How to Deal with a New Product in an Operations Management Project
New products are like babies — they need constant attention by operations management and they change rapidly. New products are said to be in the incubation phase and are typically prototypes; their design can change quickly in response to market reception. You must be flexible and responsive when managing a product in this phase.
The market for products in the incubation stage is generally nonexistent or very small, and the demand for such products is highly unpredictable. Typically, these products are revolutionary and totally new to the market, which makes demand forecasting more difficult than it is for more established products. When attempting to forecast demand, you must rely on data that’s often unreliable and on feedback from marketing efforts.
Because the market in the incubation phase is small or nonexistent, significant investment in marketing is required. You should focus this marketing effort on creating awareness of the product. You can often create demand by using lead customers to promote the product. You can distribute the product at little or no cost to “beta” customers who can create a buzz surrounding the product and provide sources for product reviews.
Keep capacity flexible
Because demand for new products is small and unpredictable, you must minimize your production costs. In the incubation phase, you should focus on producing products using a variable cost model. This may involve forgoing automation and using more manual labor until sales increase and you reach economies of scale.
This is especially critical for a start-up company. Though an established company may be able to convert some of its existing capacity from an older product to the new one, a new company doesn’t have this luxury.
Flexibility is key to driving down production costs, particularly if the design is still evolving. Outsourcing and using flexible labor to perform more than one task helps keep overhead and employment levels low.
Inventory decisions are especially difficult for new products with very low sales. You can use capacity levels and inventory to help maneuver the low and variable demand you face in the incubation phase. You need to keep capacity costs low, not maintain excess capacity, and minimize inventory to avoid being stuck with product that you may not be able to sell. So what should you do?
If possible, you want to produce only when you receive an order. This policy, however, requires that you have very low production and delivery lead times because potential customers typically won’t wait for a product, especially a new and unproven one.
Instead, for most consumer products, you often must build inventory in advance so that you can instantaneously make it available to a potential customer.
Start off with high pricing
During the incubation phase, you can often charge higher prices. With the proper marketing buzz surrounding a product, lead customers are often willing to pay a higher price to get the product first.
Many companies rely on higher pricing during the incubation phase to offset the initial development and marketing costs. Because of the upfront costs of introducing a new product, many products experience significant losses in this early stage. A high initial price allows firms to generate more cash to invest in marketing and in producing the product, and this can get the product to profitability quicker.
Design a supply chain for a new product
Designing a supply chain for a new product can be challenging. Because of the low demand and required production volumes, getting favorable contract terms with a supplier can be difficult. Though pricing is always a priority, flexibility should be at the top of the list in the incubation phase.
Building a supply chain that can produce low volumes with small lead times is critical for new products. One incentive you can offer suppliers to get them to agree to producing smaller quantities while keeping costs low is to offer long-term contracts for the current product and engage the same suppliers on subsequent products.
Define a market with no competitors
New and innovative products face little or no competition when they’re introduced. This lack of competition allows the first-to-market product to define the market and establish a customer base before competitors can enter, giving such products a commanding market share lead and advantage.
How long you’re able to maintain your sole hold on the market depends on many industry and technological factors. Factors such as the ease of replicating the product and entering the market determine how fast competitors will enter.
Even if you are introducing a product with a competitor in the incubation stage, you are still in a position typically to charge a high price. You also have some leverage over defining the market as market tastes are not fully set yet, although less than if you were the first to come out with the product.
Avoid failure in incubation
Almost any misstep in the incubation phase can kill a product. A primary mistake is a product with no sustainable market. Many times a product may catch on with a small niche market but quickly die as other new products capture the eye of the consumer.
Another reason why products fail in incubation is because continuing to market and produce them becomes too expensive. New products are characterized by upfront losses. If these losses are too big or the time to profit is too long, you may have to pull the plug on the product before it can enter the growth phase.
In extremely competitive industries, similar new products can hit the market at roughly the same time, requiring even more investment in marketing to gain sales. This competition also quickly drives down price, removing the expected higher revenue.
To avoid this painful and extremely expensive death, you can benefit from an agile product development process. Focusing efforts on product development facilitates a faster time to market with a superior product.