Sunday, September 12, 2010
Increasing options decreases sales
A large manufacturer (which will remain nameless since this is a public blog) wants to increase its market share of the products it sells (large HVAC equipment). In order to do this it decides it will increase the number of options it offers on its equipment to give customers extra incentive to purchase that equipment. Since more options lead to better fit of the product into the customer's requiremnts, and better fit makes the product more cost effective to the customer, it is thought sales will increase. These extra options are release quickly, before being fully engineered, to start bringing in more sales as quickly as possable. Unfortunately, due to the nature of the equipment and the way it is manufactured, these additional options, not being fully engineered for manufacture, create havoc on the manfuacturing floor. As a result, the correct parts fail to be ordered and the parts that do arrive get misinstalled or misplaced. Because of this, the entire line backs up, and the lead time on the product now goes from 8 weeks to 11 weeks. Because the wait time is longer, customers cannot buy the equipment, even though they desire the features, because they cannot wait that long. As a result, they purchase stock equipment from a competitor. The end result is that sales decrease and the options do not get fully engineered because engineering effort is now being put toward getting the factory lead time back down. Monitoring actual sales vs potential sales over time, we could evalute the impact of increasing the options set. The hard elements would be things like total number of sales of the product, lost sales due to lead time, factory lead time, first pass yield, profit margin, number of missing/unordered parts and total number of available options. soft elements would be things like customer perception of the company and employee contentment
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This is a tough problem for all manufacturers, especially makers of industrial equipment. Too often, management sees themselves falling behind the technological curve and jump too soon to embrace new innovation.
ReplyDeleteYour model will require the input of savvy salesmen who can read the customers' responses and an honest assessment by manufacturing about the true causes of the production delays.
Rob, I was wondering what you thought the keepers of the existing mental model were going to do? Will they actually see this problem you describe soon enough to do something about it? Will it be easy to get them to take ownership of the correct model?
ReplyDeleteRob...a very nicely articulated problem. Your choice of variables is spot on. This is a classic supply chain problem (one of many such types of problems that have been successfully tackled by system dynamics analysis). Very well done.
ReplyDeleteI might mention that I experienced this same phenomenon while at DuPont. In one of my jobs I worked in a management role in the manufacturing arm of a highly profitable business. But competition was picking up, and the marketing and R&D folks got the bright idea of developing and selling new, highly innovative products. The problem was that the mft organization was not included in the development team. Hence, the new products were sold to the customers, but we didn't know how to make them profitably. Plant productivity fell, shipping delays increased, and customer good will fell thru the floor. I was put in charge of a team that had to go back and revisit the entire process and bring some order to the mess. It was tough going! I wish we had better understood the unintended consequences of our actions!