Apple fans can order their iPhone in black and white and with just three different memory units. The Americans are not familiar with variation problems. Are Jobs’ ideas a role model in terms of production and distribution? Can German mechanical engineering learn from Apple? MM MaschinenMarkt spoke with Prof. Dr. Götz-Andreas Kemmner.
Entrepreneurs moan about the number of variants, but they don’t want to tackle the problem – why?
Kemmner: It takes courage to reduce the number of variants in the product portfolio. A strong sales force tries to throw every fishing rod into the water that a fish might bite on once a year. With each new product, marketing and development hope to have finally developed the cash cow that will take the markets by storm. Large customers are putting the gun to their heads and demanding the delivery of exotic products in return for orders for their top-selling products. And ultimately, apparently positive contribution margins conceal the actual costs of variant diversity.
As an entrepreneur, you first have to tackle this environment and then find the right balance in cutting back your product portfolio.
Otherwise it costs a lot of money…?
Kemmner: Exactly. In many cases, the reliable AX articles subsidize the unreliable CZ articles. This makes AX articles more expensive than necessary and offers the competition an unnecessary target. The way contribution margins are usually calculated, AX articles show too low and CZ articles too high contribution margins. Everything seems to be in order, except for the usual and unavoidable outliers. However, if you look at the process costs, you realize that most companies earn little or no money with their CZ articles, but have to turn a big wheel.
Many entrepreneurs are not even aware of the figures: in a typical product portfolio, 20 % to 30 % of items generate 60 % to 80 % of sales. At the other end of the product portfolio, you can achieve just 1.5 to 3% of sales with 40% to 50% of items.
How can companies get out of this dilemma?
Kemmner: From a commercial point of view, the first step is to calculate or estimate more realistic contribution margins and then at least push through cost-covering prices on the market. If the market does not accept the higher prices, these products will have to be sold.
From a technical and marketing perspective, the easiest way out of the dilemma is of course to design the bread and butter AX products in such a way that they excite customers so much that they don’t develop a desire for countless exotic variants. This can work well in the consumer sector, where a lot is sold via emotion.
Apple sends its regards – can this also work for mechanical engineering?
Kemmner: In the business sector, the key lies more in a modular strategy in which you standardize massively and create variants as late as possible in the production process. Postponed manufacturing and mass customization are the buzzwords here.
Today, this is a common strategy in mechanical engineering and there are only a few larger companies that have not yet structured their products in this way.
However, there was a time in German machine tool manufacturing when people were proud of their sophisticated special solutions and looked disdainfully at the Japanese with their standard machines. However, these were so inexpensive that many customers were happy to buy them in order to cope with their simple production tasks. And before you knew it, demand for super specialty solutions collapsed. In the 1980s and 1990s, the machine tool industry worked hard to modularize its products, enabling it to offer competitive customer-specific solutions with many standard components.
But even such a Lego construction kit is constantly growing: assemblies are becoming more differentiated and the number of customer-specific parts is increasing.
How can entrepreneurs avoid variants or calculate the costs correctly?
Kemmner: As I said, one approach is to create variants late in the value stream. Ideally, variants at the finished goods level are no longer stored at all, but are assembled to order. This counteracts a CZ explosion at finished goods level and helps to reduce the overall costs of the product portfolio.
In addition, entrepreneurs must regularly review their product portfolio and check which products or variants are simply not profitable and not necessary.
In principle, the product portfolio is like a fruit tree. You will also have to cut it back regularly and it will sprout again and again. And as with the fruit tree, it’s about switching on the head and switching off the gut feeling and the heart:
Product portfolio management is not about yes/no decisions, but about defining a delivery level with which a product is offered. From “always immediately available” to “not in stock”, there are seven levels of delivery status. Six key criteria determine the delivery level at which a product should be offered: The contribution margin, the possible assortment constraint, the life cycle status, the sales share, the required safety stocks and the available remaining stocks.
About the person: Prof. Dr.-Ing. Dipl.-Wirt.-Ing. Götz Andreas Kemmner is managing partner of the management consultancy Abels & Kemmner GmbH, Herzogenrath/Aachen. He studied mechanical engineering and economics at RWTH Aachen University, specializing in production management and business organization. He founded the management consultancy Abels & Kemmner in 1993. Kemmner worked as managing director in two mechanical engineering and automotive supply companies. He has been an honorary professor at the West Saxon University of Applied Sciences in Zwickau since June 12, 2012.
