24 Apr Six ways to improve the profitability of your new product launch (2)
Innovative or die!
You need to introduce a steady stream of new products if your business is to survive and to grow. Launching new products is a complex challenge and the costs are high if you get it wrong. Out-of-stocks could cost you as much as 16% of your potential sales in the launch phase and there is also a risk that your inventories and costs could spiral out of control.
In chapter 1 we listed six ways to improve the profitability of your new product launches:
- Produce the best Sales Forecast that you can
- Do a “what if” analysis
- Simplify the new product launch as much as you can
- Hold the right amount of safety stock
- Monitor the launch and respond quickly to events
- Maintain flexibility in supply to give you more options
We also described ways to produce the best possible Sales Forecast and to conduct a “what if” analysis to help you to anticipate surprises and to plan your response. Next we will describe ways to simplify the launch, to manage your safety stocks, to monitor progress through the launch and to give yourself more options to respond when the unexpected happens.
Simplify the new product launch as much as you can
Every new product launch is complex. Think of all of the new things that are happening at the same time – new advertising and promotional materials, stocking-up the distribution points, sourcing new materials, producing the product for the first time, adding the new product to all of the information systems, training people all the way through the chain. Anything that goes going wrong in one area spreads ripples that affect other areas.
If everything needs to come together at the last minute, as it usually does, stress levels soar and mistakes become more likely and more costly. Does it really have to be this way? Are there ways that you might simplify the launch to reduce the number of things could go wrong, and to lower the impact if they do?
Can you launch in some markets before others? Can you finalize the product specifications and packaging design earlier? Can you source the materials and even complete the first full production run early? Can you fill the distribution pipeline well before the promotions begin? Can you bring in the new staff early?
Each of these options has obvious downsides, but these may be far outweighed by the benefits of a smooth, successful launch.
Simplifying the process is important, but it doesn’t remove the need for an effective project manager to oversee the launch.
This person should have an understanding of the whole process and the ability to work with everybody involved to anticipate and prevent problems.
Hold the right amount of safety stock
Yes, inventory is wasteful, but the purpose of safety stocks is to allow for unpredictability and this is probably the most unpredictable time in your new product’s life.
You also don’t want to hold too much inventory. This would drive up your working capital levels unnecessarily and could even lead to write-offs.
A little science can help you to get it right. Your stock level on launch day should be enough to supply the product that you expect to sell (known as cycle stock) and a bit more in case you sell more than expected (safety stock).
To work out how much safety stock you should hold, you need to consider three factors:
How high could the sales go? What is the highest level of sales that you can afford to plan for?
How long will it take you to find out that the sales are high or low?
If you find that the sales are high, how long will it take you to get more product available?
You need just enough safety stock to supply the extra sales that you might make in the time that it takes you to find out that sales are high plus the time required to get more product available.
Monitor the launch and respond quickly to events
Things happen quickly in any new product launch – you need to keep a close watch on progress so that you can respond quickly when appropriate. You do need to make sure though that the fluctuations that you are responding to are real. You can’t react to every minor fluctuation that might just be “noise”. Good information and good preparation will help you to get this right.
Firstly you need information on real sales to the end consumer as well as the replenishment orders that you receive from distribution centers or stores. This way you can see what is really going on in the marketplace as well as the way that your partners are responding.
This may help you to identify the outlet that hasn’t placed an order on you, even though their sales are going well. They could be at risk of running out of stocks and costing you both sales. It might also help you to identify the outlet that has placed a large order for more product, even though their sales are only slightly ahead. You probably shouldn’t expect another order from them anytime soon.
You may be able to buy consumer sales data from data vendors. If that’s not possible then talk to some of the larger sales outlets. They may be willing to share the information with you, understanding that this will help you to serve them better.
You should formally review progress each week, comparing actual sales with your forecast and deciding on the appropriate response. Use the trigger points that you set during the “what-if” session to ensure that you are not responding too quickly or too slowly.
Maintain flexibility in supply to give you more options
When you are planning your purchasing, production and logistics for the new product launch, plan to supply your “most likely” forecast, but build in the flexibility to respond quickly if sales are higher or lower.
Here are some options that you might consider:
- Hold some production capacity in reserve.
- Increase stocks of some of your other established products a little. This may allow you to defer their production if necessary to accommodate an extra run of your new product.
- Build up stocks of any long lead time, common materials used in producing both the new product and other products.
- For any long lead time materials that are used only in the new product, try to negotiate shorter lead times, smaller lot sizes, consignment stocks or even “use or return” agreements with suppliers. It might be worth accepting higher unit costs during the product’s infancy in return for this flexibility. As the product matures you can focus on reducing costs and gaining the economies of scale.
As consumers become more demanding and product life-cycles shrink, your business will continue to feel the pressure to improve its existing products and to introduce a steady stream of new ones. You need to become expert at developing and introducing new products, bringing them to market quicker and more efficiently. The new product launch phase is often the most costly part of this process and can influence the success of the product in the marketplace.
The keys to a successful new product launch lie in good planning, and then closely monitoring progress and responding quickly and effectively to any deviations from your plan.
www.sopplan.com – Practical Sales and Operations Planning