The existence of excess plant capacity is frequently the incentive for man- agement to add new...

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The existence of excess plant capacity is frequently the incentive for man- agement to add new products. Adding one new product may not add much incremen- tal cost. But continuing to add products will at some point create new constraints, perhaps requiring additional investments in people, equipment, and facilities. The effects of product and product line proliferation are generally understood. But the effect on incremental overhead costs of changes in servicing customers is less un- derstood. For example, if a company newly offers its customers the option of product delivery by case or by pallet, the new service may appear to be simple and low in cost. But, if the manufacturing process must be realigned to package in two different forms; if two sets of inventory records must be maintained; and if warehousing, handling, and shipping require two different arrangements or sets of equipment, the additional costs of this new option could be as high as a whole new product. If the customer service option were adopted for all products, the product line could effectively be doubled-but so might many overhead costs. Source: Elizabeth Haas Edersheim and Joan Wilson, "Complexity at Consumer Goods Companies: Naming and Taming the Beast," Journal of Cost Management. 2 If your marketing director suggests that, in addition to selling your cereal in a i standard-size box, you should sell a jumbo size and an individual size, what issues must you consider? The existence of excess plant capacity is frequently the incentive for man- agement to add new products. Adding one new product may not add much incremen- tal cost. But continuing to add products will at some point create new constraints, perhaps requiring additional investments in people, equipment, and facilities. The effects of product and product line proliferation are generally understood. But the effect on incremental overhead costs of changes in servicing customers is less un- derstood. For example, if a company newly offers its customers the option of product delivery by case or by pallet, the new service may appear to be simple and low in cost. But, if the manufacturing process must be realigned to package in two different forms; if two sets of inventory records must be maintained; and if warehousing, handling, and shipping require two different arrangements or sets of equipment, the additional costs of this new option could be as high as a whole new product. If the customer service option were adopted for all products, the product line could effectively be doubled-but so might many overhead costs. Source: Elizabeth Haas Edersheim and Joan Wilson, "Complexity at Consumer Goods Companies: Naming and Taming the Beast," Journal of Cost Management. 2 If your marketing director suggests that, in addition to selling your cereal in a i standard-size box, you should sell a jumbo size and an individual size, what issues must you consider?

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