Control
Your
Product
Mix,

Control
Your
Destiny!

White
Paper




Emcien
Corporation

www.emcien.com




Emcien
White
Paper
–
Product
Mix
Management


The
Explosion
of
Product
Variety


In
 this
 “Information
 Age”
 of
 consumerism,
 buyers
 have
 access
 to
 more
 information

than
 ever
 before.
 
 They
 can
 choose
 products
 based
 on
 exact
 feature
 choices
 before

they
buy.

This
allows
them
the
luxury
of
being
more
selective
in
buying.




This
 customer
 luxury
 has
 translated
 into
 a
 serious
 challenge
 for
 manufacturing

companies
and
their
distribution
channels.


To
meet
the
feature
choice
demand
and

maintain
market
share,
companies
are
offering
more
and
more
feature
choices.

The

result
 is
 unprecedented
 product
 proliferation,
 increased
 costs
 and
 caused

tremendous
inefficiency
in
the
supply
chain.



Companies
today
have
global
supply
chains
to
take
advantage
of
the
benefits
of
cost

differentials.
 The
 extended
 supply
 chain
 further
 aggravates
 the
 cost
 of
 managing

proliferated
products,
making
it
almost
impossible
to
manage
the
product
mix
across

long
 time
 horizons
 and
 multiple
 locations.
 
 A
 poor
 product
 mix
 can
 destroy
 all
 the

benefits
 of
 even
 a
 well‐oiled
 supply
 chain.
 
 To
 survive
 in
 this
 environment,
 it
 is

mandatory
 for
 a
 company
 to
 manage
 its
 product
 configuration
 mix
 by
 quantifying

its
impact
on
the
supply
chain.




What
is
Product
Mix
and
Where
Does
it
Fit?


The
 Product
 Planning
 Group
 is
 typically
 responsible
 for
 the
 product
 mix.
 
 
 Product

Planning
may
take
into
account
sales
performance
of
the
product,
market
surveys
for

the
category,
and
market
trends.

The
output
from
Product
Planning
is
the
Product

Mix.

The
Product
Mix
is
the
set
of
product
choices
that
a
customer
will
be
allowed
to

order.

It
includes
all
feature
choices
and
feature
combination
choices.

This
defines

the
 number
 of
 “customer
 orderable
 combinations”
 the
 company
 needs
 to
 plan
 to

build
and
support.




www.emcien.com
 
 

2
 
 

Emcien
White
Paper
–
Product
Mix
Management


The
 Product
 Mix
 is
 an
 input
 into
 all
 order
 entry
 systems
 with
 which
 a
 customer

interfaces,
including
sales
configurators
and
price
sheets.

The
Product
Mix
is
also
an

input
into
the
supply
chain
planning
systems.

The
supply
chain
systems
are
tasked

with
 planning
 for
 the
 source,
 make
 and
 delivery
 of
 the
 product
 mix
 that
 has
 been

determined
by
the
Product
Planning
Group.




How
is
Product
Mix
Planning
Typically
Done
Today?

Today,
 while
 most
 departments
 have
 automation
 tools
 to
 facilitate
 their
 jobs,
 over

90%
 of
 product
 planners
 store
 and
 manipulate
 their
 product
 configuration
 mix
 on

Excel
 spreadsheets
 or
 homegrown
 tools.1
 
 Product
 planners
 have
 to
 manage
 a

dynamic
 product
 mix
 for
 a
 changing

marketplace
 and
 the
 different

spreadsheets
sheets
are
very
hard
to

synchronize,
 and
 often
 do
 not.
 
 The

product
 mix
 is
 composed
 of

configurations
with
long
feature
lists,

which
 require
 multi‐dimensional

data
 manipulations,
 well
 beyond
 the

capabilities
 of
 simple
 spreadsheets.

Due
 to
 the
 lack
 of
 tools,
 50%
 of

managers
 have
 a
 portfolio
 planning

effort
only
once
or
twice
a
year,
and
more
than
25%
do
not
have
product
portfolio

planning
meetings
at
all.2



Due
 to
 the
 lack
 of
 tools,
 companies
 are
 struggling
 to
 manage
 and
 maintain
 the

product
mix.

As
the
market
shifts,
product
planners
react
by
adding
feature
choices

to
the
product,
without
quantified
metrics
on
the
impact.
Features
choices
are
rarely

eliminated
due
to
the
lack
of
quantified
what‐if
analyses.
This
manifests
in
product

complexity
 chaos
 across
 the
 enterprise.
 Product
 proliferation
 adds
 tremendous

uncertainty
to
the
planning,
delivery
and
support
of
the
product.




Impact
of
Product
Mix
on
Your
Customers


It
hardly
needs
to
be
stated
that
the
product
mix
defines
the
face
of
the
company
that

the
customer
will
see
and
experience.


Customers
buy
products
based
on
availability

of
their
preferred
feature
choices.




If
 a
 customer
 is
 inundated
 with
 feature
 choices,
 it
 results
 in
 a
 poor
 customer

experience.
 
 In
 a
 survey
 of
 customers
 for
 mobile
 devices,
 over
 45%
 said
 too
 many

product
 choices
 prevented
 them
 from
 actually
 making
 a
 purchase
 decision3.
 
 
 In


























































1
Chief Marketing Officer Council Survey – 2006.
2
Chief Marketing Officer Council Survey – 2006.
3
Source – RBC Capital Markets Survey, 2006, Consumers' mobile technology purchasing criteria,
Conducted by InsightExpress.

www.emcien.com
 
 

3
 
 

Emcien
White
Paper
–
Product
Mix
Management


another
 recent
 ‘eye‐opening’
 experiment
 on
 complexity,
 an
 electronics
 company


created
an
alternate
web
site
with
a
streamlined
product
offering.

20%
of
the
online

buyers
 were
 routed
 to
 the
 alternate
 website
 with
 a
 streamlined
 mix.
 
 
 Results

collected
 after
 a
 30‐day
 period
 showed
 that
 the
 conversion
 rate4
 on
 the
 alternate

web
 site
 was
 50%
 higher
 and
 product
 margin
 was
 2%
 higher
 demonstrating
 that

customers
are
willing
to
pay
a
little
more
to
avoid
the
hassle
of
wading
through

unlimited
choices.



Impact
of
Product
Mix
on
Your
Supply
Chain


The
supply
chain
planning
solutions
have
to
source,
make
and
deliver
on
the
product

mix
 that
 is
 handed
 to
 them
 by
 the
 product
 planners.
 
 
 The
 product
 mix
 typically

contains
 all
 the
 feature
 choices
 that
 the
 customer
 is
 allowed
 to
 order.
 
 
 The
 supply

chain
 has
 to
 plan,
 prepare
 to
 build,
 and
 deliver
 all
 possible
 combinations
 of
 the

product
 mix
 that
 have
 been
 offered
 to
 the
 customer.
 
 This
 can
 be
 a
 very
 large

number.
 For
 a
 typical
 PC
 computer

that
 number
 can
 be
 well
 over
 a
 one

million
 configurations!
 
 
 These
 million

configurations
 also
 have
 a
 very
 large

number
 of
 parts
 that
 have
 to
 be

planned
 and
 stocked
 in
 the
 right

quantity.


The
product
mix,
as
given
by
Product

Planning,
does
not
contain
information

of
how
the
mix
is
going
to
satisfy
the

customer
orders.

How
many
units
of

each
configuration
are
required?



So
why
is
this
important?
It
is
important
because
the
supply
chain
is
measured
on

product
availability
and
service
levels.
The
product
availability
depends
on
stocking

the
right
quantity
of
parts
or
the
right
configuration
mix
of
finished
goods.

Without

this
critical
information,
the
supply
chain
will
have
to
carry
more
parts
and
finished

goods
as
the
product
configurations
grow.

A
common
symptom
of
this
is
‘too
much

inventory
and
shortage
of
the
right
parts.’



If
the
company
builds
finished
goods
inventory,
it
is
very
common
to
see
a
build‐up

of
‘wrong
product
mix
inventory’.

The
supply
chain
manages
the
units
at
the
SKU

(Stock
keeping
unit)
level,
and
does
not
have
knowledge
of
the
feature
mix
of
the

SKU.

So,
if
two
SKU’s
are
identical,
except
for
one
feature,
the
supply
chain
cannot

detect
it,
and
will
stock
them
as
two
different
units.

An
example
is
two
identical
cell

phones,
one
with
Bluetooth
and
one
without.

These
two
units
may
both
satisfy
a

customer
who
doesn’t
need
Bluetooth
once
you
have
feature
level
visibility.
But

supply
chain
systems
do
not
have
feature
visibility,
and
cannot
make
option
tradeoffs

to
consolidate
configurations.
Hence
the
supply
chain
cannot
fix
product


























































4
Conversion rate is percentage of online traffic that makes a purchase on first visit.

www.emcien.com
 
 

4
 
 

Emcien
White
Paper
–
Product
Mix
Management


proliferation.

Only
the
product
planners
have
visibility
into
the
feature
choices
of

configurations,
and
the
authority
to
change
the
mix.

Hence
the
supply
chain
suffers

with
rising
cost
and
reduced
efficiency
when
it
has
to
support
a
poor
product

mix.





Take
Control
of
Your
Product
Mix

Companies
are
beginning
to
recognize
that
their
product
mix
is
one
of
the
biggest

drivers
of
customer
experience
and
supply
chain
costs.

Over
75%
of
Fortune
500

manufacturers
have
a
current
initiative
to
address
their
product
complexity,
with

very
high
executive
sponsorship
and
visibility.


The
success
of
these
projects
rest
on

understanding
that
product
mix
management
is
not
an
island.

A
successful
mix
can

be
quantified
with
metrics
on
the
upstream
and
downstream
operations.


The
three
basic
efficiency
metrics
of
Product
Mix
are:

1. Number
of
configurations


2. Demand
Coverage
by
Configuration


3. Number
of
unique
parts
required







Reduced
configuration
efficiency

(smaller
percentage
demand

captured
by
each
configuration)


500
configurations
cover

70%
of
the
demand
(total

=
2700
configurations)




Number
of
Configurations
is
one
of
the
most
important
indicators
of
product

complexity.

The
number
of
product
configurations
offered
to
the
customer
is

typically
bigger
than
the
actual
number
that
gets
ordered
in
any
one
model
or

product
cycle.
However,
very
few
companies
monitor
the
actual
number
of

configurations
offered
or
ordered.




Demand
Coverage
by
Configuration
is
sometimes
called
configuration
attach
rate

or
configuration
take
rate.

This
is
the
percentage
of
demand
that
a
configuration

satisfies.

Few
companies
have
started
to
recognize
the
importance
of
this
metric,

and
it
is
now
being
called
the
“efficiency
of
a
configuration”.


High‐efficiency

configurations
can
capture
a
high
percentage
of
demand.
Low‐efficiency


www.emcien.com
 
 

5
 
 

Emcien
White
Paper
–
Product
Mix
Management


configurations,
as
the
name
suggests,
cover
a
very
low
percentage
of
demand.


Understanding
what
feature
attributes
the
customers’
value,
and
offering
features
in

a
configuration
that
gives
customers
more
than
they
ask
for,
can
create
high‐
efficiency
configurations.
These
are
robust
configurations
and
have
high
inventory

turns
in
a
supply
chain.

Low
efficiency
configurations
have
low
turns
because
they

satisfy
such
a
small
demand
that
they
are
usually
stocked
in
the
wrong
place
at
the

wrong
time.
These
configurations
result
in
aging
inventory,
high
logistics
cost
and

poor
capital
utilization.
Many
companies
split
their
product
offering
between
build‐
to‐order
and
build‐to‐stock
based
on
the
efficiency
of
the
configurations.


Number
of
Unique
Parts
is
a
very
important
metric
for
a
product
mix.


As
the

number
of
configurations
proliferates,
typically,
so
do
the
number
of
parts.
However,

this
is
not
always
the
case.

A
very
large
number
of
configurations
can
be
built
with
a

common
set
parts.
The
configuration
take
rate
can
be
used
to
compute
the
parts

requirements.
However,
due
to
the
lack
of
product
mix
planning
tools,
most

companies
cannot
compute
this
metric.

This
results
in
parts
proliferation,
adding

tremendous
cost
to
manufacturing.


Companies
that
attempt
configuration
reduction
or
complexity
reduction

projects
without
paying
attention
to
these
basic
product
mix
metrics
will
not

see
any
financial
improvement.


On
the
contrary,
it
may
be
an
exercise
in
futility

because
when
the
benefits
do
not
pan
out,
the
marketing
group
will
bring
the

configurations
back
due
to
fear
of
customer
and
revenue
loss.



Successful
Case
Study
In
Product
Mix
Management


A
Fortune
500
PC
manufacturer
was
struggling
with
product
complexity
and
feature

proliferation.

The
company
offered
its
products
through
online
sales
and
retail

channels.

The
product
mix
in
each
channel
was
bloated.
The
parts
inventory
was

building
up
due
to
the
growing
option
choices
on
all
the
PC
models.

While
the

company
had
an
efficient
supply
chain
with
suppliers
carrying
parts
inventory
until

needed,
the
supply
chain
cost
was
rising.

The
retail
channels
were
unhappy
that
the

PCs
were
not
turning.

The
numbers
of
parts
was
exploding
and
the
company
did
not

know
what
parts
to
eliminate
while
filling
the
orders
and
keeping
customers
happy.


Solution
Approach

The
solution
to
addressing
the
complexity
was
approached
by
first
understanding

the
customer
configuration
choices
by
channel,
and
by
region,
using
existing
sales

data.

Since
the
company
offered
a
build‐to‐order
option
for
online
sales,
information

was
available
on
how
the
customers
had
configured
the
machines.

While
the
PCs
had

a
very
large
number
of
feature
choices,
the
data
showed
that
customers
select

feature
choices
in
very
distinct
patterns.

This
pattern
of
buying
is
called
combined

take
rates
or
feature
clusters.
For
example,
for
high‐end
gaming
machines
customers

selected
video
cards
and
memory
based
on
related
CPU
and
software
choices.
The

knowledge
of
these
combined
take
rates
can
be
used
to
bundle
the
product,
and
used

with
feature
upgrades
and
standardization.
The
total
number
of
configurations
is

reduced
while
giving
the
customer
more
than
what
he/she
asked
for.



www.emcien.com
 
 

6
 
 

Emcien
White
Paper
–
Product
Mix
Management


While
customers
buy
PC’s
for
the
right
feature
mix,
they
will
quickly
settle
for
a

configuration
that
is
close
enough
to
their
choice.

So
understanding
the
popular


Original
demand
coverage

curve
(454
configurations
to

cover
80%
demand
in
retail)

30
Optimized
configurations

to
cover
80%
demand


feature
attachments
was
very
useful
in
coming
up
with
the
standardized
product

configurations.
This
was
only
possible
because
Emcien’s
tools
allowed
option
trade‐
off
analysis
and
configuration
optimization.

The
PC
company
has
improved
product

margins
by
1.5%
and
the
retail
inventory
turns
have
doubled.

This
has
translated
to

tens
of
millions
of
dollars
to
the
bottom
line.


The
computer
market
is
very
volatile,
demand
is
constantly
shifting
and
products
are

constantly
changing.


The
company
recognized
that
the
product
planners
needed

tools
to
maintain
a
constantly
streamlined
product
mix
and
ensure
an
efficient

supply
chain.


What
Is
Not
Obvious
When
You
Eliminate
Options

Companies
that
undertake
complexity
reduction
projects
tend
to
cut
options
with

low
attach
rates.

However,
this
single
dimensional
view
of
customer
demand
can

result
in
poor
market
outcomes:

The
low‐take
option
may
be
the
only
choice
for
a

profitable
model
or
configuration,
which
in
turn
has
a
low
take
rate.

Eliminating
this

low‐take
part
can
erode
margins
and
cause
loss
of
valuable
customers.


On
the
other
hand,
there
may
be
a
case
for
eliminating
an
option
that
may
not
be
so

obvious.
An
option
may
have
a
high
attach
rate,
but
may
be
splintered
across
the
tail

configurations
for
many
models.
While
this
option
has
a
high
attach
rate,
eliminating

it
reduces
complexity
in
many
models
at
once!

Managing
product
configurations
requires
tools
with
the
capability
to
analyze

the
product
at
the
configuration
level
of
detail.

Single
dimensional
views
of
the

product
can
result
in
wrong
conclusions
–
hence
wrong
product
decisions.



www.emcien.com
 
 

7
 
 

Emcien
White
Paper
–
Product
Mix
Management


Conclusion




We
have
all
heard
of
the
frog
that
will
sit
in
water
without
realizing
it
is
heating
up,

until
he
is
cooked.

Similarly
–
product
configurations
have
slowly
crept
up
on
us.

A

problem
that
was
easy
to
manage
with
sheets
of
paper
and
spreadsheets
is
now
a

critical
problem
that
is
defining
the
cost
and
efficiency
of
the
supply
chain.

We
read

about
companies
like
Dell,
who
are
the
gold
standard
in
supply
chain
efficiency,

struggling
to
manage
product
configurations.

Today’s
competitive
environment
is
global,
with
extended
supply
chains,
demanding

customers,
and
shortening
product
lifecycles.


Companies
that
want
to
survive
in

this
environment
will
need
to
manage
their
product
mix
with
an
eye
on
the
supply

chain.



Section
Summary
Points



• Product
proliferation
adds
tremendous
uncertainty
to
the

planning,
delivery
and
support
of
the
product.



• Customers
are
willing
to
pay
a
little
more
to
avoid
the
hassle

of
wading
through
unlimited
choices.



• The
supply
chain
suffers
with
rising
cost
and
reduced

efficiency
when
it
has
to
support
a
poor
product
mix.



• Companies
that
attempt
configuration
reduction
or

complexity
reduction
projects
without
paying
attention
to

these
basic
product
mix
metrics
will
not
see
any
financial

improvement.



• Managing
product
configurations
requires
tools
with
the

capability
to
analyze
the
product
at
the
configuration
level
of

detail.






www.emcien.com
 
 

8
 
 

Emcien
White
Paper
–
Product
Mix
Management


About
Emcien


Emcien
is
an
Atlanta,
GA‐based
software
firm
dedicated
to
solving
complexity

problems
in
the
discrete
manufacturing
industry.
Companies
are
dealing
with

unrelenting
pressure
to
reduce
costs
in
their
manufacturing
and
supply
chain

operations.
Emcien
offers
a
unique
software
solution
to
help
optimize
product
mix
to

maximize
profits.
To
learn
more
about
Emcien,
visit
www.emcien.com.













































www.emcien.com
 
 

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