 features, are “almost the same”. If we can measure closeness, then we can see when a configuration in stock is “close enough” to what a customer wants.
For two configurations to be close to each other, there shouldn’t be too many features with different choices. Furthermore, some features are more important than others. In a backhoe, the engine, hydraulics, and buckets are very important. The cab is quite important. The cup holder is not so important. So two configurations are close to each other if they differ on a small number of features that are not very important.
The criteria for what is important can be based on knowledge about the product and what it is used for, and also on the cost in relation to other features. So “close enough” depends on how many features are different and how important those features are,. There might also be a probability of acceptance that depends on how many features are different. This can all be formalized, and we can compute a number that represents the closeness. If we can measure closeness, then we can automate the matching of orders and inventory in a much more nuanced way than “the same” or “not the same”. For complex products that are built to stock as well as built to order, this can substantially reduce inventory holding costs by keeping the inventory moving. This is the key to inventory optimization.
Each of those backhoes in the park had a story to tell. Stories like: “I could have been sold in October of 2007, but I didn’t have the rotating cup holder. Or in January of 2008, but I had flip-guard feet instead of street-guard feet.
Someday my perfect order will come, I know it will.”
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Key Concepts To understanding Product Variety
1. Product
A product is something offered for sale to customers. This is deliberately vague, because we want to encompass services as well as tangible products. Most of our discussion and examples involve manufactured products, but our framework also applies to services with many variants like insurance policies and cell phone calling plans.
2. Instance
An instance of a product is a specific unit of the product: the car that Joe buys, which has a specific VIN (Vehicle Identification Number).
3. Configurable Product
A configurable product is a product where the instances are not all identical. No. 2 pencils are not configurable. Computers, cars, tractors, refrigerators and cell phones are configurable.
The Root Cause of Product Complexity!
Emcien defines product complexity as simply the ability to predict what the next order coming into the company will be.
Think about it: If you only made product configuration A, you have 100% confidence in knowing that the next order in the door will be configuration A (assuming you get an order in the door at all, not a total given in this economy). But if you have configurations A and B, it’s harder to know and with A, B and C, it’s even harder, and so on. When you have thousands of configurations, predicting the next one is very difficult.
It’s not just the number of configurations that’s important but also how they’re distributed. If I have 10 configurations but 90% of my orders are for config A, then it’s still safe to predict that the next order is config A. But having 10 configs that have each been ordered 10% of the time is extremely complex!
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Why product complexity matters
I was telling some friends at a brunch about what I do, and how variety drives cost in manufacturing. “But all the manufacturing has moved to China,” commented one person. I’ve heard this comment over and over.
A picture is worth a thousand words — and here’s one that fits the bill.
- Commoditization of labor in manufacturing
- Higher output per worker
- The percentage of cost in goods is much higher
