Saturday, February 7, 2009

Product proliferation

Companies had recklessly increased their product offerings in the last few years. I think in one my the earlier posts I have called this a corporate Hara kiri. Production capacity was a constraint and an increase on variety would mean a higher setup time component. This would further reduce the output.

One thing that has changed is that Production capacity is not a constraint now. Demand has drastically come down. In this period if surely makes sense to offer more variety of products and try to win over more customers.

There are two costs associated with variety. One of them is the cost of setup and changeover. The cost is the value of time in which the machine and operators are not productive. It does not involve an actual cash outflow. More changeovers would mean more idle time and less production and hence the cost. This cost is applied assuming that capacity is a constraint. If there is excess capacity more change overs would not have any impact. This part of the costs could be totally ignored.

The second set of costs would be the costs of inventory. Higher variety would mean a higher variety. Companies would have to take care of these costs. Higher inventories could cause a drastic increase in costs. Companies could look into modularisation or product postponement as a solution to this.

Companies have to and should expand their product offerings. That done, they will have to do it smartly and avoid the costs of inventories that it would create. Costs of set up could be ignored. Check this report on Grainger coming out with its largest ever catelogue.

A few months back I would have called it a stupid move. But, with the current reality and the an assumption that Grainger will manage it well, I think it was a smart move.