Friday, April 24, 2015

When I introduce a new product how much should I make? Here's an idea: zero.

You've got a brand new product. You've never sold it before. In fact, no one has ever really sold anything quite like it. Also, it's not really one new product. It has many variations—color, size and so on—so it's more like dozens of new products.

Here's your problem. How many of each kind should you make?

It's a classic manufacturing dilemma. The typical approach is to guess. No one calls it guessing of course. You dress up the process to make it seem like you're not guessing. You have math and formulas. You have spreadsheets. You title the spreadsheets "forecasts" which is another word for "guesses" but sounds way more scientific. And you are wrong. Always. You make too many of some versions, too few of others.

Another approach is to not make any—at first. You wait until one is ordered, then build it to order. Sure, you have to have all the components on hand so those aren't built to order, but most of the components are probably shared between the different variations so it's not that big of a deal. The big benefit is that you never have the wrong level of finished goods inventory. It's always zero. The only products that exist are the ones that are already paid for.

Apple introduces their watch this week. Build-to-order is the approach that some believe they are taking. There are demo versions of watches out there but, when you buy one, the order goes to China and someone in a pink dust suit starts making your watch. 

Will Apple keep doing this forever? I don't think so. For one, FedExing a single watch at a time out of China is expensive. Another reason is that build-to-order creates a long lead time for the customer—days, if not a week or more (though Apple doesn't seem to care much about long lead times when they introduce products, to some extent it appears to be their strategy). If Apple does build to order they're probably doing it to learn about the demand. Once they see which versions sell in what quantities they can begin to build inventory ahead of time.