Why Having an Extensive Product Line is not Always Useful - Assignment Example

Ans a We know that our company has an extensive line of products. While the extensive range gives us certain leverage in the fact that we have all that a customer might want. But on the other hand having such a long product line does have its operational challenges which need to be overcome. The following is the list of reasons why having an extensive product line is not always useful The 80-20 Rule: This rule also known as the Pareto Principle suggests that 80% of a companys revenues come from about 20% of its products. This can be seen from the graph below. Figure 1: The Column and Line graph of Total income and Cumulative Percentage As can be seen from the graph, the top 4 products (J, O, E and F) contribute 80.10% of the companys total income. The remaining products contribute only about 20% of the total income. Hence, it is no point in keeping such an extensive product line when most of our revenues are from a short number of products only Process Types: With the large number of product variety, the process takes the form of batch process. Such a process type requires quite a narrow but specialized skills. Getting skilled manpower from is the highest factor resulting in high costs. Moreover such a process type requires changeovers at each stage of production thereby increasing the complexity and the costs of the production process. Process Layout: With a reasonably large variety and volume, the appropriate process layout is a combination of functional layout with elements of cellular layout. Such a combination is difficult to manage as the manager has to keep track of a large number of processes going on simultaneously. This type of layout requires free flow of product pieces and resources in the organization. The most important characteristic of such a layout is the flexibility of path, product design and lot size (Shim and Siegel, 1999). Hence, it calls for an extensive coordination amongst the workers. Since more than one item might be vying for a same resource, the time in production of the item increases, some of the products might have to wait to get the appropriate resource. This results in a decrease in productivity. Skills required: With the large number of product types, it becomes necessary to have a wide range of skills that are differentiated. These specialized skills increase the overall cost of the products. Managing different skills becomes another challenge as the manager has to keep track of the various resources that will be required for various products. Design issues: With the large types of products being produced in the organization, the employees are not in better position to contribute towards the betterment of product design. As a result, the organization fails in launching new design products that enhance the customer satisfaction. Thus, we can see that having an unnecessary long line is not only operationally challenging but also not desirable. It raises the problems of resource conflicts, and increased production time. Moreover, the large number of products do not help in generation of new ideas towards betterment of product designs. Statistically, when most of the companys revenues come from just a small portion (about 20%) of the products, it is not advisable to keep such an extensive range. Ans b.) Contribution of a product for the year is defined as follows: Contribution margin = (Retail Price- Manufacturing cost) * Yearly Sales The graph below shows the scatter diagram for Total Income/ Contribution: Figure 2: The scatter plot for income/contribution of the various products The graph indicates that most of the products have near zero contributions and annual income. Only two products (O and J) have contribution more than 2000£. This is a worrying trend as the organization is wasting resources without incurring much profits on most of its products. Ans c.) The scatter plot of the income and contribution and the pareto chart have highlighted certain areas of improvement: There are certain products with negative contributions. These products (E with a negative contribution of -30.60£, K with a negative contribution of -3.60£ and C with a negative contribution of -2.10£) erode the profit line of the organization. The reason for the negative contribution is the high manufacturing costs of the products. Of these three products, E contributes a reasonable 12.39% of the total income which makes it necessary to make it profitable. Assuming that the retail prices can not be increased, the company shall to reduce the production costs. This can be done by achieving economies of scope by producing more of the same product. Another thing that can be done is to redesign the process thereby giving the company the option of increasing the retail prices. The remaining two products: K and C have very less contribution towards the total income of the company. The company can think of removing these products from its product line. Product J is the major product of the company. It gives the maximum revenue and contribution to the company and hence is essential to the companys existence. The sales shall take note of this and hence shall promote this product more. The company shall increase its marketing expenditure on the product J to increase its demand. Increased demand will enable the company to achieve economies of scale and increase its profit. Another stand-out performer is the product O. The same strategy that the company follows for the product J shall be followed for O as well as this is amongst the most profitable products. Too many products in the product line is a problem that needs to be taken care off. Products such as K, I, Q, B, S, L, T, C, and M contribute less than 1.00% to the total income. At the same time, products like M and S have very less contribution margin in-spite of a reasonably good difference in their retail price and manufacturing costs. The reason for this situation is the low yearly sales for the product. The company can try to increase the demand of these products by more promotion or design enhancements. If that does not work, the company can shelve off these products. Same is the case with I with high retail price and low production costs. The profits of the company can be increased by increasing the sales of I through marketing and promotion. A similar analysis can be done on all the products. The various factors to look out for are the contribution margin per unit, yearly sales, retail price, manufacturing costs and total income. If a product is having less contribution margin per unit but good sales, the company shall try to reduce the cost. If the contribution margin is good but the sales are not good then the company shall try to promote the product to increase the sales. If a product is having less contribution per unit and low sales, then the product can be taken off the product line. Based on the various values, the table below shows the various steps that the company can take: Table 1: Suggestions for the various products for Chelwood Country Food stores. References Shim, J.K., and Siegel, J.G. (1999). Operations Management: Barrons Business Review Series. Barrons Educational Series. Read More