In Part Three of this series we examined some cultural and technological underpinnings essential to make sales and operations planning work effectively. Here in Part Three we discuss managing product lifecycles and transitions.
With ever-shortening product lifecycles, increasing numbers of products, and pressure on margins, lifecycle planning and new product introductions are critical for successful demand management for many industries. Product transitions are a very dynamic time with lots of change, and many hard to predict forces at work simultaneously (see Figure 1). In industries like CPG with very high SKU counts, the sheer volume of new product introductions (NPI) presents big challenges.
There are also interdependencies: If manufacturing is slow to ramp, then you may scale back the promotion. If the channel is empty of the product being replaced, then there is pressure on engineering to accelerate the release schedule. If engineering is late, you may have to lower the price. The consequences of poor lifecycle planning are devastating:
- Product transition too early — demand for the old product dies, while there is still lots of inventory in the channel or warehouses, resulting in markdowns, returns, and obsolescence.
- Product transition too late/production ramp too slow — empty shelves, season missed, price erosion wipes out your margins, dissatisfied customers, lose market share to your competitors.
Because of these severe consequences, even slight improvements in product transition performance and predictably can have dramatic improvements to the bottom line. This is especially true in steep price erosion industries like high tech, but also in any industry where you frequently get stuck with too much or too little, such as fashion apparel.
Lead Time to Product-life Ratio
It’s important to understand that the challenges faced in lifecycle planning change a lot depending on the ratio of lead times to life of the product, as illustrated in Table 1 – Product Lifecycle Variants.
One sunglass manufacturer had an order-to-shelf lead time of 120 days. With a selling season of only 140 days, they had to place orders for the entire season before they sold a single pair.By designing everything with common raw materials and parts, the manufacturer was able to place orders for the entire aggregate demand much earlier, since aggregate demand is much more predictable than per-model demand. This has the effect of shortening the order-to-shelf lead time for individual models to about 50 days, because the raw materials are already in place.As a result, the manufacturer is able to place smaller model-specific orders, receive the order and see what styles are hot or not, and then order larger quantities only for those models that are selling well. This dramatically reduces both stock-outs and over-buys.
Postponement, Transfer, and Early Demand
One strategy is to move your products down the curve, turning one-time buy products into short-life products or short-life products into replenishment products. It’s usually not an option to lengthen the product lifecycle, but it may be possible to shorten lead times, for example, by aggressively looking for postponement or differed-differentiation opportunities to cut lead times. The deeper the differed-differentiation is designed into the product, the more flexibility is provided. Packaging and labeling are “shallow” differentiation, whereas designing common parts and raw materials into many different sets of products is a deeper level that enables the postponement to be pushed further back to your suppliers. By combining this with some level of commitment to suppliers about aggregate quantities, a manufacturer can get their suppliers to procure and manufacture the basic building blocks ahead of time, thereby dramatically reducing lead times, and moving their product down the curve (see sidebar “Moving from One-time-Buy to Short-Lifecycle”). It also may be possible to shorten lead times by moving some portion of production closer to your end markets. Total-cost-sourcing can be used to determine if the shorter lead times and reduced transportation costs compensate for higher production costs.
Scenario and Contingency Planning
In addition to developing a primary product transition strategy, it is important to recognize transition risks and develop contingency strategies for various scenarios: What will we do if the product sells faster or slower than expected; if the release is late or the channel is still full. Probability or range forecasts are useful for understanding the range of possible scenarios in demand.
It is also helpful to have strong monitoring tools such as a product transition dashboard, with key indicators and trigger/alerts for triggering decisions on adjusting your strategy. This approach helps reduce reactive, seat-of-the-pants decisions, made late, in a crisis mode.
Initial Buy Techniques
The initial buy is critical in short life products and is everything in one-time buy products. To understand best techniques for making better initial buys, it is important to distinguish between line extensions vs. truly new products. Iterations on existing products can make heavier use of history for predicting demand, and the production challenges are already better understood. But history doesn’t always help a company really understand the impact of disruptive technologies, competitor’s actions, and other market forces.
Truly new products require more creativity, such as looking at uptake patterns for introductions of similar products, while taking into account differences in product, market, circumstances, etc. The more radically different the product or launch circumstances from others being compared, the harder it will be to get an accurate picture before launch. Merchandising and product development organizations in companies that do this well have rigorous methodology for understanding similarities and differences with past launches and products from other companies, and quantifying the expected impact on demand. More challenging is capturing the impact of changing market forces like new disruptive technologies, changing fashions, and major events.
Communications and Visibility
Product Lifecycle Codes – a Better Way
Many companies have a single system for tracking the evolution of a product throughout its lifecycle. Typically, engineering and production need a dozen or more detailed, technical lifecycle codes to track the various states and inform production decisions. This is confusing for marketing and sales.Some companies have moved to two sets of lifecycle tracking codes – one for marketing and sales, the other for production and engineering. This makes it simple for marketing and sales to understand exactly the disposition of the product, while giving the operational and design departments the detailed granularity they need.
Product transitions are times of a lot of change, deadlines, and high stress for the whole team: product managers, engineers, manufacturing, sales, support, and marketing. Because everyone is so busy, poor product transitions are often the result of lack of good, timely communication and coordination, both within the organization and with trading partners. Moving to a dual product lifecycle code system can help marketing and sales people better understand and track release status (see side-bar “Product Lifecycle Codes – a Better Way” for explanation).
For many manufacturers, a major challenge is lack of visibility into inventory in the channel. They want to flush the channel before introducing a new product, but if they guess wrong about what’s out there, they risk heavy returns/markdowns or stockouts/lost sales and lost customer loyalty. Systems that provide visibility into channel inventory can be highly valuable. But these are often not available. Good product managers have ongoing dialogs with their channel about current inventory levels, the pace of consumption of the old product in the channel, as well as the inevitable changes in rollout schedules. Frequent communication during product transitions is a must.
Component manufacturers, especially of standardized components that are shared across multiple customers, also go through challenges of EOL/launch transitions. Few things will alienate the customer (i.e. the OEM/manufacturer that uses the component) faster and more profoundly than when the supplier suddenly and unexpectedly starts shipping another revision or version of a component, different than the one the OEM has been using, which they had previously tested and qualified. For component manufacturers, the foundation is regular, ongoing product roadmap alignment discussions with the customer. There must be no surprises!
The Power of Well-executed Product Lifecycle Management
Managing product lifecycle, especially product transitions, will always be challenging. With ever-shrinking lifecycles and ever-expanding supply chains in almost all industries, it is not getting any easier. However, by combining the appropriate elements, as outlined above — e.g. deep postponement, scenario/contingency planning, advanced initial buy techniques, and frequent communications during transitions — planners and operations personnel can overcome these challenges. Where so much is riding on successfully launching new products these days, smooth execution of product transitions can be a competitive weapon that makes a huge difference in competitiveness and ultimately market share.
In Part Five, we discuss how forecasts are better off based on end-user consumption, rather than retailer orders.
To view other articles from this issue of the brief, click here.