During development you’ve been building prototypes and presenting them to key customers for feedback. Often, these prototypes will demonstrate selected features or subsystems of the final product you intend to launch. Once all features and subsystems are developed, you will begin to prepare for production readiness. In some organizations, production readiness and launch are synonymous. More on this point later.
Demonstrating Production Readiness
Production readiness is demonstrated via a pilot production run. Up to this point, your product developers were likely involved in building your prototypes. The pilot run is different because your developers now need to step aside so that your production team can demonstrate readiness on their own. Further, your quality assurance team is required to validate that all performance criteria can be met without that “magic touch” of the developers.
Pilot runs are rarely executed perfectly, and the intention is not to sell the pilot units. Pilot units can be used most effectively for sales and marketing purposes: demo samples, collateral development, trade show inventory, and so on. The question for the product manager is how many units should be allocated for these purposes. My recommendation is to count how many units you think you’ll need, and double it. I’ve never seen extra demo units go unused for long, and the cost of stocking out as you’re just getting your sales team and customers excited about trying out your product far exceeds the cost of some extra time and material spent in the pilot phase.
The Financial Realities
In an earlier post on setting requirements for manufactured products, I highlighted the need for the development team to held accountable to a cost of goods sold (COGS) target. As you move into production, the burdened COGS becomes the more relevant metric to your final pricing decision and ability to achieve good profitability. The burdened COGS applies a factory overhead rate to the labor costs required to build your product and gives a more accurate representation of your true production cost. The product manager can’t control the overhead rate, but can make key decisions to reduce labor hours. However, there is no free lunch, and reducing labor hours often requires capital expenditures (capex), namely tooling and automation.
Capital investment decisions require solid sales volume projections. Make the capex decision too soon, before your product-market fit is validated, and you run the risk of sinking capital costs that you’ll never recover. Make it too late and you risk going to market at too high of a price or too low of a margin. The best way to justify the capex decision? Get your feature-complete demo units in the hands of your sales team and customers as quickly as possible to build that solid sales forecast.
In the simplest form, you can create the justification for a capex investment via a breakeven analysis. If the investment costs X and the savings per unit is Y, then you’ll pay off the investment when X = nY, where n is the number of units required to break even. The decision is straightforward if your sales forecast projects that n will be reached in less than one year. The modeling becomes more complex if it will take multiple years to reach the breakeven point as the time value of money and depreciation will become relevant factors (which explains my decision to get an MBA soon after becoming a product manager).
Setting the Launch Date
Many organizations who use the Phase-Gate new product development methodology attempt to sync the production readiness and product launch dates. However, in practice, they rarely adhere to this and regardless of their governing standard operating procedures, will often decide to launch ahead of demonstrating production readiness. I am personally against applying a rigid definition to when a new product should be launched, as market conditions often require us to be flexible in determining the proper launch date. I use the following criteria for determining when a product can be launched:
- Part numbers are assigned
- Pricing is set
- Lead times from receipt of order are identified
- Freedom to operate, or any other necessary legal and compliance steps, are complete
Product launch is an authorization to accept orders. In my definition, orders can be accepted when the four above criteria are met. Take careful notice of my language here – “can” doesn’t necessarily mean “should”. My definition gives latitude for launching prior to demonstrating production readiness, but does require that the schedule for getting to production readiness and being able to fulfill orders can be predicted accurately. Likewise, there must be enough information about the cost structure to price the product at an acceptable margin. And, if you’re just starting to consider the legal freedom to operate at the time of launch, there is a larger problem your organization needs to solve.
What are the pros and cons of launching before or after demonstrating production readiness? If you decide to launch early, you can reduce your financial exposure by withholding certain manufacturing startup costs until you’ve secured firm orders for your product. The (obvious) risk is that you may miss your committed order fulfillment dates leading to a loss of credibility and the potential of those orders getting cancelled. Many organizations never get a second chance to make this mistake.
By waiting until after production readiness to launch you are trading one of the above risks for the other. Once readiness is demonstrated, there is much less risk of missing your committed ship dates. However, you have by this time invested all of the startup costs and have material in inventory or on order, and those costs will be sunk if the orders never come. This seemingly prudent, by-the-book, approach requires two things, discipline and cash, and not all organizations have both readily available.
Returning to the new product development example of my earlier posts, we can illustrate how the launch approach may change as a product line matures. When preparing to introduce a higher-end, differentiated fitness tracker to a new group of customers, there are some valid reasons to launch early. You can successfully execute an early launch by being selective on the customers you’ll target, avoiding overcommitment and utilizing intellectual property rights to keep from getting scooped while you finish the product. Later in the product lifecycle, when introducing an upgraded model or key new feature to these established customers, a more conservative approach will be prudent. Once you’ve secured customers, you have more to lose from failing to meet commitments and should have more financial resources available to “finish the job” before launching.
Great product managers earn their titles by demonstrating mastery of the three areas discussed above. Up to this point, most product people are in their comfort zone of designing and developing. However, the product manager must transition the product into the market successfully to realize financial returns, and the stakes are high for manufactured products given the costs of inventory, capital equipment, and production personnel. These are the dynamics that require the most careful attention from any software product manager transitioning into the manufactured product space.