ControlYourProductMix,ControlYourDestiny!

WhitePaper

EmcienCorporation

www.emcien.com

EmcienWhitePaper–ProductMixManagement

www.emcien.com 2

TheExplosionofProductVariety

In this “InformationAge”ofconsumerism,buyershaveaccess tomore informationthaneverbefore. Theycanchooseproductsbasedonexact featurechoicesbeforetheybuy.Thisallowsthemtheluxuryofbeingmoreselectiveinbuying.

This customer luxury has translated into a serious challenge for manufacturingcompaniesandtheirdistributionchannels.Tomeetthefeaturechoicedemandandmaintainmarketshare,companiesareofferingmoreandmorefeaturechoices.Theresult is unprecedented product proliferation, increased costs and causedtremendousinefficiencyinthesupplychain.

Companiestodayhaveglobalsupplychainstotakeadvantageofthebenefitsofcostdifferentials. The extended supply chain further aggravates the cost of managingproliferatedproducts,makingitalmostimpossibletomanagetheproductmixacrosslong timehorizonsandmultiple locations. Apoorproductmixcandestroyall thebenefits of even a well‐oiled supply chain. To survive in this environment, it ismandatory foracompany tomanage itsproductconfigurationmixbyquantifyingitsimpactonthesupplychain.

WhatisProductMixandWhereDoesitFit?

TheProductPlanningGroup is typicallyresponsible for theproductmix. ProductPlanningmaytakeintoaccountsalesperformanceoftheproduct,marketsurveysforthecategory,andmarkettrends.TheoutputfromProductPlanningistheProductMix.TheProductMixisthesetofproductchoicesthatacustomerwillbeallowedtoorder. Itincludesallfeaturechoicesandfeaturecombinationchoices. Thisdefinesthe number of “customer orderable combinations” the company needs to plan tobuildandsupport.

EmcienWhitePaper–ProductMixManagement

www.emcien.com 3

The Product Mix is an input into all order entry systems with which a customerinterfaces,includingsalesconfiguratorsandpricesheets.TheProductMixisalsoaninputintothesupplychainplanningsystems.Thesupplychainsystemsaretaskedwith planning for the source,make anddelivery of the productmix that has beendeterminedbytheProductPlanningGroup.

HowisProductMixPlanningTypicallyDoneToday?

Today,whilemostdepartmentshave automation tools to facilitate their jobs, over90%ofproductplanners storeandmanipulate theirproduct configurationmixonExcel spreadsheets or homegrown tools.1 Product planners have to manage adynamic productmix for a changingmarketplace and the differentspreadsheetssheetsareveryhardtosynchronize, and often do not. Theproduct mix is composed ofconfigurationswithlongfeaturelists,which require multi‐dimensionaldatamanipulations,well beyond thecapabilities of simple spreadsheets.Due to the lack of tools, 50% ofmanagers have a portfolio planningeffortonlyonceortwiceayear,andmorethan25%donothaveproductportfolioplanningmeetingsatall.2

Due to the lack of tools, companies are struggling to manage and maintain theproductmix.Asthemarketshifts,productplannersreactbyaddingfeaturechoicestotheproduct,withoutquantifiedmetricsontheimpact.Featureschoicesarerarelyeliminatedduetothe lackofquantifiedwhat‐ifanalyses.Thismanifests inproductcomplexity chaos across the enterprise.Product proliferation adds tremendousuncertaintytotheplanning,deliveryandsupportoftheproduct.

ImpactofProductMixonYourCustomers

Ithardlyneedstobestatedthattheproductmixdefinesthefaceofthecompanythatthecustomerwillseeandexperience.Customersbuyproductsbasedonavailabilityoftheirpreferredfeaturechoices.

If a customer is inundated with feature choices, it results in a poor customerexperience. In a surveyof customers formobiledevices, over45%said toomanyproduct choices prevented them from actually making a purchase decision3. In

1 Chief Marketing Officer Council Survey – 2006. 2 Chief Marketing Officer Council Survey – 2006. 3 Source – RBC Capital Markets Survey, 2006, Consumers' mobile technology purchasing criteria, Conducted by InsightExpress.

EmcienWhitePaper–ProductMixManagement

www.emcien.com 4

another recent ‘eye‐opening’ experiment on complexity, an electronics companycreatedanalternatewebsitewithastreamlinedproductoffering.20%oftheonlinebuyers were routed to the alternate website with a streamlined mix. Resultscollected after a 30‐day period showed that the conversion rate4 on the alternateweb sitewas 50% higher and productmarginwas 2% higher demonstrating thatcustomersarewillingtopayalittlemoretoavoidthehassleofwadingthroughunlimitedchoices.

ImpactofProductMixonYourSupplyChain

Thesupplychainplanningsolutionshavetosource,makeanddeliverontheproductmix that is handed to them by the product planners. The product mix typicallycontainsall the featurechoices that thecustomer isallowedtoorder. Thesupplychain has to plan, prepare to build, and deliverall possible combinations of theproduct mix that have been offered to the customer. This can be a very largenumber. For a typical PC computerthat number can be well over a onemillionconfigurations! Thesemillionconfigurations also have a very largenumber of parts that have to beplanned and stocked in the rightquantity.

Theproductmix,asgivenbyProductPlanning,doesnotcontaininformationofhowthemixisgoingtosatisfythecustomerorders.Howmanyunitsofeachconfigurationarerequired?

Sowhyisthisimportant?Itisimportantbecausethesupplychainismeasuredonproductavailabilityandservicelevels.Theproductavailabilitydependsonstockingtherightquantityofpartsortherightconfigurationmixoffinishedgoods.Withoutthiscriticalinformation,thesupplychainwillhavetocarrymorepartsandfinishedgoodsastheproductconfigurationsgrow.Acommonsymptomofthisis‘toomuchinventoryandshortageoftherightparts.’

Ifthecompanybuildsfinishedgoodsinventory,itisverycommontoseeabuild‐upof‘wrongproductmixinventory’.ThesupplychainmanagestheunitsattheSKU(Stockkeepingunit)level,anddoesnothaveknowledgeofthefeaturemixoftheSKU.So,iftwoSKU’sareidentical,exceptforonefeature,thesupplychaincannotdetectit,andwillstockthemastwodifferentunits.Anexampleistwoidenticalcellphones,onewithBluetoothandonewithout.Thesetwounitsmaybothsatisfyacustomerwhodoesn’tneedBluetoothonceyouhavefeaturelevelvisibility.Butsupplychainsystemsdonothavefeaturevisibility,andcannotmakeoptiontradeoffstoconsolidateconfigurations.Hencethesupplychaincannotfixproduct4 Conversion rate is percentage of online traffic that makes a purchase on first visit.

EmcienWhitePaper–ProductMixManagement

www.emcien.com 5

proliferation.Onlytheproductplannershavevisibilityintothefeaturechoicesofconfigurations,andtheauthoritytochangethemix.Hencethesupplychainsufferswithrisingcostandreducedefficiencywhenithastosupportapoorproductmix.

TakeControlofYourProductMix

Companiesarebeginningtorecognizethattheirproductmixisoneofthebiggestdriversofcustomerexperienceandsupplychaincosts.Over75%ofFortune500manufacturershaveacurrentinitiativetoaddresstheirproductcomplexity,withveryhighexecutivesponsorshipandvisibility.Thesuccessoftheseprojectsrestonunderstandingthatproductmixmanagementisnotanisland.Asuccessfulmixcanbequantifiedwithmetricsontheupstreamanddownstreamoperations.

ThethreebasicefficiencymetricsofProductMixare:

1. Numberofconfigurations2. DemandCoveragebyConfiguration3. Numberofuniquepartsrequired

NumberofConfigurationsisoneofthemostimportantindicatorsofproductcomplexity.Thenumberofproductconfigurationsofferedtothecustomeristypicallybiggerthantheactualnumberthatgetsorderedinanyonemodelorproductcycle.However,veryfewcompaniesmonitortheactualnumberofconfigurationsofferedorordered.

DemandCoveragebyConfigurationissometimescalledconfigurationattachrateorconfigurationtakerate.Thisisthepercentageofdemandthataconfigurationsatisfies.Fewcompanieshavestartedtorecognizetheimportanceofthismetric,anditisnowbeingcalledthe“efficiencyofaconfiguration”.High‐efficiencyconfigurationscancaptureahighpercentageofdemand.Low‐efficiency

Reducedconfigurationefficiency(smallerpercentagedemand

capturedbyeachconfiguration)

500configurationscover70%ofthedemand(total=2700configurations)

EmcienWhitePaper–ProductMixManagement

www.emcien.com 6

configurations,asthenamesuggests,coveraverylowpercentageofdemand.Understandingwhatfeatureattributesthecustomers’value,andofferingfeaturesinaconfigurationthatgivescustomersmorethantheyaskfor,cancreatehigh‐efficiencyconfigurations.Thesearerobustconfigurationsandhavehighinventoryturnsinasupplychain.Lowefficiencyconfigurationshavelowturnsbecausetheysatisfysuchasmalldemandthattheyareusuallystockedinthewrongplaceatthewrongtime.Theseconfigurationsresultinaginginventory,highlogisticscostandpoorcapitalutilization.Manycompaniessplittheirproductofferingbetweenbuild‐to‐orderandbuild‐to‐stockbasedontheefficiencyoftheconfigurations.

NumberofUniquePartsisaveryimportantmetricforaproductmix.Asthenumberofconfigurationsproliferates,typically,sodothenumberofparts.However,thisisnotalwaysthecase.Averylargenumberofconfigurationscanbebuiltwithacommonsetparts.Theconfigurationtakeratecanbeusedtocomputethepartsrequirements.However,duetothelackofproductmixplanningtools,mostcompaniescannotcomputethismetric.Thisresultsinpartsproliferation,addingtremendouscosttomanufacturing.

Companiesthatattemptconfigurationreductionorcomplexityreductionprojectswithoutpayingattentiontothesebasicproductmixmetricswillnotseeanyfinancialimprovement.Onthecontrary,itmaybeanexerciseinfutilitybecausewhenthebenefitsdonotpanout,themarketinggroupwillbringtheconfigurationsbackduetofearofcustomerandrevenueloss.

SuccessfulCaseStudyInProductMixManagement

AFortune500PCmanufacturerwasstrugglingwithproductcomplexityandfeatureproliferation.Thecompanyoffereditsproductsthroughonlinesalesandretailchannels.Theproductmixineachchannelwasbloated.ThepartsinventorywasbuildingupduetothegrowingoptionchoicesonallthePCmodels.Whilethecompanyhadanefficientsupplychainwithsupplierscarryingpartsinventoryuntilneeded,thesupplychaincostwasrising.TheretailchannelswereunhappythatthePCswerenotturning.Thenumbersofpartswasexplodingandthecompanydidnotknowwhatpartstoeliminatewhilefillingtheordersandkeepingcustomershappy.

SolutionApproach

Thesolutiontoaddressingthecomplexitywasapproachedbyfirstunderstandingthecustomerconfigurationchoicesbychannel,andbyregion,usingexistingsalesdata.Sincethecompanyofferedabuild‐to‐orderoptionforonlinesales,informationwasavailableonhowthecustomershadconfiguredthemachines.WhilethePCshadaverylargenumberoffeaturechoices,thedatashowedthatcustomersselectfeaturechoicesinverydistinctpatterns.Thispatternofbuyingiscalledcombinedtakeratesorfeatureclusters.Forexample,forhigh‐endgamingmachinescustomersselectedvideocardsandmemorybasedonrelatedCPUandsoftwarechoices.Theknowledgeofthesecombinedtakeratescanbeusedtobundletheproduct,andusedwithfeatureupgradesandstandardization.Thetotalnumberofconfigurationsisreducedwhilegivingthecustomermorethanwhathe/sheaskedfor.

EmcienWhitePaper–ProductMixManagement

www.emcien.com 7

WhilecustomersbuyPC’sfortherightfeaturemix,theywillquicklysettleforaconfigurationthatiscloseenoughtotheirchoice.Sounderstandingthepopular

featureattachmentswasveryusefulincomingupwiththestandardizedproductconfigurations.ThiswasonlypossiblebecauseEmcien’stoolsallowedoptiontrade‐offanalysisandconfigurationoptimization.ThePCcompanyhasimprovedproductmarginsby1.5%andtheretailinventoryturnshavedoubled.Thishastranslatedtotensofmillionsofdollarstothebottomline.

Thecomputermarketisveryvolatile,demandisconstantlyshiftingandproductsareconstantlychanging.Thecompanyrecognizedthattheproductplannersneededtoolstomaintainaconstantlystreamlinedproductmixandensureanefficientsupplychain.

WhatIsNotObviousWhenYouEliminateOptions

Companiesthatundertakecomplexityreductionprojectstendtocutoptionswithlowattachrates.However,thissingledimensionalviewofcustomerdemandcanresultinpoormarketoutcomes:Thelow‐takeoptionmaybetheonlychoiceforaprofitablemodelorconfiguration,whichinturnhasalowtakerate.Eliminatingthislow‐takepartcanerodemarginsandcauselossofvaluablecustomers.

Ontheotherhand,theremaybeacaseforeliminatinganoptionthatmaynotbesoobvious.Anoptionmayhaveahighattachrate,butmaybesplinteredacrossthetailconfigurationsformanymodels.Whilethisoptionhasahighattachrate,eliminatingitreducescomplexityinmanymodelsatonce!

Managingproductconfigurationsrequirestoolswiththecapabilitytoanalyzetheproductattheconfigurationlevelofdetail.Singledimensionalviewsoftheproductcanresultinwrongconclusions–hencewrongproductdecisions.

Originaldemandcoveragecurve(454configurationstocover80%demandinretail)30Optimizedconfigurations

tocover80%demand

EmcienWhitePaper–ProductMixManagement

www.emcien.com 8

Conclusion

Wehaveallheardofthefrogthatwillsitinwaterwithoutrealizingitisheatingup,untilheiscooked.Similarly–productconfigurationshaveslowlycreptuponus.Aproblemthatwaseasytomanagewithsheetsofpaperandspreadsheetsisnowacriticalproblemthatisdefiningthecostandefficiencyofthesupplychain.WereadaboutcompanieslikeDell,whoarethegoldstandardinsupplychainefficiency,strugglingtomanageproductconfigurations.

Today’scompetitiveenvironmentisglobal,withextendedsupplychains,demandingcustomers,andshorteningproductlifecycles.Companiesthatwanttosurviveinthisenvironmentwillneedtomanagetheirproductmixwithaneyeonthesupplychain.

SectionSummaryPoints

• Productproliferationaddstremendousuncertaintytotheplanning,deliveryandsupportoftheproduct.

• Customersarewillingtopayalittlemoretoavoidthehassleofwadingthroughunlimitedchoices.

• Thesupplychainsufferswithrisingcostandreducedefficiencywhenithastosupportapoorproductmix.

• Companiesthatattemptconfigurationreductionor

complexityreductionprojectswithoutpayingattentiontothesebasicproductmixmetricswillnotseeanyfinancialimprovement.

• Managingproductconfigurationsrequirestoolswiththe

capabilitytoanalyzetheproductattheconfigurationlevelofdetail.

EmcienWhitePaper–ProductMixManagement

www.emcien.com 9

AboutEmcien

EmcienisanAtlanta,GA‐basedsoftwarefirmdedicatedtosolvingcomplexityproblemsinthediscretemanufacturingindustry.Companiesaredealingwithunrelentingpressuretoreducecostsintheirmanufacturingandsupplychainoperations.Emcienoffersauniquesoftwaresolutiontohelpoptimizeproductmixtomaximizeprofits.TolearnmoreaboutEmcien,visitwww.emcien.com.