Companies increasingly are focusing on innovation as a driver of growth. But innovation—especially in the form of new products—often comes at a cost.
Terra Technology's 2015 Forecasting Benchmark Study shows how unbridled new product introductions can create so much complexity in the supply chain that it becomes increasingly difficult to forecast and plan for demand. Terra Technology provides software for demand sensing, inventory optimization, and predicting transportation and warehousing requirements.
The study, now in its sixth year, polls 14 multinational consumer products companies encompassing US $250 billion in annual sales about their demand-planning performance. The findings paint a worrisome picture of out-of-control product proliferation. In the past five years, according to the study, the number of items offered for sale by the respondents grew by 32 percent, but sales have only grown by 4 percent. As a result, average sales per item dropped by 22 percent.
Terra Technology says that according to its data, 10 percent of items generate 75 percent of sales, and the bottom 50 percent of items make up a "long tail" that contributes only 1 percent of sales. Chris Anderson's 2006 book The Long Tail: Why the Future of Business is Selling Less of More, which popularized the term, suggested that future business success lies in selling more items to smaller audiences—in other words, providing more products to niche markets. In its 2015 study, however, Terra Technology argues that such a strategy isn't beneficial for all businesses. Long product tails, the report says, "are good for digital businesses with minimal inventory costs, but represent a major financial commitment for make-to-stock manufacturers." That's because each product introduction and discontinuation is associated with significant costs, such as setup changes to manufacturing, raw materials inventory, packaging and finished goods, and write-downs for obsolescence, the study says. "The sheer scale of the introduction/churn cycle raises questions about the financial advantages of current innovation strategies," the study's authors write.
Furthermore, the more new products a company introduces, the more difficult it is to forecast and plan for demand. Demand for new products is hard to predict because there are no historical data on which to base forecasts, and current demand planning processes, which are mostly manual, cannot handle the increase in new products, the study says. The report does not, however, suggest that companies reduce the number of new products that they roll out. Instead, it recommends that they implement demand-sensing technology (a perhaps unsurprising conclusion given that the company sells such technology). Terra defines demand sensing as an automated process that uses daily demand signals to understand actual customer demand for each new item at each location. This allows companies to adjust inventory levels to match actual demand and reduces the risk of being out of stock or holding too much inventory.