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Taking product replacement decisions by means of the Analytic Hierarchy Process

Hellström, Pierre (2008) MIO920
Production Management
Abstract
In an economic environment signified by shortened product lifecycles, product proliferation and
reduced profit margins, product replacement decision making (PRDM) ought to be an important part
of management. The case is however often that considerably more energy and resources at a firm are
spent at the opposite task, hence product development. The main purpose of this master thesis was to
construct and test a model that provides structure for PRDM, this by implementing and combining the
advantages of the Analytic Hierarchy Process (AHP), the SWOT analysis and the Product Lifecycle
Concept (PLCC) into one coherent model.
The model referred to was tested at a German company, Webasto AG, a supplier within the motor
vehicle industry,... (More)
In an economic environment signified by shortened product lifecycles, product proliferation and
reduced profit margins, product replacement decision making (PRDM) ought to be an important part
of management. The case is however often that considerably more energy and resources at a firm are
spent at the opposite task, hence product development. The main purpose of this master thesis was to
construct and test a model that provides structure for PRDM, this by implementing and combining the
advantages of the Analytic Hierarchy Process (AHP), the SWOT analysis and the Product Lifecycle
Concept (PLCC) into one coherent model.
The model referred to was tested at a German company, Webasto AG, a supplier within the motor
vehicle industry, where suboptimal product proliferation had been the case regarding one of its offered
products. The product was actually three air heater models, all fulfilling about the same spectrum of
customer needs in the lower output range. This implied, triple offering of similar products was realised
to cause bad utilization of resources at the company, meaning complications such as higher inventory
costs, more references to purchase, higher costs due to component discontinuation notices and more
suppliers to manage. In this paper we further refer to the three investigated products as: “WH-α”,
“WH-β” and “WH-γ”. WH-α represents an old product version, WH-β an intermediate version –
indeed resembling WH-α with respect to its product breakdown structure– and WH-γ a newer,
conceptually different, state-of-the-art product. The model framework for PRDM consists of five
steps:
STEP 1 –THE REVIEW PROCESS. Here we review the overall product situation at the company (or
business unit) and state the current, precipitating circumstances for evaluating our potentially weak
products.
When relating to the performed case-study at Webasto AG the management responsible for air
heaters expressed the four circumstances “operational problems”, “development of a variety reduction
policy”, “poor sales performance” and “poor profit performance” as being apt precipitating
circumstances for our product-mix review.
STEP 2 –DETECTION OF WEAK PRODUCT PERFORMANCE. This step initially involves stating
the criteria which will be used to detect our potentially weak products. In short, the AHP is based on
three principles performed in consecutive order. The principle of decomposition corresponds to
forming a suitable decision hierarchy for some problem of investigation, including formation of
hierarchy levels and its sub elements; e.g. the paramount, overall goal for the evaluation, the criteria to
measure against as an intermediate level, and the decision alternatives of choice as the bottom-level.
The consecutive principle of comparative judgments means pairwise comparing the elements within
each level with respect to a higher level’s element or goal, by using a comparative scale. The scale,
foremost focusing on the respondent’s intensities of feelings rather than on numbers, is central to the
AHP concept. As these comparisons have been made we furthermore compute the results according to
an AHP algorithm. These computations, followed by a synthesis of priorities, enable us to finally
obtain a rank order for our alternatives of choice, i.e. the products.
In the case-study, the management initially stipulated four suitable product criteria for finding the
most valuable product: sales-growth (%), relative market-share (%), profitability (%) and earnings
(k€). When furthermore wanting to prioritise the criteria with regard to their mutual importance, the
author let eight concerned managers give their individual opinions of how the criteria related. The
obtained group opinion, followed by some computations, generated the following priorities:
Earnings 48,7%, Sales-growth 22,2%, Profitability 21,8% and Relative market-share 7,4%.
The next phase of Step 2 meant letting a single top executive manager pairwise compare the products
as to how he perceived the products to perform under each criterion. These judgments as input data to
the prior mentioned AHP-algorithm furthermore generated the following AHP rank order:
1) WH-γ = 79,3% 2) WH-β = 13,2% 3) WH-α = 7,4%
STEP 3 –ANALYSIS OF PERFORMANCE FACTORS. This step of the evaluation process means a
possibility to obtain complementing, qualitative information about the products. In Step 3 we start off
by complementing the products’ situations by analysing them with regard to their perceived strengths,
weaknesses, opportunities and threats. We then additionally widen our perspectives on the products by
examining their sales history, thereafter mapping the products with respect to the Product Lifecycle
Concept (PLCC).
In our case-study the SWOT analysis told us that WH-γ was a clear winner as it was more modern,
technically more efficient, better performing, had more features and was cheaper to produce. Indeed
the two other products had strengths such as being products well known to the customers, as well as
being products somewhat easier to maintain. However, as WH-α and WH-β were similar in product
structure, yet conceptually different to WH-γ, the weakness “differing product breakdown structures
to WH-γ” was realised to be a major disadvantage for the two older products.
When finally examining and mapping the individual products with respect to the classical PLCC,
WH-α was estimated to currently be somewhere in the late decline stage. WH-β was moreover
estimated to be in the late maturity stage, however most likely to enter the decline stage within a year.
As last, WH-γ showed the preferable signs of being in the growth stage, expected to take over
customers from its two forerunners – and thereto also winning over brand new customers – in the
future.
STEP 4 AND 5 –EVALUATION AND DECISION. This step corresponds to evaluating all
information gathered, thereafter taking a final replacement decision.
In this step of evaluation the prior mentioned top executive manager once again evaluated the
products, but this time he did it considering all results gathered:
WH-α had continuously received weak notes during the evaluation and was proposed and formulated
to be “abolished as soon as possible in order to avoid further losses” (6 months was mentioned by the
management as a possible timeframe).
WH-β indeed showed good sales figures for the current year (2006), but as the large majority of
customers had already decided to definitely switch to the newer WH-γ the coming year (2007), it
should undoubtly be phased out. –However, as the company did not want to abolish both old products
at the same time, WH-β was proposed to be gradually phased out, this instead of a more sudden
termination. (12-18 months was estimated to be a reasonable timeframe.)
When examining the end results of each aspect of the product evaluation WH-γ was a clear winner!
The outcome of the AHP, the SWOT analysis and the PLCC all motivated to keep and grow the
product. The explicit formulation sounded: “Keep growing the WH-γ and take over the customers
from the old products!” (Less)
Please use this url to cite or link to this publication:
author
Hellström, Pierre
supervisor
organization
course
MIO920
year
type
M1 - University Diploma
subject
other publication id
08/5291
language
Swedish
id
1979410
date added to LUP
2011-06-17 12:42:05
date last changed
2011-06-20 11:17:32
@misc{1979410,
  abstract     = {In an economic environment signified by shortened product lifecycles, product proliferation and
reduced profit margins, product replacement decision making (PRDM) ought to be an important part
of management. The case is however often that considerably more energy and resources at a firm are
spent at the opposite task, hence product development. The main purpose of this master thesis was to
construct and test a model that provides structure for PRDM, this by implementing and combining the
advantages of the Analytic Hierarchy Process (AHP), the SWOT analysis and the Product Lifecycle
Concept (PLCC) into one coherent model.
The model referred to was tested at a German company, Webasto AG, a supplier within the motor
vehicle industry, where suboptimal product proliferation had been the case regarding one of its offered
products. The product was actually three air heater models, all fulfilling about the same spectrum of
customer needs in the lower output range. This implied, triple offering of similar products was realised
to cause bad utilization of resources at the company, meaning complications such as higher inventory
costs, more references to purchase, higher costs due to component discontinuation notices and more
suppliers to manage. In this paper we further refer to the three investigated products as: “WH-α”,
“WH-β” and “WH-γ”. WH-α represents an old product version, WH-β an intermediate version –
indeed resembling WH-α with respect to its product breakdown structure– and WH-γ a newer,
conceptually different, state-of-the-art product. The model framework for PRDM consists of five
steps:
STEP 1 –THE REVIEW PROCESS. Here we review the overall product situation at the company (or
business unit) and state the current, precipitating circumstances for evaluating our potentially weak
products.
When relating to the performed case-study at Webasto AG the management responsible for air
heaters expressed the four circumstances “operational problems”, “development of a variety reduction
policy”, “poor sales performance” and “poor profit performance” as being apt precipitating
circumstances for our product-mix review.
STEP 2 –DETECTION OF WEAK PRODUCT PERFORMANCE. This step initially involves stating
the criteria which will be used to detect our potentially weak products. In short, the AHP is based on
three principles performed in consecutive order. The principle of decomposition corresponds to
forming a suitable decision hierarchy for some problem of investigation, including formation of
hierarchy levels and its sub elements; e.g. the paramount, overall goal for the evaluation, the criteria to
measure against as an intermediate level, and the decision alternatives of choice as the bottom-level.
The consecutive principle of comparative judgments means pairwise comparing the elements within
each level with respect to a higher level’s element or goal, by using a comparative scale. The scale,
foremost focusing on the respondent’s intensities of feelings rather than on numbers, is central to the
AHP concept. As these comparisons have been made we furthermore compute the results according to
an AHP algorithm. These computations, followed by a synthesis of priorities, enable us to finally
obtain a rank order for our alternatives of choice, i.e. the products.
In the case-study, the management initially stipulated four suitable product criteria for finding the
most valuable product: sales-growth (%), relative market-share (%), profitability (%) and earnings
(k€). When furthermore wanting to prioritise the criteria with regard to their mutual importance, the
author let eight concerned managers give their individual opinions of how the criteria related. The
obtained group opinion, followed by some computations, generated the following priorities:
Earnings 48,7%, Sales-growth 22,2%, Profitability 21,8% and Relative market-share 7,4%.
The next phase of Step 2 meant letting a single top executive manager pairwise compare the products
as to how he perceived the products to perform under each criterion. These judgments as input data to
the prior mentioned AHP-algorithm furthermore generated the following AHP rank order:
1) WH-γ = 79,3% 2) WH-β = 13,2% 3) WH-α = 7,4%
STEP 3 –ANALYSIS OF PERFORMANCE FACTORS. This step of the evaluation process means a
possibility to obtain complementing, qualitative information about the products. In Step 3 we start off
by complementing the products’ situations by analysing them with regard to their perceived strengths,
weaknesses, opportunities and threats. We then additionally widen our perspectives on the products by
examining their sales history, thereafter mapping the products with respect to the Product Lifecycle
Concept (PLCC).
In our case-study the SWOT analysis told us that WH-γ was a clear winner as it was more modern,
technically more efficient, better performing, had more features and was cheaper to produce. Indeed
the two other products had strengths such as being products well known to the customers, as well as
being products somewhat easier to maintain. However, as WH-α and WH-β were similar in product
structure, yet conceptually different to WH-γ, the weakness “differing product breakdown structures
to WH-γ” was realised to be a major disadvantage for the two older products.
When finally examining and mapping the individual products with respect to the classical PLCC,
WH-α was estimated to currently be somewhere in the late decline stage. WH-β was moreover
estimated to be in the late maturity stage, however most likely to enter the decline stage within a year.
As last, WH-γ showed the preferable signs of being in the growth stage, expected to take over
customers from its two forerunners – and thereto also winning over brand new customers – in the
future.
STEP 4 AND 5 –EVALUATION AND DECISION. This step corresponds to evaluating all
information gathered, thereafter taking a final replacement decision.
In this step of evaluation the prior mentioned top executive manager once again evaluated the
products, but this time he did it considering all results gathered:
WH-α had continuously received weak notes during the evaluation and was proposed and formulated
to be “abolished as soon as possible in order to avoid further losses” (6 months was mentioned by the
management as a possible timeframe).
WH-β indeed showed good sales figures for the current year (2006), but as the large majority of
customers had already decided to definitely switch to the newer WH-γ the coming year (2007), it
should undoubtly be phased out. –However, as the company did not want to abolish both old products
at the same time, WH-β was proposed to be gradually phased out, this instead of a more sudden
termination. (12-18 months was estimated to be a reasonable timeframe.)
When examining the end results of each aspect of the product evaluation WH-γ was a clear winner!
The outcome of the AHP, the SWOT analysis and the PLCC all motivated to keep and grow the
product. The explicit formulation sounded: “Keep growing the WH-γ and take over the customers
from the old products!”},
  author       = {Hellström, Pierre},
  language     = {swe},
  note         = {Student Paper},
  title        = {Taking product replacement decisions by means of the Analytic Hierarchy Process},
  year         = {2008},
}