Product Variety in New Ventures
Operations Management for New Ventures
1.2.2016
Aalto University
School of Science
Industrial Engineering and Management
© Jouko Karjalainen 2016
Benefits and Costs of Product Variety
o Respond rapidly to
market opportunities;
increases customer
responsiveness
o Promotes greater
economies of scale and
scope
Aalto University
School of Science
Industrial Engineering and Management
o Costs of variety increase
at a faster rate than
benefits
• Complex processes
• Longer cycle times
• Lower capacity slack
o Risk of spreading
limited resource base too
thin
doubts of
legitimacy and reliability
© Jouko Karjalainen 2016
1
The main message of this week’s article
o How can new ventures manage a diverse product portfolio with a
small resource base?
o Product modularity can increase product variety; whereas process
modularity and manufacturing flexibility mitigate the inverted Utype relationship between product variety and operational
performance.
Aalto University
School of Science
Industrial Engineering and Management
© Jouko Karjalainen 2016
Moderation effect of manufacturing flexibility
Variation in
performance
due to variety
More
Less
Post-hoc analysis: Effect is stronger for smaller firms
Aalto University
School of Science
Industrial Engineering and Management
© Jouko Karjalainen 2016
2
Operational Performance
o Self-reported performance compared to competitors
• Inventory availability
• Maintaining availabe inventory
• Order-to-delivery cycle time [differences in order penetration
point?]
• Inventory turnover
• Operating profit growth
o In post-hoc anlyses, 3-year sales growth as an alternate measure
of NV performance
Aalto University
School of Science
Industrial Engineering and Management
© Jouko Karjalainen 2016
Product variety
o The number of unique product classes and the number of unique
product varieties within each product class
o The total SKUs as a proxy (stock keeping units)
• SKUs relate to the total number of models or versions of a given product
• product and service identification code
o Note!
• Variety can be detected for other elements (materials,
purchased components, customers
• Distinguish variety from variation in demand (fluctuation) &
variation in the process performance (deviation from
standards)
Aalto University
School of Science
Industrial Engineering and Management
© Jouko Karjalainen 2016
3
Product Modularity
o
o
o
o
o
Products use modularized design
Products share common modules/components
Product features are designed around a standard base unit
Modules can be reassembled into different forms
Feature modules can be added to a standard base unit [plus
modularity]
Aalto University
School of Science
Industrial Engineering and Management
© Jouko Karjalainen 2016
Process Modularity
o Standardizing manufacturing process modules that support
product modularity
•
•
•
•
Process designed as adjustable modules
New process modules can be added
Process modules adjusted for changing production needs
Process can be broken down into standard sub-processes that produce
standard base units and customization sub-processes
• Process modules can be arranged so that customization sub-processes
occur last
o Notice the correlation matrix: process modularity and
manufacturing flexibility correlate significantly
• High correlation co-efficient 0.26 (significant at <0.01)
Aalto University
School of Science
Industrial Engineering and Management
© Jouko Karjalainen 2016
4
Manufacturing Flexibility
o Machine
• Many different operations possible, quick setups, machines equally
effective
o Labor
• Cross-trained, easily moved between tasks, equally effective
o Material handling
• Different paths, capability for different sizes, equally effective paths
o Mix
• Number of product lines with varying processing requirements; mix
changed easily; efficiency of production process in not affected by
changes in mix
o Modification
• Amount and nature of modifications to customer’s specifications
Aalto University
School of Science
Industrial Engineering and Management
© Jouko Karjalainen 2016
Structural Equation Model
Better than the alternate models!
Aalto University
School of Science
Industrial Engineering and Management
© Jouko Karjalainen 2016
5
Standardization
o Internal standards as well - not only external standards!
• Standards are documents containing
– technical specifications or other precise criteria
• to be used consistently as
– rules, guidelines or definition of characteristics
• to ensure that
– materials, products, processes, and services
• are fit to their purpose
o Standards support repeatability and learning
o Enable measuring quality (in terms of conformance to
specifications)
Aalto University
School of Science
Industrial Engineering and Management
© Jouko Karjalainen 2016
Modularity
o Minimizing the effect a downstream process has on an upstream process
o Tools for the user to build large programs out of pieces
o The degree to which a product’s architecture is composed of modules with
minimal interactions between modules
o Functionality
• The most modular architecture is one in which each functional element of the
product is implemented by exactly one chunk (subassembly) and in which
there are few interactions between chunks. Such a modular architecture allows a
design change to be made to one subassembly without affecting the others.
o Interfaces
•
•
•
•
Spatial. The need for adjacency or orientation between elements.
Energy. The need for energy transfer between two elements.
Information. The need for information or signal transfer between two elements.
Material. The need or material exchange between two elements.
Aalto University
School of Science
Industrial Engineering and Management
© Jouko Karjalainen 2016
6
Types of modularity
o Component sharing modularity
o Component swapping modularity: standardized interfaces for
enabling the components to be changed or replaced
o Cut-to-fit modularity: standardized interfaces but one module is
continually variable within certain limits
o Mix modularity: when components are mixed together they
become something different (mixing paints to get colors)
o Bus modularity: standard structure that can attach different kinds
of components
o Sectional modularity: only the interfaces between components
are standardized (different products made simply by combining
components together, like Lego)
Aalto University
School of Science
Industrial Engineering and Management
© Jouko Karjalainen 2016
Commonality
o Commonality calls for sharing to reduce complexity
o Component commonality can be defined as the use of the same
version of a component across multiple products (Labro, 2004),
and it is often considered as a means to combine product variety
with cost efficiency.
o Process commonality means using common processes for
different products
• can be interpreted as a dimension focusing on maximizing economies of
scale by similar operational processes.
• an optimal fit of the product–production system for a given product
architecture
Aalto University
School of Science
Industrial Engineering and Management
© Jouko Karjalainen 2016
7
Related concepts
o Process Independence.
•
•
Each task of each life-cycle process of each component in a module has fewer dependencies
on the processes of external components.
Process independence allows for the reduced cost in each life-cycle process and the re-design
of a module in isolation if processes should change.
o Process Similarity.
•
•
•
Group components and subassemblies that undergo the same or compatible life-cycle
processes into the same module.
Minimizes the number of external components that undergo the same processes, creates a
strong differentiation between modules, reduces process repetition, and reduces process
costs.
Process similarity also conserves re-design effort by ensuring that changes to individual
life-cycle processes only affect one module of the product
Aalto University
School of Science
Industrial Engineering and Management
© Jouko Karjalainen 2016
Generic model (?)
References
Customer base
Growth of sales
1st product success
Profitable growth
Minimum winning games
Performance
Environment
(contextual
conditions)
Specific NV
Charateristics
• Newness
• Smallness
FIT
Internal
Structure
(OM practices)
Processes
Resources
Aalto University
School of Science
Industrial Engineering and Management
© Jouko Karjalainen 2016
8
To Do
o For next Friday (Feb 5)
• Consider the topic for your course essay
o For next Monday (Feb 8)
• Funk, J.L. (2013), What Drives Exponential Improvements.
California Management Review, Vol. 55, No. 3, SPRING
2013, 134-152.
Aalto University
School of Science
Industrial Engineering and Management
© Jouko Karjalainen 2016
9