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Introduction to Product Variety
The Problem and Basic Concepts
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Grading:
Group Assignments 30%Class Participation 20%Final Case 50%
Monday
Introduction
Strategic Decisions
Tuesday
Costs of Variety
Cost Tools
Wednesday
Decouple Points
Customer Interface
Thursday
Platform
Development
Friday
Final Case
Due 15:00
Course Outline
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Why offer more variety?
Higher revenues come from variety through many mechanisms.
Enter new market segments - Toyota entry into luxury autos.
Stimulate demand - ice cream flavors
Deter price competition - mattress salesDeter channel competition - Laser jet printers
Deter market entry - Breakfast cereal
Shelf space - Tooth paste
Value capture with pricing - bicycle product linesBetter technology attracts more customers - Technological change.
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SKU(Stock Keeping Unit)
Model
ProductCategory(Division)
Blocks
Variety manifests itself at different levels in an organization
Dolls
Toy Inc.
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100 1000 10000
Manufacturer's Suggested Retail Price (US$)
Conejo
Klein
Cannondale
Marin
Specialized
GT
Trek
Schwinn
Raleigh
Giant
Product variety conveys competitive position
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Variety is introduced over time
Matchedor
One-to-one
SynchronousAsynchronous
Timing Strategy
ReplacementStrategy
Unmatched
(Computers, Automobiles, Bicycles) (Consumer Packaged Goods)
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Model Growth in US Auto Industry
150
200
250
300
350
400
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Year
#ofMod
els
Average of 5 new models per year
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Model Growth in US Auto Industry
150
200
250
300
350
400
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Model Growth in Mountain Bike Industry
0
500
1000
1500
2000
2500
3000
3500
4000
1985 1987 1989 1991 1993 1995 1997
Year
#ofMo
dels
Growth from 50 to nearly 1600 mountain bikes
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Model Growth in Mountain Bike Industry
0
500
1000
1500
2000
2500
3000
3500
4000
1985 1987 1989 1991 1993 1995 1997
Model Growth in US Auto Industry
150
200
250
300
350
400
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Model Growth in Mutual Fund Industry
0
500
1,000
1,500
2,000
2,500
3,000
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
Year
#
of
Models
in
10,000s
Over 200,000 mutual funds to choose from in 2000
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Model Growth in Mountain Bike Industry
0
500
1000
1500
2000
2500
3000
3500
4000
1985 1987 1989 1991 1993 1995 1997
Model Growth in US Auto Industry
150
200
250
300
350
400
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Model Growth in Mutual Fund Industry
0
500
1,000
1,500
2,000
2,500
3,000
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
Model Growth in PC Industry
0
100
200
300
400
500
600
700
800
1980 1982 1984 1986 1988 1990 1992 1994 1996
Year
#
of
Mod
els
Over 350 PCs to choose from by 1996.
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Model Growth in Mountain Bike Industry
0
500
1000
1500
2000
2500
3000
3500
4000
1985 1987 1989 1991 1993 1995 1997
Model Growth in US Auto Industry
150
200
250
300
350
400
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Model Growth in Mutual Fund Industry
0
500
1,000
1,500
2,000
2,500
3,000
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
Model Growth in PC Industry
0
100
200
300
400
500
600
700
800
1980 1982 1984 1986 1988 1990 1992 1994 1996
Increase in variety across 4 industries at different stages ofproduct life cycle.
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Profit
Revenue Costs
The variety increase will payoff only if costs are balancedagainst revenues.
Complex economic relationships make this a non-trivialbalance!
PriceQuantity
R&DProduction investment
ToolingInventory obsolesenceMarketing costs
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Revenue
Costs
ProfitVariety
+
+
+
-
Product Variety and Profit
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Model Growth and Sales Per Model in US Auto Industry
150
200
250
300
350
400
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Year
#ofModelsandSalesperModel
Unit sales per model decrease
from 4000 to 2500 per year.
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Model Growth and Sales Per Model in US Auto Industry
150
200
250
300
350
400
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Model Growth and Sales Per Model in Mountain Bike Industry
0
500
1000
1500
2000
2500
3000
3500
4000
1985 1987 1989 1991 1993 1995 1997
Year
#
of
Mo
de
ls
an
d
Sa
les
per
Mo
de
l
Unit sales decrease
from 4000 to 1000per year
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Model Growth and Sales Per Model in US Auto Industry
150
200
250
300
350
400
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Model Growth and Sales Per Model in Mountain Bike Industry
0
500
1000
1500
2000
2500
3000
3500
4000
1985 1987 1989 1991 1993 1995 1997
Mutual Fund Accounts and Net Assets Per Account
0
500
1,000
1,500
2,000
2,500
3,000
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
Year
#
of
Models
and
Sal
es
per
Model
Net assets per account
increase by over $700
per year.
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Mutual Fund Accounts and Net Assets Per Account
0
500
1,000
1,500
2,000
2,500
3,000
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
Model Growth and Sales Per Model in Mountain Bike Industry
0
500
1000
1500
2000
2500
3000
3500
4000
1985 1987 1989 1991 1993 1995 1997
Model Growth and Sales Per Model in US Auto Industry
150
200
250
300
350
400
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Model Growth and Sales Per Model in PC Industry
0
100
200
300
400
500
600
700
800
1980 1982 1984 1986 1988 1990 1992 1994 1996
Year
#
of
Models
an
d
Sales
per
Mode
l
Sales growth per model
increase over $2.6
million per year.
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Model Growth and Sales Per Model in US Auto Industry
150
200
250
300
350
400
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Model Growth and Sales Per Model in Mountain Bike Industry
0
500
1000
1500
2000
2500
3000
3500
4000
1985 1987 1989 1991 1993 1995 1997
Mutual Fund Accounts and Net Assets Per Account
0
500
1,000
1,500
2,000
2,500
3,000
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
Model Growth and Sales Per Model in PC Industry
0
100
200
300
400
500
600
700
800
1980 1982 1984 1986 1988 1990 1992 1994 1996
Decreasing sales per model in autos and bicyclesIncreasing sales per model in mutual funds and PCs
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Bankruptcy Risk and Product Variety in the Bicycle Industry
0
2
4
6
8
10
12
14
16
18
20
1985 1987 1989 1991 1993 1995 1997
Year
#Mo
de
ls
per
Firm
an
d
Odds
Models per Firm
Increase In Probability of Bankruptcy Associated with Average Product Line
Increase in probability of
bankruptcy if you continue to proliferate!
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How did successful companies manage variety?
Success in Autos defined by stock price performance.Successful: Toyota, Honda, FordUnsuccessful: GM, Nissan, Chrysler
Success in Bicycles defined by market share and no bankruptcy.Successful: GT, Trek, Diamond BackUnsuccessful: Bridgestone, Mountain Goat, Miyata
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Auto Industry Returns (1974-1999)
Toyota
Ford
Honda
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Observation 1:
At successful firms, sales growth exceeds
variety growth.
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-0.01
0.00
0.01
0.01
0.020.02
0.03
0.03
0.04
Top 3
Performers
Industry
Average
Bottom 3
Performers
Sales Growth - Variety Growth in Auto Industry
-0.40
-0.30
-0.20
-0.10
0.00
0.10
0.20
0.30
Top 3
Performers
Industry
Average
Bottom 3
Performers
Sales Growth - Model Growth in Mountain Bike
Industry
Toyota,
Honda,
Ford GM,Nissan,
Chrysler
Diamond
Back,
Trek,
GT,
Bridgestone,
Miyata,
Mountain
Goat
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Observation 2:
At successful firms, sales growth and variety
growth move in lock-step.
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0
5
10
15
20
25
30
35
40
45
50
1974 1979 1984 1989 1994 1999
Models Unit Sales x20,000
Honda moves in lock-step
0
10
20
30
40
50
60
70
80
90
1974 1979 1984 1989 1994 1999
Models Unit Sales x100,000
GM does not
Correlation = .94
Correlation = -.33
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0
0.1
0.2
0.3
0.4
0.5
0.6
Top 3
Performers
Industry
Average
Bottom 3
Performers
Auto Industry Models/Sales Correlation
Toyota,Honda,
Ford GM,
Nissan,
Chrysler
0.50
0.60
0.70
0.80
0.90
Top 3
Performers
Industry
Average
Bottom 3
Performers
Mountain Bike Industry Models/Sales
Correlation
Diamond
Back,Trek,
GT,
Bridgestone,
Miyata,
Mountain
Goat
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Observation 3:
Successful firms expand product lines along
dimensions that leverage existing supply chain
assets, product architectures, and production
processes.
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Product Variety at 4 Successful Mountain Bike Companies
Cannondale Specialized VooDoo National
Models 110 134 1728 6240
Which company offers the most variety?
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Basic Mountain Bike Attributes
Model level variety is created by changing the level of each attribute
Frame Material - Carbon Fiber
Frame Geometry/size - Softtail, Grande
Color - Burnished Black
Component group - Shimano LX, P-bone front shock
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Cannondale Specialized VooDoo National
Models 110 134 1728 6240
Frame Geometries 12 6 2 3
Materials 1 6 (3 basic) 3 2
Components per frame 2 1.4 48 6
Colors per model 1.25 1 1 104
In bicycles, companies optimize around attributes.
Product Variety at 4 Successful Mountain Bike Companies
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Not All Attributes Should be Managed the Same
FitQuality Taste
IndividualPreferenceFunction
PopulationPreferenceFunction
XS S M L XL XXL16 kg 12 kg 8 kg
16 kg 12 kg 8 kg XS S M L XL XXL
Frame Weight
Frame Weight
Frame Size
Frame Size
Frame Color
Frame Color
CompetitiveEmphasis
More Qualityfor Less Money
Customizationand
Service
Meet ChangingTastes
(Service)
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Effect of product variety on costs
(occurs at the attribute level)
Productvariety
ProductionCosts
MarketMediation
Costs
Incremental production costs :
Fixed investments in tooling, dies etc.Production (batch) related costsProduction technology choice
Costs of making supply meet demand:
Mark-down costsExcess inventoryIncreased safety stock
+
+
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Differences in Production and Market Mediation Costs
Across Product Attributes
Materials US$ 2,000,000 Low
Geometry/Size US$ 10,000 Medium
Colors US$ 1,000 High
Components US$ 0 Medium
Production Cost(tooling investment) Mediation Cost(forecast difficulty)
Materials is a production dominant attribute.Geometry/Size, colors and components are mediation dominant attributes.
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Cannondale Specialized VooDoo National
Models 110 134 1728 6240
Frame Geometries 12 6 2 3
Materials 1 6 (3 basic) 3 2
Components per frame 2 1.4 48 6
Colors per model 1.25 1 1 104
Core Asset Flexible Welding Alliances Configuration Color System
Product Variety at 4 Successful Mountain Bike Companies
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Statistic: Determine
the difference
between sales growth
and model growth.
Diagnosis:Difference should be
positive. If
negative indicates
lack of return on
variety.
Test 1: Test of Market Acceptance
(Sales-Sales)/Sales
-(Models-Models)/Models
Toolkit of Vital Variety Statistics
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Statistic: Determine
the correlation
between sales and
models over time.
Diagnosis: Thecorrelation should be
close to 1. If
significantly less
than 1 or negative
indicates lack ofcoordinated efforts
in managing variety.
Test 2: Test of Coordinated Efforts
0
5
10
15
20
25
30
35
40
45
50
1974 1979 1984 1989 1994 1999
Models Unit Sales x20,000
Company Correlation
Toolkit of Vital Variety Statistics
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Statistics: Decompose
product line into
attributes and tie
attributes to core
assets.
Diagnosis: Clear link
between variety and
assets indicates
coherent leveraging
of existing assets.
No pattern indicates
wasted variety
related assets.
Test 3: Test of Leveraged Resources
Toolkit of Vital Variety Statistics
Cannondale Specialized VooDoo National
Models 110 134 1728 6240
Frame Geometries 12 6 2 3
Materials 1 6 (3 basic) 3 2
Components per frame 2 1.4 48 6
Colors per model 1.25 1 1 104
Core Asset Flexible Welding Alliances Configuration Color System
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Honda expanded product lines using platforms.
Platform:
Chassis of a car
Accord
Civic
Odyssey
Wh ff th t i t ?
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Cannondale Specialized VooDoo National
End Items 110 134 1728 6240
Frame Geometries 12 6 2 3
Materials 1 6 (3 basic) 3 2
Components per frame* 2 1.4 48 6
Colors per model** 1.25 1.25 1 104
*A frame is a material/geometry combination
**A model is a frame/component combination
Model level analysis hides true differences in variety
Who offers the most variety?
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6 Strategic Variety Decisions
The dimension of variety offered to the market
The degree of vertical integration
The nature of the customer interface/distribution channel
The process technologyThe location of the decouple point in the supply chain
The product architecture.
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Critical Elements of Variety
Strategies1. Dimension of variety must offer perceived value to consumer.
2. Variety strategies are distinct.
3. Product architecture and distribution system minimizes
the costs of the chosen dimension of variety.
4. Firm possesses the capabilities to support dimension of variety.
5. Strategy exploits the unique context and resources of the firm.
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Fit
Deliv erAssemble
Design NewProducts
Promote
Display
Component Fab
Cut Tubes Weld Frame Paint Frame Transport
Frame Fabrication
Vertical integration of production
Production process technology
Product architecture
Dimensions of v ariety
Strategic Decisions Tactical Decisions
Number of levels of attributes
Bundling of combinations
Parts sharing
Lot sizing
Inv entory policy
Product ion scheduling
(every 5-10 product cy cles) (every product cycle)
Location of decouple point
Nature of customer interf ace and distribution channel
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Revenue
Costs
ProfitVariety
+
+
+
-
Product Variety and Profit
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Vertical Integration
Motive to outsource Motive to insource
Lower Costs vs. More Control
Helps production costs Helps mediation costs
Implications of Vertical Integration
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Implications of Vertical Integration
Supply chain structure = distance of production from target market,
degree of scale economies
Th l h i t t ill h ff t d ti d k t di ti t
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The supply chain structure will have an effect on production and market mediation costs.
Low production costs
due to scale economies, but
high mediation costs attributed to
longer lead times.
Higher production costs due to
scale inefficiency, but low mediation
costs attributed to shorter lead times.
S ppl Chain Str ct re and Prod ct Variet
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Scale Inefficient Scale Efficient
Local
Distant
Supply Chain Structure and Product Variety
Degree of Scale in Production
D
istanceofproduction
from
targetmarket
Low Variety
High Production-Dominant
Variety
Low Mediation-Dominant
Variety
High Production-Dominant
Variety
and
High Mediation-Dominant
Variety
Low Production-Dominant
Variety
High Mediation-Dominant
Variety
C I f
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Customer Interface
Au Bon Pain Lees Hoagie House
Select a Bread
Hoagie Roll
Croissant
Bagel
Whole wheatSelect a Meat
Turkey
Ham
Roastbeef
Select Toppings
LettuceTomato
Pickle
Onion
Peppers
Mayonaise
El Grande $3.50(Turkey, Ham, Roastbeeflettuce, tomato, onion on ahoagie roll)
The Varden $5.60(Ham, Pickle, Onion, Pepperson Whole wheat)
The Molde $7.75
(Turkey on a bagel)
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Frame geometries of 4 bicycle companies
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Tub cutting options
T di i l W ldi Fi
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Traditional Welding Fixture
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Slot and Tab Detail Simple Fixture ProvidesLocating Forces
Cannondale Slot and Tab System
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Decouple Points in Bicycles
Asia U.SFrame
FabricationPainting Assembly
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Principles of Decouple Points
Understand who the customer is (end user vs. retailer)
Variety fan-out after the decouple point.
Variety fan-out after long leadtimes.
Variety fan-out after capacity intensive production processes.Variety fan-out after high value added production processes.
Watch out for exceptions.
Modular vs Integral Architecture
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Modular vs. Integral Architecture
S f V i t St t i
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Cannondale Specialized VooDoo National
Key Dimensions of Variety Frame Geometry Frame Material Component Group Color
Customer Interface andDistribution Channel Select from retailer stock Select from retailer stock Order through retailer Order through retailer
End Items Enumerated End Items Enumerated "Ingredient Menu" "Ingredient Menu"
Vertical Integration Frame fabrication and
some component
fabrication integrated
Outsource entire bicycle
production
Outsource frame
production
Frame fabrication and
assembly integrated
Assembly Integrated
Process Technology Laser cutting Conventional dies and
fixtures at supplier
Conventional dies and
fixtures at supplier
Robotic frame painting
Slot and tab fixturing
Decouple Point
end customer perspective Retailer Stock Retailer Stock Assembly Frame Fabrication/
painting
retailer perspective Frame painting or
Cannondale finished goods
inventory
Specialized finished
goods inventory
Assembly Frame Fabrication/
painting
Product Architecture Integral front suspension Modular front suspension Modular front suspension Modular front suspension
Substantial geometric
differences among different
sizes
Minor or no geometric
differences among sizes
Minor or no geometric
differences among sizes
Minor or no geometric
differences among sizes
Summary of Variety Strategies
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Understanding Production and Mediation Costs
Molde College Banner Exercise
BannerCutting AssemblyPainting StringCutting
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Materials per Team
2 straight scissors2 patterned scissors
1 ream of paper
4 markers 2x2 colors
1 tape dispenser1 spool of string
2 shape templates (circle and triangle)
Record Sheets.
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Performance Metrics
Production Cost Measure:
Productivity = units of output in 1.5 minute intervals/# of people
Market Mediation Cost Measures:
Inventory = Ending and Work in Process Inventoriesat end of each 1.5 minute interval
Lost Sales = # orders unable to fill during 1.5 minute interval
Total Cost Per Unit =[(avg inventory x 1) + (# lost sales x 2) + (# people in production x 1)]/units sold
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Team RBK
-1
0
1
2
3
4
5
6
7
1 2 3 4 5 6 7 8
Time
Cos
t
Lost Sales Productivity Cost/Unit
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Team Colgate
-1
0
1
2
3
4
5
6
7
8
1 2 3 4 5 6 7 8
Time
Cos
t
Lost Sales Productivity Cost/Unit
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Changes in Productivity - Cook for Congress
00.5
1
1.5
22.5
3
3.5
4
4.5
1 2 3 4 5 6 7 8 9 10 11
Time Period
Product
ivity
New Product
Introduction
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Lost Sales - U of U
0
1
2
3
4
5
6
7
8
1 2 3 4 5 6 7 8 9 10 11
Time Period
Los
tSales
New Product Introduction
Top Related