new product introduction Archives

Innovating Production and Supply Networks to Increase Value from New Product Introductions

Supply Chain Network Design | By Valentijn de Leeuw • 07/24/2018

I recently contributed to the webinar “Product and services innovation, using digital transformation” to increase success and value from new product introductions (NPI). Elemica covered the supply chain execution aspects to it, and I introduced strategy and long-term planning aspects to product and supply network innovation.

What we generally perceive of a product starts when it is introduced to the market. By then, the product has been through strategic planning, portfolio management, R&D and product development processes for years and sometimes decades. During that time period, the design of the product, the process and the supply network can be modified and optimized according to data that become available over time, from the design process and from the evolving markets.

The resource invested in, and the objectives defined for the development should be guided by a business case, that estimates the net present value (NPV) of the product over its lifecycle. Experience shows that design changes that create more value, that is, those that maximize production, sales price and successful deliveries, are often more effective changes than those focused on reducing costs. But it is true that the earlier in the lifecycle, the larger the opportunities for optimization in both categories. An improvement project usually impacts both cost and value aspects. For example, the introduction of a cloud-based market place increases access to the market and can increase total volumes and market shares, while it also reduces the cost of transactions and supply chain execution.

Flexible and modular plants are a recent development that impact both manufacturing and supply chains. Implementing this concept implies that upscaling to world-size plants is not necessary anymore and replaced by lining up a sufficient number of modular plants that correspond to the market needs. This decreases time to market and avoids the low utilization rates of large plants during times of market volatility. Moreover, these plants can easily be modified to make other products or product variants, that creates the agility to react on changing market needs. And what is very disruptive, these plants are transportable which creates a whole new class of supply network optimization challenges.

One area of innovation in supply network optimization is to include a wider range of domains and time ranges. Shell Global Solutions’ GMOS/Netsim is an example of such an innovation. It includes supply, manufacturing and distribution, and includes middle long and long-term time frames. To find even more global and financially favorable optima, this could be taken further to include also short-term optimization, demand forecasting, supply and demand balancing, and more.

In a project where the Delft University of Technology cooperated with the institute for sustainable process technology. Agent-based simulation was used to study how a global decentralized multi-tier supply network would react on the introduction of modular, flexible plants. The simulations showed that operating margins for those plants increased by over 25 percent compared to a classical size production plant. Using the same technique, the university found that companies collaborating in networks, have comparable cost, but increased profitability from network collaboration.

There are many more areas where innovation in supply networks can create additional added value. Examples are networks related to 3D printing of mechanical spare parts, new flows and processes related to circular economy, new supply networks for hydrogen and ammonia as chemical energy sources and storage, emergency and cold chain networks for epidemics, shelf-life optimization, emergencies and epidemics. And taking a hard look at your own business you will find more. Take the long view!

My recommendations are for the short term: optimize planning, scheduling and supply chain execution. Pay attention to the willingness to collaborate and its relation to team norms and company culture. For the middle long term, reconsider and improve your supply network design and optimization tools. Improve anti-counterfeiting and traceability. Make your operations reliable and reduce interruptions and downtime to scheduled stops only. For the long term, innovate manufacturing and supply networks, and where possible optimize both simultaneously. Include as many time horizons as your tool will allow you in optimization. Consider agent-based modeling to study the supply network dynamics. When introducing innovation or updating innovation approaches, think of introducing design thinking.

Valentijn is a Vice President at the ARC Advisory Group. His technology focus is on manufacturing operations management, performance management, supply chain management, and the role of the knowledge worker in manufacturing. Valentijn is the focal point for ARC’s Benchmarking Consortium in Europe.

Stanley Black & Decker Effectively Manages Excess and Obsolete Inventory

Consumer Packaged Goods (CPG) | By Steve Banker • 10/12/2010

I had the opportunity to see Carl Offhaus, Director of Supply Chain & Consumer Services at Stanley Black & Decker, speak at the IE Group’s Sales & Operations Planning Innovation Summit in September. Carl spoke about the techniques his company uses to manage end-of-life stock keeping units (SKUs).

Stanley Black & Decker is a $9 billion hardware and home improvement manufacturer. Carl focused his talk on the Kwikset (locksets, door knobs) and Price Pfister (faucets, showerheads) brands. Sixty percent of the sales of these products come from “Big Box” retailers like Home Depot, Lowe’s, and Menards. Surprisingly, these products are style sensitive—i.e., 33 percent of their revenues come from products introduced in the last three years. This volume of new product introductions greatly increases the risks associated with excess and obsolete (E&O) inventory.

The Big Box channel includes retail chains with thousands of stores, representing different regions and target customers with different tastes. Stores vary in size, product velocity and geographic location. This leads to very different product mixes and varying aisle configurations (6, 7, or 8 bay sets, for example). Making channel management even more difficult is that the company ships to retailer distribution centers for some chains, while for others it ships direct to store or to transit facilities. Some retailers engage in centralized buying, while others have very decentralized processes. And some retailers demand exclusive SKUs.

The Big Box channel can be a significant source of E&O inventory. If demand for a new product introduction is misjudged, it is unlikely that other markets will be able to sell the excess inventory. Further, Stanley Black & Decker sources many of its products from Asia, so order-to-shipment lead times are four to six weeks. As a result, the company keeps 15 to 20 weeks of inventory for many SKUs to meet its service levels goals.

2007 was the watershed year, a bad year for the company in terms of excess and obsolete inventory. Consequently, the company formed an E&O reduction team, which identified four areas for process improvement:

New product introductions (NPI): the company needed a more disciplined approach to NPI from the very inception of the product;
The company needed to more efficiently transition out of obsolete inventory by better managing the drawdown of inventory as the SKUs matured (a glide path to zero inventory);
Following the drawdown, if the company was left with excess inventory, it needed to improve and accelerate the efficiency of its disposition process;
The company needed an early warning system about underperforming SKUs, with defined corrective actions. This was the area that Carl spoke mainly about in his presentation.

The first step in developing a better early warning system was to come to an agreement with sales and marketing on how to rate a SKU’s performance, a methodology it calls a “life rating.” This led to a weekly meeting where all SKUs are reviewed every other week (bath products are reviewed in weeks one and three, kitchen products are reviewed in weeks 2 and 4).

Carl was kind enough to send me a copy of his presentation slides. The diagram below shows how the company categorized its SKUs and the actions associated with the different categories.

SKU Life Ratings (Source: Carl Offhaus, Stanley Black & Decker; click to enlarge)

The company’s definition of good SKU performance is based on store-level sales. For example, a strong performer would sell at a rate of over 0.35 units per store per week. But these rules are not set in stone. There is ongoing collaboration with sales and marketing on this process; for some SKUs sold to certain customers, there may be good reasons to make exceptions.

In conclusion, Carl made it clear that the rules were designed to provide parameters that would allow the company to “take action” instead of just saying, “We’ve got to watch that.” The company’s discipline paid off. In 2007, E&O cost Stanley Black & Decker 1.7 percent of sales. By 2009, it had fallen to 0.5 percent of sales, resulting in millions of dollars in savings per year.

A Front-End Approach to SKU Rationalization

Consumer Packaged Goods (CPG) | By Steve Banker • 08/26/2009

Last month, I wrote a posting on how Walmart is reducing its SKU selection to improve merchandising and reduce complexity. In response, Kate Vitasek, founder of Supply Chain Visions, sent me an article she wrote with Eric Tinker and Shawn Bhimani called “Rationalizing SKU Introductions.”

In her email to me, Kate commented that we should “step back and think of [an] alternative approach. What if companies approached the problem from the other angle of ‘Rationalizing SKU Introduction’ [on the front end] vs. ‘SKU Rationalization’ on the back end? If [companies] can attack it on the front end… that will prevent billions of dollars in waste on the back end.”

When you flip this and think about focusing less on cutting the number of SKUs you already have and more on introducing fewer new products to start with, then we enter the realm of product lifecycle management. The article provides data on how incredibly unsuccessful the vast majority of new product introductions (NPIs) are:

The failure rate of consumer products is 95 percent in the U.S and 90 percent in Europe (Harvard Business Review, Don’t Blame the Metrics, Kevin J. Clancy and Randy L. Stone, June 2005).
Research shows fewer than two hundred of the hundreds of thousands of products introduced over a recent ten-year period earn sales of more than $15 million a year (The Origin of Brands: How Product Evolution Creates Endless Possibilities for New Brands, Al Ries, 2005).
Only 45 percent of new products experience an on-time launch, a key driver in the long-term success and future viability of a product (Industry Week, Failure To Launch, Kill Jusko, Sept. 2007).
At most, only 10 percent of new products are successful after three years (Marketing Management, SURVIVING Innovation, Kevin Clancy and Peter Krieg, April 2003).

Many companies use the stage-gate process to make “Go/No-Go” decisions, using predefined criteria, at defined points in the new product introduction process. To move on to the next stage, teams from different departments must typically complete a prescribed set of related cross-functional tasks at each stage.

Source: Stage Gate International (www.stage-gate.com); click to enlarge

I view SKU reduction programs as a form of complexity reduction, a way to decrease the number of ingredients, components, and subassemblies used to make a product. Ideally, in building the business case, the “product definition and analysis” sub-step would include looking at whether parts (or ingredients) commonly used in making other products can also be used in making the new product.

The article urges that the “Testing and Validation” step include a sub-stage—market testing—that companies often omit. Market testing is a trial production of a product before the company does a full roll-out. “Testing gives a company the ability to obtain a better idea of whether or not the product will succeed in the market and meet these goals,” the authors write. “It also offers the added bonus of being able to demonstrate the potential issues of the product’s marketing, packaging sizes, compatibility, etc. Lastly, market testing allows for collecting end-consumer feedback. By using testing, a company can not only ensure that it only delivers products which stand a chance in the market, but it also helps strengthen the full product launch to be as successful as possible.”

However, being more selective about product introductions, which probably reduces the number of SKUs, is not the full story. This may slow the speed with which the “SKU tank” fills up, but it does not empty the tank when it gets too full. Thus, as the authors state, “products should be introduced with the expectation that they have a finite life and are to be actively managed throughout a defined lifecycle. The lifecycle is criteria-based and considers the total effect on the product portfolio as well as the supply chain. In addition to implementing a defined stage gate process to get products to market, leading organizations actively manage the portfolio and have defined exit strategies for every product (emphasis mine).” What we are talking about here goes beyond new product introductions to encompass managing SKU profitability on an ongoing basis.

The stage gate product innovation process is widely known. In contrast, the process for managing SKUs on an ongoing basis – emptying the SKU tank before it gets too full – has not been written about much. What would this process look like? Does your company have a process for managing SKUs on an ongoing basis? We’d love to hear about it.

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