product variety intro.ppt

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    Introduction to Product Variety

    The Problem and Basic Concepts

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    Grading:

    Group Assignments 30%Class Participation 20%Final Case 50%

    Monday

    Introduction

    Strategic Decisions

    Tuesday

    Costs of Variety

    Cost Tools

    Wednesday

    Decouple Points

    Customer Interface

    Thursday

    Platform

    Development

    Friday

    Final Case

    Due 15:00

    Course Outline

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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 salesDeter channel competition - Laser jet printers

    Deter market entry - Breakfast cereal

    Shelf space - Tooth paste

    Value capture with pricing - bicycle product linesBetter technology attracts more customers - Technological change.

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    SKU(Stock Keeping Unit)

    Model

    ProductCategory(Division)

    Blocks

    Variety manifests itself at different levels in an organization

    Dolls

    Toy Inc.

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    100 1000 10000

    Manufacturer's Suggested Retail Price (US$)

    Conejo

    Klein

    Cannondale

    Marin

    Specialized

    GT

    Trek

    Schwinn

    Raleigh

    Giant

    Product variety conveys competitive position

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    Variety is introduced over time

    Matchedor

    One-to-one

    SynchronousAsynchronous

    Timing Strategy

    ReplacementStrategy

    Unmatched

    (Computers, Automobiles, Bicycles) (Consumer Packaged Goods)

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    Model Growth in US Auto Industry

    150

    200

    250

    300

    350

    400

    1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

    Year

    #ofMod

    els

    Average of 5 new models per year

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    Model Growth in US Auto Industry

    150

    200

    250

    300

    350

    400

    1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

    Model Growth in Mountain Bike Industry

    0

    500

    1000

    1500

    2000

    2500

    3000

    3500

    4000

    1985 1987 1989 1991 1993 1995 1997

    Year

    #ofMo

    dels

    Growth from 50 to nearly 1600 mountain bikes

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    Model Growth in Mountain Bike Industry

    0

    500

    1000

    1500

    2000

    2500

    3000

    3500

    4000

    1985 1987 1989 1991 1993 1995 1997

    Model Growth in US Auto Industry

    150

    200

    250

    300

    350

    400

    1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

    Model Growth in Mutual Fund Industry

    0

    500

    1,000

    1,500

    2,000

    2,500

    3,000

    1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999

    Year

    #

    of

    Models

    in

    10,000s

    Over 200,000 mutual funds to choose from in 2000

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    Model Growth in Mountain Bike Industry

    0

    500

    1000

    1500

    2000

    2500

    3000

    3500

    4000

    1985 1987 1989 1991 1993 1995 1997

    Model Growth in US Auto Industry

    150

    200

    250

    300

    350

    400

    1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

    Model Growth in Mutual Fund Industry

    0

    500

    1,000

    1,500

    2,000

    2,500

    3,000

    1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999

    Model Growth in PC Industry

    0

    100

    200

    300

    400

    500

    600

    700

    800

    1980 1982 1984 1986 1988 1990 1992 1994 1996

    Year

    #

    of

    Mod

    els

    Over 350 PCs to choose from by 1996.

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    Model Growth in Mountain Bike Industry

    0

    500

    1000

    1500

    2000

    2500

    3000

    3500

    4000

    1985 1987 1989 1991 1993 1995 1997

    Model Growth in US Auto Industry

    150

    200

    250

    300

    350

    400

    1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

    Model Growth in Mutual Fund Industry

    0

    500

    1,000

    1,500

    2,000

    2,500

    3,000

    1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999

    Model Growth in PC Industry

    0

    100

    200

    300

    400

    500

    600

    700

    800

    1980 1982 1984 1986 1988 1990 1992 1994 1996

    Increase in variety across 4 industries at different stages ofproduct life cycle.

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    Profit

    Revenue Costs

    The variety increase will payoff only if costs are balancedagainst revenues.

    Complex economic relationships make this a non-trivialbalance!

    PriceQuantity

    R&DProduction investment

    ToolingInventory obsolesenceMarketing costs

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    Revenue

    Costs

    ProfitVariety

    +

    +

    +

    -

    Product Variety and Profit

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    Model Growth and Sales Per Model in US Auto Industry

    150

    200

    250

    300

    350

    400

    1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

    Year

    #ofModelsandSalesperModel

    Unit sales per model decrease

    from 4000 to 2500 per year.

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    Model Growth and Sales Per Model in US Auto Industry

    150

    200

    250

    300

    350

    400

    1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

    Model Growth and Sales Per Model in Mountain Bike Industry

    0

    500

    1000

    1500

    2000

    2500

    3000

    3500

    4000

    1985 1987 1989 1991 1993 1995 1997

    Year

    #

    of

    Mo

    de

    ls

    an

    d

    Sa

    les

    per

    Mo

    de

    l

    Unit sales decrease

    from 4000 to 1000per year

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    Model Growth and Sales Per Model in US Auto Industry

    150

    200

    250

    300

    350

    400

    1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

    Model Growth and Sales Per Model in Mountain Bike Industry

    0

    500

    1000

    1500

    2000

    2500

    3000

    3500

    4000

    1985 1987 1989 1991 1993 1995 1997

    Mutual Fund Accounts and Net Assets Per Account

    0

    500

    1,000

    1,500

    2,000

    2,500

    3,000

    1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999

    Year

    #

    of

    Models

    and

    Sal

    es

    per

    Model

    Net assets per account

    increase by over $700

    per year.

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    Mutual Fund Accounts and Net Assets Per Account

    0

    500

    1,000

    1,500

    2,000

    2,500

    3,000

    1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999

    Model Growth and Sales Per Model in Mountain Bike Industry

    0

    500

    1000

    1500

    2000

    2500

    3000

    3500

    4000

    1985 1987 1989 1991 1993 1995 1997

    Model Growth and Sales Per Model in US Auto Industry

    150

    200

    250

    300

    350

    400

    1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

    Model Growth and Sales Per Model in PC Industry

    0

    100

    200

    300

    400

    500

    600

    700

    800

    1980 1982 1984 1986 1988 1990 1992 1994 1996

    Year

    #

    of

    Models

    an

    d

    Sales

    per

    Mode

    l

    Sales growth per model

    increase over $2.6

    million per year.

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    Model Growth and Sales Per Model in US Auto Industry

    150

    200

    250

    300

    350

    400

    1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

    Model Growth and Sales Per Model in Mountain Bike Industry

    0

    500

    1000

    1500

    2000

    2500

    3000

    3500

    4000

    1985 1987 1989 1991 1993 1995 1997

    Mutual Fund Accounts and Net Assets Per Account

    0

    500

    1,000

    1,500

    2,000

    2,500

    3,000

    1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999

    Model Growth and Sales Per Model in PC Industry

    0

    100

    200

    300

    400

    500

    600

    700

    800

    1980 1982 1984 1986 1988 1990 1992 1994 1996

    Decreasing sales per model in autos and bicyclesIncreasing sales per model in mutual funds and PCs

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    Bankruptcy Risk and Product Variety in the Bicycle Industry

    0

    2

    4

    6

    8

    10

    12

    14

    16

    18

    20

    1985 1987 1989 1991 1993 1995 1997

    Year

    #Mo

    de

    ls

    per

    Firm

    an

    d

    Odds

    Models per Firm

    Increase In Probability of Bankruptcy Associated with Average Product Line

    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, FordUnsuccessful: GM, Nissan, Chrysler

    Success in Bicycles defined by market share and no bankruptcy.Successful: GT, Trek, Diamond BackUnsuccessful: Bridgestone, Mountain Goat, Miyata

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    Auto Industry Returns (1974-1999)

    Toyota

    Ford

    Honda

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    Observation 1:

    At successful firms, sales growth exceeds

    variety growth.

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    -0.01

    0.00

    0.01

    0.01

    0.020.02

    0.03

    0.03

    0.04

    Top 3

    Performers

    Industry

    Average

    Bottom 3

    Performers

    Sales Growth - Variety Growth in Auto Industry

    -0.40

    -0.30

    -0.20

    -0.10

    0.00

    0.10

    0.20

    0.30

    Top 3

    Performers

    Industry

    Average

    Bottom 3

    Performers

    Sales Growth - Model Growth in Mountain Bike

    Industry

    Toyota,

    Honda,

    Ford GM,Nissan,

    Chrysler

    Diamond

    Back,

    Trek,

    GT,

    Bridgestone,

    Miyata,

    Mountain

    Goat

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    Observation 2:

    At successful firms, sales growth and variety

    growth move in lock-step.

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    0

    5

    10

    15

    20

    25

    30

    35

    40

    45

    50

    1974 1979 1984 1989 1994 1999

    Models Unit Sales x20,000

    Honda moves in lock-step

    0

    10

    20

    30

    40

    50

    60

    70

    80

    90

    1974 1979 1984 1989 1994 1999

    Models Unit Sales x100,000

    GM does not

    Correlation = .94

    Correlation = -.33

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    0

    0.1

    0.2

    0.3

    0.4

    0.5

    0.6

    Top 3

    Performers

    Industry

    Average

    Bottom 3

    Performers

    Auto Industry Models/Sales Correlation

    Toyota,Honda,

    Ford GM,

    Nissan,

    Chrysler

    0.50

    0.60

    0.70

    0.80

    0.90

    Top 3

    Performers

    Industry

    Average

    Bottom 3

    Performers

    Mountain Bike Industry Models/Sales

    Correlation

    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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    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.

    Product Variety at 4 Successful Mountain Bike Companies

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    Not All Attributes Should be Managed the Same

    FitQuality Taste

    IndividualPreferenceFunction

    PopulationPreferenceFunction

    XS S M L XL XXL16 kg 12 kg 8 kg

    16 kg 12 kg 8 kg XS S M L XL XXL

    Frame Weight

    Frame Weight

    Frame Size

    Frame Size

    Frame Color

    Frame Color

    CompetitiveEmphasis

    More Qualityfor Less Money

    Customizationand

    Service

    Meet ChangingTastes

    (Service)

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    Effect of product variety on costs

    (occurs at the attribute level)

    Productvariety

    ProductionCosts

    MarketMediation

    Costs

    Incremental production costs :

    Fixed investments in tooling, dies etc.Production (batch) related costsProduction technology choice

    Costs of making supply meet demand:

    Mark-down costsExcess inventoryIncreased safety stock

    +

    +

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    Differences in Production and Market Mediation Costs

    Across Product Attributes

    Materials US$ 2,000,000 Low

    Geometry/Size US$ 10,000 Medium

    Colors US$ 1,000 High

    Components US$ 0 Medium

    Production Cost(tooling investment) Mediation Cost(forecast difficulty)

    Materials is a production dominant attribute.Geometry/Size, colors and components are mediation dominant attributes.

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    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

    Product Variety at 4 Successful Mountain Bike Companies

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    Statistic: Determine

    the difference

    between sales growth

    and model growth.

    Diagnosis:Difference should be

    positive. If

    negative indicates

    lack of return on

    variety.

    Test 1: Test of Market Acceptance

    (Sales-Sales)/Sales

    -(Models-Models)/Models

    Toolkit of Vital Variety Statistics

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    Statistic: Determine

    the correlation

    between sales and

    models over time.

    Diagnosis: Thecorrelation should be

    close to 1. If

    significantly less

    than 1 or negative

    indicates lack ofcoordinated efforts

    in managing variety.

    Test 2: Test of Coordinated Efforts

    0

    5

    10

    15

    20

    25

    30

    35

    40

    45

    50

    1974 1979 1984 1989 1994 1999

    Models Unit Sales x20,000

    Company Correlation

    Toolkit of Vital Variety Statistics

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    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.

    Test 3: Test of Leveraged Resources

    Toolkit of Vital Variety Statistics

    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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    Honda expanded product lines using platforms.

    Platform:

    Chassis of a car

    Accord

    Civic

    Odyssey

    Wh ff th t i t ?

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    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

    Colors per model** 1.25 1.25 1 104

    *A frame is a material/geometry combination

    **A model is a frame/component combination

    Model level analysis hides true differences in variety

    Who offers the most 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 technologyThe location of the decouple point in the supply chain

    The product architecture.

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    Critical Elements of Variety

    Strategies1. 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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    Fit

    Deliv erAssemble

    Design NewProducts

    Promote

    Display

    Component Fab

    Cut Tubes Weld Frame Paint Frame Transport

    Frame Fabrication

    Vertical integration of production

    Production process technology

    Product architecture

    Dimensions of v ariety

    Strategic Decisions Tactical Decisions

    Number of levels of attributes

    Bundling of combinations

    Parts sharing

    Lot sizing

    Inv entory policy

    Product ion scheduling

    (every 5-10 product cy cles) (every product cycle)

    Location of decouple point

    Nature of customer interf ace and distribution channel

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    Revenue

    Costs

    ProfitVariety

    +

    +

    +

    -

    Product Variety and Profit

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    Vertical Integration

    Motive to outsource Motive to insource

    Lower Costs vs. More Control

    Helps production costs Helps mediation costs

    Implications of Vertical Integration

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    Implications of Vertical Integration

    Supply chain structure = distance of production from target market,

    degree of scale economies

    Th l h i t t ill h ff t d ti d k t di ti t

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

    Low production costs

    due to scale economies, but

    high mediation costs attributed to

    longer lead times.

    Higher production costs due to

    scale inefficiency, but low mediation

    costs attributed to shorter lead times.

    S ppl Chain Str ct re and Prod ct Variet

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    Scale Inefficient Scale Efficient

    Local

    Distant

    Supply Chain Structure and Product Variety

    Degree of Scale in Production

    D

    istanceofproduction

    from

    targetmarket

    Low Variety

    High Production-Dominant

    Variety

    Low Mediation-Dominant

    Variety

    High Production-Dominant

    Variety

    and

    High Mediation-Dominant

    Variety

    Low Production-Dominant

    Variety

    High Mediation-Dominant

    Variety

    C I f

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    Customer Interface

    Au Bon Pain Lees Hoagie House

    Select a Bread

    Hoagie Roll

    Croissant

    Bagel

    Whole wheatSelect a Meat

    Turkey

    Ham

    Roastbeef

    Select Toppings

    LettuceTomato

    Pickle

    Onion

    Peppers

    Mayonaise

    El Grande $3.50(Turkey, Ham, Roastbeeflettuce, tomato, onion on ahoagie roll)

    The Varden $5.60(Ham, Pickle, Onion, Pepperson 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

    T di i l W ldi Fi

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    Traditional Welding Fixture

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    Slot and Tab Detail Simple Fixture ProvidesLocating Forces

    Cannondale Slot and Tab System

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    Decouple Points in Bicycles

    Asia U.SFrame

    FabricationPainting 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.

    Modular vs Integral Architecture

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    Modular vs. Integral Architecture

    S f V i t St t i

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    Cannondale Specialized VooDoo National

    Key Dimensions of Variety Frame Geometry Frame Material Component Group Color

    Customer Interface andDistribution Channel Select from retailer stock Select from retailer stock Order through retailer Order through retailer

    End Items Enumerated End Items Enumerated "Ingredient Menu" "Ingredient Menu"

    Vertical Integration 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

    Slot and tab fixturing

    Decouple Point

    end customer perspective Retailer Stock Retailer Stock Assembly Frame Fabrication/

    painting

    retailer perspective Frame painting or

    Cannondale finished goods

    inventory

    Specialized finished

    goods inventory

    Assembly Frame Fabrication/

    painting

    Product Architecture Integral front suspension Modular front suspension Modular front suspension Modular front suspension

    Substantial geometric

    differences among different

    sizes

    Minor or no geometric

    differences among sizes

    Minor or no geometric

    differences among sizes

    Minor or no geometric

    differences among sizes

    Summary of Variety Strategies

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    Understanding Production and Mediation Costs

    Molde College Banner Exercise

    BannerCutting AssemblyPainting StringCutting

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    Materials per Team

    2 straight scissors2 patterned scissors

    1 ream of paper

    4 markers 2x2 colors

    1 tape dispenser1 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:

    Inventory = Ending and Work in Process Inventoriesat 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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    Team RBK

    -1

    0

    1

    2

    3

    4

    5

    6

    7

    1 2 3 4 5 6 7 8

    Time

    Cos

    t

    Lost Sales Productivity Cost/Unit

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    Team Colgate

    -1

    0

    1

    2

    3

    4

    5

    6

    7

    8

    1 2 3 4 5 6 7 8

    Time

    Cos

    t

    Lost Sales Productivity Cost/Unit

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    Changes in Productivity - Cook for Congress

    00.5

    1

    1.5

    22.5

    3

    3.5

    4

    4.5

    1 2 3 4 5 6 7 8 9 10 11

    Time Period

    Product

    ivity

    New Product

    Introduction

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    Lost Sales - U of U

    0

    1

    2

    3

    4

    5

    6

    7

    8

    1 2 3 4 5 6 7 8 9 10 11

    Time Period

    Los

    tSales

    New Product Introduction