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Optimizing the design of business processes


Since the design phase of a process largely determines the later production costs, the question of how to reduce the negative effects of variety on process performance by clever process design is becoming more and more important.

One successful method of improving process design is the so-called delayed differentiation. This method allots keeping as many process steps identical as possible for all products before splitting the production process up. The decision, which variant of a certain product is actually produced is thus delayed until the very last possible point in the process. This process design is optimal for products that differ only mildly (e.g. t-shirts of different colour). Delayed differentiation is made easy, if variable elements of the product can be isolated (the so-called moduled product design).

An interesting example for delayed differentiation is the casing around the (otherwise completely identical) iPhones. The hype over the iPhone also shows, that even hugely successful products do not necessarily need to offer a lot of variation. The reason for this is, that customers can also be overwhelmed by too much choice. To understand this, one has to understand that most customers only care about the characteristics e.g. of a computer that provide utility for them – not about the actual technical specifications (e.g. gaming performance compared to the actual graphic card of a computer). Companies thus might want to think about limiting their product variety in order to not make customers nervous by offering too much choice and keeping them from purchasing a product.

These lecture notes were taken during 2013 installment of the MOOC “An Introduction to Operations Management” taught by Prof. Dr. Christian Terwiesch of the Wharton Business School of the University of Pennsylvania at Coursera.org.
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Basic forms of product variety


There are three different basic forms of product variety:

(1) Fit variety: Customers need to be able to buy different versions (sizes, shapes etc.) of a product if the product is to be of use for them (personal utility maximization). The more the characteristics of a product move away from the customer specifications, the less use it has for that customer. This kind of variability is also known as horizontal differentiation. Examples are different sizes of shoes or t-shirts, different locations of shops or airports and different departure times of trains or planes.

(2) Performance-based variety: Companies might sometimes offer products of more or less quality (e.g. a “high end” product and a “standard” product), so that customers can buy according to their quality needs and / or their financial abilities (price discrimination). This kind of variability is also known as vertical differentiation. Examples are computers with different processor speeds, mobile phones with different weights and diamond earrings with different diamond sizes.

(3) Taste-based variety: Customers also want products to come in different versions appealing to their personal taste in colour, design, sapidity etc. This kind of variability is the outcome of rather “rugged” individualistic utility functions with local optima and no clear common thread.

A company may therefore choose to aim for more variety for one of the following reasons:

  • Their heterogeneous customer base does not accept “one size fits all”-products (taste-based variety)
  • They want to make use of price discrimination mechanisms and offer different quality versions for different income groups (performance-based variety, market segmentation)
  • Their customers actively demand more variety (e.g. by wanting to be offered a broad range of foods in a restaurant as opposed to being offered the same food every day)
  • Saturating a niche and thus preventing competitors from being active in that niche
  • Avoiding a direct price competition with competitors by product differentiation
These lecture notes were taken during 2013 installment of the MOOC “An Introduction to Operations Management” taught by Prof. Dr. Christian Terwiesch of the Wharton Business School of the University of Pennsylvania at Coursera.org.
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