Chapter 6Chapter 6Product Development:Product Development:
A Team ApproachA Team Approach
IDS 605IDS 605
BusingBusing
Product DevelopmentProduct Development
Product Development is a process which generates concepts, designs, and plans to create services and goods to meet customer needs
1. Analyze market to assess need
2. Design product
3. Design process for making product
4. Develop plan to market product
5. Develop plan for full-scale production
6. Analyze financial feasibility
Transparency 6.1
Product Life CycleProduct Life Cycle
Transparency 6.2 (Exhibit 6.1)
Increasing Importance ofIncreasing Importance ofProduct Development Product Development (Slide 1 of 2)(Slide 1 of 2)
1. Customers demand greater product variety
2. Advances in technology make rapid introduction of replacement products possible
3. These factors have a multiplicative factor on the number of new products a firm must introduce
Transparency 6.3a
Increasing Importance ofIncreasing Importance ofProduct Development Product Development (Slide 2 of 2)(Slide 2 of 2)
Example:» If the number of products a firm sells increases from 1 to 3,» If the product life cycle for each product declines from 10
to 5 years» Then, the number of new products introduced over a 10
year period increases from:
Transparency 6.3b
Global Aspects of Product Global Aspects of Product DesignDesign
Global trade initially involved shipping existing products to foreign countries
Followed by location of production facilities in foreign countries
Organizations develop strategies which consider the world-wide marketplace
Organizations develop products and production systems for global distribution
Transparency 6.4
Mortality Rate of New ProductsMortality Rate of New Products
Transparency 6.7 (Exhibit 6.3)
Marketing’s Role inMarketing’s Role inProduct Development Product Development (Slide 1 of 3)(Slide 1 of 3)
Examine needs of potential customers» Study markets for
existing products» Consider emerging
technologies to create new products for new markets
Transparency 6.8a
Marketing’s Role inMarketing’s Role inProduct Development Product Development (Slide 2 of 3)(Slide 2 of 3)
Measure consumer needs to determine» Features» Market size» Market price» Performance
characteristics Work with R & D to create
imaginative new products
Transparency 6.8b
Marketing’s Role inMarketing’s Role inProduct Development Product Development (Slide 3 of 3)(Slide 3 of 3)
Measure competitive pressure
Measure other factors in external environment» Economic conditions» Status of technology» Social, legal and political
factors
Transparency 6.8c
Product DesignProduct Design
Product design shapes the product. Concepts drawn from market research are transformed into features, characteristics and performance
Transparency 6.10
Product TechnologyProduct Technology
Product technology = application of practical or industrial arts to develop new or improved products
Transparency 6.11
Bill of MaterialsBill of Materials
Describes type and quantity of each component needed to build the good
Bill of Materials for a Pencil
Part # Description Quantity
16841 woodenhalves
2
2824 1/8” diameterlead
1
5134 1/2” eraser 1
1621 1/2” metalband
1
7771 yellow paint 1/2 oz
29494 glue 1/4 oz
Transparency 6.14
Ethical Issues in Product DesignEthical Issues in Product Design
Safe products Ethics and potential for
law suits encourage» Fail safe features» Safety devices
reducing risk of improper operation
Correct problems with product design promptly
Transparency 6.19
Issues in DeterminingIssues in DeterminingMethod of ProductionMethod of Production
Required machinery Sequence of operations Facility layout Procedures and job
training Safety of employees
Transparency 6.23
Human EngineeringHuman Engineering (Slide 1 of 2) (Slide 1 of 2)
Consideration of people in the design of products and facilities
Ergonomics enhance functional effectiveness of product and improve the health, safety and satisfaction of the user
Transparency 6.25a
Human Engineering Human Engineering (Slide 2 of 2)(Slide 2 of 2)
Strategic advantage: improve product comfort and safety which improves its value to customer
Operating advantage: increases productivity by making a job easier
Legal advantage: makes products and facilitates safer which reduces law suits
Human Engineering
Transparency 6.26b
Role of Operations ManagementRole of Operations Management
Produce product» As design» By process selected» With available
equipment, people and materials
Overcoming problems in full-scale production
Facility design and layout Material management Training
Transparency 6.26
Role of Suppliers inRole of Suppliers inProduct DevelopmentProduct Development
Customers and suppliers share design responsibilities and capabilities
Involved suppliers respond more quickly and better meet the needs of the customer
Suggest alterations in product design for better quality and lower cost
Improved participation to benefit overall product design
GM
Transparency 6.27
Role of Finance inRole of Finance inProduct DesignProduct Design
Capital formation Evaluation of
product and profit potential
Transparency 6.28
Information for Decision MakingInformation for Decision Making
Product design decisions require significant amounts of information beginning with market research studies through the final launch of the product. This information is critical to effective decision making.
Transparency 6.29
Quality Function Deployment Quality Function Deployment (QFD)(QFD)
Technique used to:» Focus the attention of the product development team on the quality object» Focus attention on customer needs
Customer requirements are “attributes” Each attribute or group of attributes are assessed Attributes are then translated into design characteristics
Transparency 6.31
Chapter 8Chapter 8Process Selection: Volume Drives Process Selection: Volume Drives
Costs and ProfitsCosts and Profits
IDS 605IDS 605
BusingBusing
Problem Number10
Carder Kitchen Utensil Production makes steak knives and salad forks in thesame facility.
Steak Knives Salad ForksProduct mix .7 .3Selling price/unit $.80 $.40Variable cost/unit $.50 $.25
Annual fixed costs are estimated at $250,000.
a. At what volume will Carder cover its costs, given the present mix?
b. At what volume will Carder report a $150,000 annual profit given thepresent mix?
c. If the mix changes to .6 for steak knives and .4 for salad forks,recalculate the answers to parts a and b.
d. If the price of a steak knife is raised $.05, what is the impact of this newmix on the volume required to make a $150,000 profit?
a. At what volume will Carder cover its costs, given the present mix?
a. At what volume will Carder cover its costs, given the present mix?Contribution for steak knives = .30Contribution for salad forks = .15
WC = .7(.3) + .3(.15) = .255
a. At what volume will Carder cover its costs, given the present mix?Contribution for steak knives = .30Contribution for salad forks = .15
WC = .7(.3) + .3(.15) = .255
X = (P + FC) / WC = (0+250,000)/.255 = 980,392 units
a. At what volume will Carder cover its costs, given the present mix?Contribution for steak knives = .30Contribution for salad forks = .15
WC = .7(.3) + .3(.15) = .255
X = (P + FC) / WC = (0+250,000)/.255 = 980,392 units
Therefore, they should make 980,392 (.7) = 686,275 steak knives and 980,392 (.3) = 294,117 salad forks
b. At what volume will Carder report a $150,000 annual profit given thepresent mix?
b. At what volume will Carder report a $150,000 annual profit given thepresent mix?
X= (P+FC)/WC = (150,000+250,000)/.255 = 1,568,627 units
b. At what volume will Carder report a $150,000 annual profit given thepresent mix?
X= (P+FC)/WC = (150,000+250,000)/.255 = 1,568,627 units
Steak knives: 1,568,627(.7) = 1,098,039 unitsSalad forks: 1,568,627(.3) = 470,588 units
c. If the mix changes to .6 for steak knives and .4 for salad forks,recalculate the answers to parts a and b.
c. If the mix changes to .6 for steak knives and .4 for salad forks,recalculate the answers to parts a and b.
WC = .6(.3) + .4(.15) = .24
Just covering costs, x= (0+250,000)/.24 = 1,041,667 units
Therefore, steak knives = 1,041,667(.6) = 625,000 unitsand salad forks = 1,041,667(.4) = 416,667 units
If desired profit = 150,000, then x=(150,000+250,000)/.24 = 1,666,667 units
Therefore, steak knives = 1,666,667(.6) = 1,000,000 unitsand salad forks = 1,666,667(.4) = 666,667 units
d. If the price of a steak knife is raised $.05, what is the impact of this newmix on the volume required to make a $150,000 profit?
d. If the price of a steak knife is raised $.05, what is the impact of this newmix on the volume required to make a $150,000 profit?
WC = .7(.35)+.3(.15) = .29
X=(150,000+250,000)/.29 = 1,379,310 unitsNote that the volume decreased from that of part b, above.
d. If the price of a steak knife is raised $.05, what is the impact of this newmix on the volume required to make a $150,000 profit?
WC = .7(.35)+.3(.15) = .29
X=(150,000+250,000)/.29 = 1,379,310 unitsNote that the volume decreased from that of part b, above.
Therefore, steak knives = 1,379,310(.7) = 965,517 unitsand salad forks = 1,379,310(.3) = 413,793 units
Problem Number 12
Winken, Blinken, and Knod, Inc. is considering three different machines to grind contact lenses. Theannual costs and operating costs are listed below.
Annualized VariableSystem Fixed Costs Operating Costs
Manual Grinder $9000 $5.00/lens
Automatic grinder $30000 $2.50/lens
Computer-controled $50000 $0.75/lensAutomatic grinder
A. If 10,000 lenses are needed, which option has the lowest cost?
Grinder Technology Choice
0
20000
40000
60000
80000
100000
120000
500
1500
2500
3500
4500
5500
6500
7500
8500
9500
1050
0
1150
0
1250
0
1350
0
1450
0
1550
0
1650
0
1750
0
1850
0
1950
0
Volume
To
tal
Co
st Manual Grinder
Automatic Grinder
Computer-controlled automatic grinder
B. If 20,000 lenses are needed, which option has the lowest cost?
Grinder Technology Choice
0
20000
40000
60000
80000
100000
120000
500
1500
2500
3500
4500
5500
6500
7500
8500
9500
1050
0
1150
0
1250
0
1350
0
1450
0
1550
0
1650
0
1750
0
1850
0
1950
0
Volume
To
tal
Co
st Manual Grinder
Automatic Grinder
Computer-controlled automatic grinder
C. At what volume(s) of lens production do the alternatives have equal cost?
Grinder Technology Choice
0
20000
40000
60000
80000
100000
120000
500
1500
2500
3500
4500
5500
6500
7500
8500
9500
1050
0
1150
0
1250
0
1350
0
1450
0
1550
0
1650
0
1750
0
1850
0
1950
0
Volume
To
tal
Co
st Manual Grinder
Automatic Grinder
Computer-controlled automatic grinder
D. How would you explain these options to management?
Grinder Technology Choice
0
20000
40000
60000
80000
100000
120000
500
1500
2500
3500
4500
5500
6500
7500
8500
9500
1050
0
1150
0
1250
0
1350
0
1450
0
1550
0
1650
0
1750
0
1850
0
1950
0
Volume
To
tal
Co
st Manual Grinder
Automatic Grinder
Computer-controlled automatic grinder
Process SelectionProcess Selection
Process selection includes:» Technical issues–basic technology used to
produce a service or good» Volume or scale decision–using the proper
amount of mechanization to leverage the organization’s work force
MECHANIZATION
Work Force
Transparency 8.1
Product Design, Process Product Design, Process Selection, and Capacity Selection, and Capacity
DecisionsDecisions
Transparency 8.2 (Exhibit 8.1)
Understanding the Scale FactorUnderstanding the Scale Factor
Economies of scale doctrine » most efficient size for a facility » most efficient size for a firm
» Put a large volume of the same product across the same equipment or fixed cost base.
Economies of scope occurs when a large volume and high variety of products are produced by the same equipment for fixed cost base
Transparency 8.5
Scale Factor: Cost-VolumeScale Factor: Cost-VolumeProfit Model Profit Model (Slide 1 of 3)(Slide 1 of 3)
TR= (SP) (Xs)
TR = Total Revenue
SP = Selling price/unit
Xs = Number of units sold
TC = FC + (VC) (Xp)
TC = Total cost
FC = Fixed cost
VC = Variable cost/unit
Xp = Number of units produced
Transparency 8.6a
Scale Factor: Cost-VolumeScale Factor: Cost-VolumeProfit Model Profit Model (Slide 2 of 3)(Slide 2 of 3)
The profit (P) equation is
P = TR -TC
P = SP(Xs) - {FC + VC(Xp)}
If X= Xs = Xp, then
P = SP(X) - {FC + VC(X)}
P = SP(X) - VC(X) - FC
P + FC = (SP - VC)(X)
Transparency 8.6b
Scale Factor: Cost-VolumeScale Factor: Cost-VolumeProfit Model Profit Model (Slide 3 of 3)(Slide 3 of 3)
Solve for X as follows:
X =
If C is defined as contribution/unit, then C = (SP - VC).
Then the equation becomes
X=
(P + FC)
(SP - VC)
C
(P + FC)
Transparency 8.6c
Cost-Volume-Profit ModelCost-Volume-Profit Model
Transparency 8.7 (Exhibit 8.2)
Assumptions of theAssumptions of theCost-Volume-Profit ModelCost-Volume-Profit Model
Sales volume is equal to production volume Total cost and total revenue are linear functions of volume Historical data on costs and selling price are representative of
what will happen in the future The organization has only one product
Transparency 8.8
Cost Structure of Cost Structure of Low-Volume ProducerLow-Volume Producer
Transparency 8.10 (Exhibit 8.3)
Cost Structure ofCost Structure ofHigh-Volume ProducerHigh-Volume Producer
Transparency 8.11 (Exhibit 8.4)
Operating LeverageOperating Leverage
Transparency 8.12 (Exhibit 8.5)
Matching Process Alternatives Matching Process Alternatives with Product Characteristicswith Product Characteristics
Transparency 8.13 (Exhibit 8.6)
Characteristics of theCharacteristics of theProcess AlternativesProcess Alternatives
Transparency 8.14 (Exhibit 8.7)
Process Flows Before and After Process Flows Before and After Applying Group Technology Applying Group Technology (Slide 1 of 2)(Slide 1 of 2)
Transparency 8.15a (Exhibit 8.8)
Process Flows Before and After Process Flows Before and After Applying Group Technology Applying Group Technology (Slide 2 of 2)(Slide 2 of 2)
Transparency 8.15b (Exhibit 8.8)
Problems with Managing Large, Problems with Managing Large, Unfocused Operations Unfocused Operations (Slide 1 of 2)(Slide 1 of 2)
Growing facilities add more levels of management and make coordination and control difficult
New products are added to the facility as customers demand greater product variety
Hidden overhead costs increase as managers add staff to deal with increased complexity
Transparency 8.17a
Problems with Managing Large, Problems with Managing Large, Unfocused Operations Unfocused Operations (Slide 2 of 2)(Slide 2 of 2)
The result is higher operating costs
» Productive time is being taken to do setups
» More mistakes are made by attempting to manage increasing complexity with control systems designed for a single product facility
Transparency 8.17b
Focused FactoryFocused Factory
Smaller facility (less than 500 employees) concentrates on one or few products
Limits scope of operations to a few process technologies
Strives only for highest level of quality
Strives for simplicity in management and control
Transparency 8.18