Innovative Product with High Demand Volatility

4 Innovative Product with High Demand Volatility 

Innovative products are primarily sold in the ME. It typically comprises innovative components (produced in ME) and simple components (produced in EE), as shown in Eig. 7.10. 

Assume that the company in ME sells the innovative product that has a random demand of Also assume that the company assembles one innovative component and one simple component to produced one unit of the final product. It procures units of simple components from EE, and qM units of innovative component from ME. The actual delivered quantities are Ye e and Ym m, where Ye and Ym are random variables, not exceeding one, that capture procurement uncertainties in the EE and ME respectively. It follows that the number of units of the final product that would be available for sale in ME, Q = Min(YEqE, Ym m)- A. complete analysis of this business model is provided in Appendix 1. 

Example. Consider a company that orders components from EE and ME with qE=l, 000 and qM = 600. Assume two possible values of Ye with associated probabilities in parenthesis as 0.3, (0.8) and 0.6, (0.2), and two possible values of Ym with associated probabilities in parenthesis as 0.6, (0.3) and 0.8, (0.7). Therefore the possible values of finished product Q that can be produced and its associated probabilities will be as shown in Fig. 7.11. 

Assume component E s procurement cost 10 per unit, component M s procurement cost 40 per unit, and assembly cost 20 per product. Assume sales price of the product 200 per unit. 

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The challenge to every business is to become a responsive organisation in every sense of the word. The organisation must respond to changes in the market with products and services that provide innovative solutions to customers problems it must respond to volatile demand and it must be able to provide high levels of flexibility in delivery. 

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