|
New products account for over 30% of sales revenue in many high
technology companies. In spite of their importance, forecasting
demand and managing this planning process remains a conundrum. In
this article we discuss two key aspects of New Product Introduction
planning and management that many companies struggle with:
- How can we effectively manage frequent changes in demand
projections or product configurations in a complex supply-chain?
- With highly uncertain future demand forecasts; how do we
balance the risk of excess inventory against the possibility of
not being able to meet customer demand?
Dealing with frequent changes
In the time-to-market race, demand projections and
product configurations typically change frequently. In this fluid
environment, effective communication up and down the supply-chain is
critical to the success of the product launch. Suppliers need to
know about demand or configuration changes, and finance, operations
and product management need an accurate picture of what -and when-
suppliers are able to deliver. The following diagram illustrates
a common supply-chain structure in the high technology industry,
where new products typically emerge from a set of components. When
demand projections or product configurations change, the entire
supply chain is affected. Effective and timely information sharing
up and down the supply chain “web” is a daunting yet vital task.
We have found that successful product launches
are closely related to effective communication between all
stake-holders in the supply chain, and includes these specific
elements:
- Timely information about New Product Introductions – Somewhat
surprising, but all too often important stake-holders do not learn
about new product launches early enough. This leaves less time for
planning, resulting in longer lead times, inaccurate plans, sloppy
execution, or all of the above.
- Common assumptions – By establishing and managing to a common
set of assumptions – cost, ASP, launch date, demand projections,
component attach rates, etc - planning is easier and results
improve.
- Transparency - When assumptions change, they should
immediately be transparent to all stake-holders. With
transparency, the supply chain stake-holders can address
inconsistencies in a timely manner, will more quickly adapt to
changes and march in the same direction.
- Alerts – Transparency alone is usually not sufficient – in an
environment with frequent changes and information overflow,
management by exception can significantly better the chances of a
successful launch.
- Measurement and continuous improvement – NPI planning is a
continuous improvement process. By tracking events, changes and
assumptions (qualitative and quantitative), product managers can
learn from past launches and determine where improvements can be
made for future product launches.
Dealing with uncertain New Product
Forecasts
New product forecasting and planning is
different from forecasting existing products. There is little or no
history on which to base future forecasts, a new or evolving product
is inherently in a state of configuration flux, and the race towards
an early launch date will only accelerate the pace of changes.
This section introduces a frame-work for dealing with the
inherent uncertainty in New Product forecasts. The premise is that
management can make more informed decisions if they have a thorough
understanding of the consequences and tradeoffs of various
scenarios. This framework explicitly recognizes uncertainty and
faces it “head on”.
In the diagram below, three demand
forecast scenarios are enumerated in terms of their demand, revenue,
cost and margin. Each possible (demand) outcome has an associated
probability.
If we forecast and plan for a low demand scenario,
we leave money on the table if demand turns out to be medium or
high; conversely, if we assume high demand and demand turns out to
be low or medium, we incur excess inventory costs and risk expensive
write-offs. If we plan for the medium scenario, we face risks in
both directions.
Given this, what would be the most prudent
course of action?
The following diagram shows the risk exposure discussed above –
quantifying the risk of over- or under-forecasting:
In this example, the cost of under-forecasting in the low
scenario (~33) is smaller than the cost of over-forecasting in the
high scenario (~37). The risk in the medium scenario is lower than
in either of the low or high scenarios.
Building on the above, the diagram below shows the “risk-weighted
margin” for each scenario, which is calculated as the expected
margin for each scenario less the cost incurred if actual demand
turned out to be different from forecasted values. In other words,
the diagram shows the expected system margin weighted by the risk
inherent in each scenario. These values, against a back-drop of
total margin potential – the margin realized if planned demand
equals actual demand – provide decision makers with a powerful tool
for making informed risk/return trade-offs.
In this examples we see that planning for the low demand scenario
is clearly inferior to the medium and high scenarios; planning for
the medium scenario has a lower expected value than the high
scenario. However, as we saw above, the risk exposure is clearly
higher for the high demand scenario. In the end, the final decision
about what scenario to plan for depends on the judgment of the
decision makers – a solid return prospect at moderate risk, or a
higher return prospect with higher risk?
About the Author Anders Gjerde is a Senior
Manager and Business Development Analyst at Steelwedge Software.
Since joining Steelwedge in 2002, he has worked with customers to
implement innovative solutions to help them solve a wide range of
planning and performance management problems. Prior to joining
Steelwedge, Anders was Director of Global Client Solutions at
Decision Focus/Talus Solutions (acquired by Manugistics, Inc in
2001). Anders holds an MBA from the Norwegian School of Economics
and Business Administration. |
