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111 The Product Design ProcessContract manufacturer defined

Core competence defined

112 The Product Development ProcessConcurrent engineering defined

117 Economic Analysis of Product Development ProjectsBuild a base-case financial modelSensitivity analysis to understand project trade-offs

120 Designing for the CustomerQuality function deployment Quality function deployment (QFD) definedValue analysis/value engineering House of quality defined

Value analysis/value engineering (VA/VE) defined

123 Designing Products for Manufacture and AssemblyHow does design for manufacturing and assembly (DFMA) work?

126 Measuring Product Development Performance

127 Conclusion

132 Case: The Best-Engineered Part Is No Part

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I D E O P R O D U C T D E V E L O P M E N T — C A NY O U L E A R N C R E A T I V I T Y ?4 IDEO Product Development is the world’s most celebrated design firm. Its ulti-

mate creation is the process of creativity itself. For founder David M. Kelley

and his colleagues, work is play, brainstorming is a science, and the most

important rule is to break the rules (www.ideo.com).

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“IDEO is a zoo—oh, lovely metaphor for this age of the nanosecond! Experts of all fla-

vors commingle in ‘offices’ that look more like cacophonous kindergarten classrooms than

home to one of America’s (and the world’s) most successful design firms. Desks are littered

with works-in-progress and the remains of midnight fast food binges. Models of futur-

istic lamps and movie special-effects devices and high-tech blood-chemistry analyzers, in all

stages of development, lie about here and there—and are the cause of nonstop kibitzing.

The planet’s most advanced software programs, running on the world’s most advanced

workstations, networked with heaven knows whom from heaven knows where, hum 24 hours

a day.

“Clients and other outsiders pop in and out without ado. Chatter is ceaseless.

Brainstorming sessions, pitting a dozen minds from different disciplines against one another

in raucous pursuit of zany ideas, are called on a moment’s notice. Bikes line the halls. Joke

prizes, along with impressive awards, hang on every wall. The bottom line: IDEO gets the job

done on time, on budget, and with exceptional imagination.”1

IDEO’s novel design process centers on two activities that are repeated over and over:

1. Brainstorming. IDEO enforces some strict rules during these sessions.

a. Defer judgment so that the flow of ideas is not interrupted.

b. Build on the ideas of others because this is far more productive than hogging the

glory for your own insights.

c. Stay focused on the topic; tangents are not allowed.

d. One person at a time so that you do not drown out that quiet, brilliant mumbler in

the corner of the room.

e. Go for quantity—150 in 30–45 minutes is good.

f. Encourage wild ideas.

g. Be visual; for example, sketch ideas to help others understand them.

2. Rapid prototyping. The idea is that it is easier to discuss a model of something, no

matter how primitive, than to talk about a bunch of abstract ideas. Rapid prototyping

consists of three R’s: rough, rapid, and right. The first two R’s are fairly self-explanatory—

make your models rough and make them rapidly. In the early stages, perfecting a

model is a waste of time. Right does not mean your model needs to work. Instead,

it refers to building lots of small models that focus on specific problems. For exam-

ple, when a group at IDEO designed a phone, they cut out dozens of pieces of foam

and cradled them between their heads and shoulders to find the best shape for a

handset. –>

Designing new products and getting them to market quickly is the challenge facing manu-facturers in industries as diverse as computer chips and potato chips. Customers of computerchip manufacturers, such as computer companies, need ever-more-powerful semiconductorsfor their evolving product lines. Food producers need to provide their grocery store cus-tomers new taste sensations to sustain or enlarge their retail market share. How manufac-tured products are designed and how the process to produce them is selected are the topicsof this chapter.

110 section 1 OPERATIONS STRATEGY AND MANAGING CHANGE

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PRODUCT DESIGN chapter 4 111

In today’s world, companies often outsource major functions rather than supportthese functions in-house. Companies that specialize in manufacturing products for other com-panies have become very successful. These companies are called contract manufacturersand they have become successful in industries such as electronic products, clothing, drug,plastics, and custom manufacturing. A simple definition of a contract manufacturer is an orga-nization capable of manufacturing and/or purchasing all the components needed to produce afinished product or device.

The use of contract manufacturers has dramatically changed the way traditional manufac-turing companies now operate. Depending on the situation, contract manufacturers will takevarious roles for a company. For example, in the automobile industry, contract manufacturersproduce many of the parts and subassemblies such as the seats and other interior parts, theheadlight and taillight assemblies, and the electronic equipment such as radio/CD and GPSnavigation systems. The actual automobiles are often built regionally in the countries wherethe products will be sold to reduce transportation cost and manage currency exchange risk.Close coordination is required to manage the network of assembly plants and contract man-ufacturing partners for success.

Similar to the outsourcing of manufacturing, many companies outsource the productdesign function. Product design differs significantly depending on the industry. For consumerproducts, understanding consumer preferences and market testing prospective products arevery important activities. For pharmaceuticals, extensive clinical tests are often required thatinvolve carefully controlled experiments to test the effectiveness of a potential product.Companies that specialize in the design of products have highly developed processes to sup-port the activities needed for an industry.

Given the potential advantages of using contract manufacturers for producing products andspecialized design firms for designing their products, a firm must decide what their core com-petence should be. A company’s core competence is the one thing that it can do better thanits competitors. A core competency can be anything from product design to sustained dedi-cation of a firm’s employees. The goal is to have a core competency that yields a long-termcompetitive advantage to the company.

As an example, consider Honda’s expertise in engines. Honda has been able to exploit thiscore competency to develop a variety of quality products from lawn mowers and snow blow-ers to trucks and automobiles. To take another example from the automotive industry, it hasbeen claimed that Volvo’s core competence is safety.

A core competence has three characteristics:

1. It provides potential access to a wide variety of markets,2. It increases perceived customer benefits.3. It is hard for competitors to imitate.

A good example is Black and Decker, the U.S. manufacturer of tools. Black and Decker’s coretechnological competency is in 200- to 600-watt electric motors. All of their products aremodifications of this basic technology (with the exception of their work benches, flashlights,battery-charging systems, toaster ovens, and coffee percolators). They produce products forthree markets:

1. The home workshop market. In the home workshop market, small electric motorsare used to produce drills, circular saws, sanders, routers, rotary tools, polishers, anddrivers.

2. The home cleaning and maintenance market. In the home cleaning and maintenancemarket, small electric motors are used to produce dust busters, vacuum cleaners,hedge trimmers, edge trimmers, lawn mowers, leaf blowers, and pressure sprayers.

3. Kitchen appliance market. In the kitchen appliance market, small electric motors areused to produce can openers, food processors, blenders, bread makers, and fans.

T H E P R O D U C T D E S I G N P R O C E S S

Contract manufacturer

Core competence

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The real challenge for a firm is to decide exactly how the various functionscritical to success will be handled. At one extreme is the fully vertically inte-grated firm where all activities from the design to the fabrication of the indi-vidual parts are handled in-house. At the other extreme is a company that onlysells products and outsources all the design and manufacturing functions.

The following are a few examples of what some highly successful companiesare doing:

• Sun Microsystems designs the SPARC chips used in its high-performance workstations but subcontracts the fabrication of thosechips to specialized chip makers (while maintaining ownership of theintellectual property).

• A pharmaceutical company may purchase information on genetic targetsfrom a genomics company, contract with a specialist in combinatorialchemistry for rapid synthesis and screening of candidate compounds, andeven utilize a contract research organization to conduct clinical trials butretain ownership of the intellectual property (patents, experimental data,trademarks, etc.) of the drug that eventually comes to market.

• Dell has developed a set of highly specialized systems that support itsmake-to-order operating strategy. Dell has created a set of proprietarylogistical processes that range from the design of its Web page throughits information systems infrastructure (a process that has proven difficultfor others to imitate). Dell owns the data about what people are buyingand in which combinations. It also has vertically integrated into final

assembly facilities that have been designed to efficiently produce in lot sizes of one.Finally, while it outsources components, Dell uses longer-term relationships with itssuppliers and links them into its information system to support quick response.

In the chapter we first discuss a generic product design process. Here we develop a genericprocess and show how this can be adapted to various types of common products. Next, we showhow the economic impact of new products can be evaluated. Later in the chapter we discuss howcustomer preferences are considered in product design. Then we show how the design of theproduct impacts manufacturing and assembly processes. Finally, we discuss measures of prod-uct development performance.


We begin by defining a generic product development process that describes thebasic steps needed to design a product. This process represents the basic sequence of steps oractivities that a firm employs to conceive, design, and bring a product to market. Many of thesetasks involve intellectual rather than physical activities. Some firms define and follow a preciseand detailed development process, while others may not even be able to describe their process-es. Every organization employs a process that is different from that of every other organization;in fact, the same organization may follow different processes for different product groups.

Our generic product development process consists of six phases, as illustrated in Exhibit 4.1.The process begins with a planning phase, which is the link to advanced research and technol-ogy development activities. The output of the planning phase is the project’s mission state-ment, which is the input required to begin the concept development phase and serves as a guideto the development team. The conclusion of the product development process is the productlaunch, at which time the product becomes available for purchase in the marketplace. Exhibit 4.1identifies the key activities and responsibilities of the different functions of the firm duringeach development phase. Because of their continuous involvement in the process, we articu-late the roles of marketing, design, and manufacturing. Representatives from other functions,such as research, finance, field service, and sales, also play key roles at points in the process.

T H E P R O D U C T D E V E L O P M E N T P R O C E S S 2

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e x h i b i t 4 . 1

PHASE 1: PHASE 2: PHASE 3: PHASE 4: PHASE 5:PHASE 0: CONCEPT SYSTEM-LEVEL DETAIL TESTING AND PRODUCTION

PLANNING DEVELOPMENT DESIGN DESIGN REFINEMENT RAMP-UP

MARKETING

• Articulate marketopportunity.

• Define marketsegments.

DESIGN

• Consider productplatform andarchitecture.

• Assess newtechnologies.

MANUFACTURING

• Identify productionconstraints.

• Set supply chainstrategy.

OTHER FUNCTIONS

• Research:Demonstrateavailabletechnologies.

• Finance: Provideplanning goals.

• GeneralManagement:Allocate projectresources.

• Collect customerneeds.

• Identify leadusers.

• Identifycompetitiveproducts.

• Investigatefeasibility ofproduct concepts.

• Develop industrialdesign concepts.

• Build and testexperimentalprototypes.

• Estimatemanufacturingcost.

• Assess productionfeasibility.

• Finance: Facilitateeconomicanalysis.

• Legal: Investigatepatent issues.

• Develop plan forproduct optionsand extendedproduct family.

• Set target salesprice point(s).

• Generatealternativeproductarchitectures.

• Define majorsubsystems andinterfaces.

• Refine industrialdesign.

• Identify suppliersfor keycomponents.

• Perform make-buyanalysis.

• Define finalassembly scheme.

• Set target costs.

• Finance: Facilitatemake-buyanalysis.

• Service: Identifyservice issues.

• Developmarketing plan.

• Define partgeometry.

• Choose materials.• Assign tolerances.• Complete

industrial designcontroldocumentation.

• Define piece-partproductionprocesses.

• Design tooling.• Define quality

assuranceprocesses.

• Beginprocurement oflong-lead tooling.

• Developpromotion andlaunch materials.

• Facilitate fieldtesting.

• Reliability testing.• Life testing.• Performance

testing.• Obtain regulatory

approvals.• Implement design

changes.

• Facilitate supplierramp-up.

• Refine fabricationand assemblyprocesses.

• Train work force.• Refine quality

assuranceprocesses.

• Sales: Developsales plan.

• Place earlyproduction withkey customers.

• Evaluate earlyproductionoutput.

• Begin operationof entireproductionsystem.

The Generic Product Development Process.Six phases are shown, including the tasks and responsibilities of the key functions of theorganization for each phase.

• ••••

•

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The six phases of the generic development process are

Phase 0: Planning. The planning activity is often referred to as “phase zero” since it pre-cedes the project approval and launch of the actual product development process. This phasebegins with corporate strategy and includes assessment of technology developments andmarket objectives. The output of the planning phase is the project mission statement, whichspecifies the target market for the product, business goals, key assumptions, and constraints.

Phase 1: Concept development. In this phase the needs of the target market are identi-fied, alternative product concepts are generated and evaluated, and one or more conceptsare selected for further development and testing. A concept is a description of the form,function, and features of a product and is usually accompanied by a set of specifications,an analysis of competitive products, and an economic justification of the project.

Phase 2: System-level design. The system-level design phase includes the definition of theproduct architecture and the decomposition of the product into subsystems and components.The final assembly scheme (which we discuss later in the chapter) for the production systemis usually defined during this phase as well. The output of this phase usually includes a geo-metric layout of the product, a functional specification of each of the product’s subsystems,and a preliminary process flow diagram for the final assembly process.

Phase 3: Design detail. This phase includes the complete specification of the geometry,materials, and tolerances of all the unique parts in the product and the identification of allthe standard parts to be purchased from suppliers. A process plan is established and tool-ing is designed for each part to be fabricated within the production system. The output ofthis phase is the drawings or computer files describing the geometry of each part and itsproduction tooling, the specifications of purchased parts, and the process plans for thefabrication and assembly of the product.

Phase 4: Testing and refinement. The testing and refinement phase involves the con-struction and evaluation of multiple preproduction versions of the product. Early proto-types are usually built with parts with the same geometry and material properties as theproduction version of the product but not necessarily fabricated with the actual processesto be used in production. Prototypes are tested to determine whether the product will workas designed and whether the product satisfies customer needs.

Phase 5: Production ramp-up: In the production ramp-up phase, the product is madeusing the intended production system. The purpose of the ramp-up is to train the workforceand to work out any remaining problems in the production processes. Products producedduring production ramp-up are sometimes supplied to preferred customers and are care-fully evaluated to identify any remaining flaws. The transition from production ramp-up toongoing production is usually gradual. At some point in the transition, the product islaunched and becomes available for widespread distribution.

The development process described in Exhibit 4.1 is generic, and particular processes will dif-fer in accordance with a firm’s unique context. The generic process is most like the processused in a market-pull situation. This is when a firm begins product development with a marketopportunity and then uses whatever available technologies are required to satisfy the marketneed (i.e., the market “pulls” the development decisions). In addition to the generic market-pull processes, several variants are common and correspond to the following: technology-pushproducts, platform products, process-intensive products, customized products, high-risk prod-ucts, quick-build products, and complex systems. Each of these situations is described below.The characteristics of these situations and the resulting deviations from the generic process aresummarized in Exhibit 4.2.

Te c h n o l o g y - P u s h P r o d u c t s In developing technology-push products, a firmbegins with a new proprietary technology and looks for an appropriate market in which toapply this technology (that is, the technology “pushes” development). Gore-Tex, an expandedTeflon sheet manufactured by W. L. Gore Associates, is a good example of technology push.The company has developed dozens of products incorporating Gore-Tex, including artificial


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veins for vascular surgery, insulation for high-performance electric cables, fabric for outerwear,dental floss, and liners for bagpipe bags.

P l a t f o r m P r o d u c t s A platform prod-uct is built around a preexisting technologicalsubsystem (a technology platform). Examplesinclude the tape transport mechanism in theSony Walkman, the Apple Macintosh operatingsystem, and the instant film used in Polaroidcameras. Huge investments were made in devel-oping these platforms, and therefore everyattempt is made to incorporate them into several different products. In some sense, platformproducts are very similar to technology-push products in that the team begins the developmenteffort with an assumption that the product concept will embody a particular technology. The pri-mary difference is that a technology platform has already demonstrated its usefulness in the mar-ketplace in meeting customer needs. The firm, in many cases, can assume that the technology


e x h i b i t 4 . 2Summary of Variants of Generic Product Development Process

PROCESS TYPE

Generic (market-pullproducts)

Technology-push products

Platform products

Process-intensive products

Customized products

High-risk products

Quick-build products

Complex systems

DESCRIPTION

The team begins with a marketopportunity and selectsappropriate technologies to meet customer needs

The team begins with a newtechnology, then finds anappropriate market

The team assumes that the newproduct will be built around anestablished technologicalsubsystem

Characteristics of the product arehighly constrained by theproduction process

New products are slight variationsof existing configurations

Technical or market uncertaintiescreate high risks of failure

Rapid modeling and prototypingenables many design–build–testcycles

System must be decomposedinto several subsystems andmany components

EXAMPLES

Sporting goods, furniture, tools

Gore-Tex rainwear, Tyvekenvelopes

Consumer electronics,computers, printers

Snack foods, breakfast cereals,chemicals, semiconductors

Motors, switches, batteries,containers

Pharmaceuticals, space systems

Software, cellular, phones

Airplanes, jet engines,automobiles

DISTINCT FEATURES

Process generally includes distinctplanning, concept development,system-level design, detail design,testing and refinement, andproduction ramp-up phases

Planning phase involves matchingtechnology and market; conceptdevelopment assumes a giventechnology

Concept development assumes aproven technology platform

Either an existing productionprocess must be specified fromthe start or both product andprocess must be developedtogether from the start

Similarity of projects allows fora streamlined and highlystructured development process

Risks are identified early andtracked throughout the processAnalysis and testing activities takeplace as early as possible

Detail design and testing phasesare repeated a number of timesuntil the product is completed ortime/budget runs out

Subsystems and components aredeveloped by many teams workingin parallel, followed by systemintegration and validation

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also will be useful in related markets. Products built on technology platforms are much sim-pler to develop than if the technology were developed from scratch. For this reason, andbecause of the possible sharing of costs across several products, a firm may be able to offer aplatform product in markets that could not justify the development of a unique technology.

P r o c e s s - i n t e n s i v e P r o d u c t s Examples of process-intensive products includesemiconductors, foods, chemicals, and paper. For these products, the production process hasan impact on properties of the product so that product design cannot be separated from theproduction process design. In many cases, process-intensive products are produced at veryhigh volumes and are bulk, rather than discrete, goods. Often, the new product and newprocess are developed simultaneously. For example, creating a new shape of breakfast cerealor snack food requires both product and process development activities. In other cases, theexisting process will constrain the product design by the capabilities of the process. Thismight be true of a new paper product to be made in a particular paper mill or a new semi-conductor device to be made in an existing wafer fabrication facility, for example.

C u s t o m i z e d P r o d u c t s Customized products are slight variations of standard con-figurations and are typically developed in response to a specific order by a customer. Examplesinclude switches, motors, batteries, and containers. Developing these products consist primar-ily of setting values of design variables such as physical dimensions and materials. Companiescan become very good at quickly producing these custom products using a highly structureddesign and development process structured around the capabilities of the process to be used.

H i g h - R i s k P r o d u c t s High-risk products are those that entail unusually large uncer-tainties related to the technology or market so that there is substantial technical or market risk.The generic product development process is modified to face high-risk situations by taking stepsto address the largest risks in the early stages of product development. This usually requires com-pleting some design and test activities earlier in the process. For example, if there is high uncer-tainty related to the technical performance of the product, it makes sense to build working modelsof the key features and to test these earlier in the process. Multiple solution paths may be exploredin parallel to ensure that one of the solutions succeeds. Design reviews must assess levels of riskon a regular basis, with the expectation that risk is being reduced over time and not postponed.

Q u i c k - B u i l d P r o d u c t s For the development of some products, such as software andmany electronic products, building and testing prototype models has become such a rapid processthat the design–build–test cycle can be repeated many times. Following concept development inthis process, the system-level design phase entails decomposition of the product into high-,medium-, and low-priority features. This is followed by several cycles of design, build, integrate,and test activities, beginning with the highest-priority items. This process takes advantage of thefast prototyping cycle by using the result of each cycle to learn how to modify the priorities forthe next cycle. Customers may even be involved in the testing process. When time or budget runsout, usually all of the high- and medium-priority features have been incorporated into the evolv-ing product, and the low-priority features may be omitted until the next product generation.

C o m p l e x S y s t e m s Larger-scale products such as automobiles and airplanes arecomplex systems comprised of many interacting subsystems and components. When devel-oping complex systems, modifications to the generic product development process address anumber of system-level issues. The concept development phase considers the architecture ofthe entire system, and multiple architectures may be considered as competing concepts for theoverall system. The system-level design becomes critical. During this phase, the system isdecomposed into subsystems and these further into many components. Teams are assigned todevelop each component. Additional teams are assigned the special challenge of integratingcomponents into the subsystems and these into the overall system. Detail design of the com-ponents is a highly parallel process, often referred to as concurrent engineering, with manyseparate development teams working at once. System engineering specialists manage theinteractions across the components and subsystems. The testing and refinement phaseincludes not only system integration but extensive testing and validation of the product.


Concurrent engineering

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A product development team at Polaroid Corporation was in the midst of devel-oping a new photograph printer, the CI-700. The CI-700 would produce instant full-colorphotographs from digital images stored in a computer. The primary markets for the productare the graphic arts, insurance, and real estate industries. During the CI-700’s development,the Polaroid team was faced with several decisions that it knew could have a significantimpact on the product’s profitability:

• Should the team take more time for development in order to make the product avail-able on multiple computer “platforms” or would a delay in bringing the CI-700 to mar-ket be too costly?

• Should the product use print media (instant film) from Polaroid’s consumer camerabusiness or new and specialized premium-quality print media?

• Should the team increase development spending in order to increase the reliability ofthe CI-700?

It is important to remember that economic analysis can only capture those factors that are mea-surable and that projects often have both positive and negative implications that are difficult toquantify. Also, it is difficult for an economic analysis to capture the characteristics of a dynamicand competitive environment. Economic analysis is useful in at least two different circumstances:

1. Go/no-go milestones. For example, should we try to develop a product to address anew market opportunity? Should we proceed with the implementation of a selectedconcept? Should we launch the product we have developed? These decisions typicallyarise at the end of each phase of development.

2. Operational design and development decisions. Operational decisions involve questionssuch as: Should we spend $100,000 to hire an outside firm to develop this componentin order to save two months of development time? Should we launch the product in fourmonths at a unit cost of $450 or wait six months when we can reduce the cost to $400?

We recommend that a base-case financial model be initially built to understand the financialimplications of a product development project. In the following, we describe how to constructthis model.

B U I L D A B A S E - C A S E F I N A N C I A L M O D E LConstructing the base-case model consists of estimating the timing and magnitude of futurecash flows and then computing the net present value (NPV) of those cash flows. The timingand magnitude of the cash flows are estimated by merging the project schedule with the pro-ject budget, sales volume forecasts, and estimated production costs. The level of detail of cashflows should be coarse enough to be convenient to work with, yet contain enough detail tofacilitate effective decision making. The most basic categories of cash flow for a typical newproduct development project are

• Development cost (all remaining design, testing, and refinement costs up to productionramp-up).

• Ramp-up cost.• Marketing and support cost.• Production cost.• Sales revenue.

The financial model we use is simplified to include only the major cash flows that are typicallyused in practice, but conceptually it is identical to more complex models. The numerical valuesof the cash flows come from budgets and other estimates obtained from the development team,

E C O N O M I C A N A L Y S I S O F P R O D U C TD E V E L O P M E N T P R O J E C T S 3

CrossFunctional

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the manufacturing organization, and the marketing organization. We will illustrate the approachby using data similar to what might have been used by the Polaroid team developing the CI-700.

The following are cost estimates that we will use for our sample model:

Development cost $5 million

Ramp-up cost $2 million

Marketing and support cost $1 million/year

Unit production cost $400/unit

Sales and production volume 20,000 units/year

Unit price $800/unit

For our model, we assume that all revenue and expenses that have occurred prior to today aresunk costs and are irrelevant to NPV calculations. For those of you not familiar with NPV cal-culations, see Supplement A at the end of the book.

To complete the model, the financial estimates must be merged with timing information.This can be done by considering the project schedule and sales plan. Exhibit 4.3 shows theproject timing information in Gantt chart form for the CI-700. For most projects, a time incre-ment of months or quarters is most appropriate. The remaining time to market is estimated tobe five quarters, and the product sales are anticipated to last 11 quarters.

A simple method of organizing project cash flow is with a spreadsheet. The rows of thespreadsheet are the different cash flow categories, while the columns represent successivetime periods. To keep things simple, we assume that the rate of cash flow for any category isconstant across any time period. For example, total development spending of $5 million overone year is allocated equally to each of the four quarters. In practice, of course, the values canbe arranged in any way that best represents the team’s forecast of the cash flows. We multi-ply the unit sales quantity by the unit price to find the total product revenues in each period.We also multiply the unit production quantity by the unit production cost to find the total pro-duction cost in each period. Exhibit 4.4 illustrates the resulting spreadsheet.

Computing the NPV requires that the net cash flow for each period be determined, and thenthat this cash flow be converted to its present value (its value in today’s dollars), as shown in thelast few rows of Exhibit 4.5. Consider, for example, the calculations for year 3, first quarter:

1. The period cash flow is the sum of inflows and outflows.

Marketing cost $ �250,000

Product revenues 4,000,000

Production cost �2,000,000

Period cash flow $1,750,000

2. The present value of this period cash flow discounted at 10 percent per year (2.5 per-cent per quarter) back to the first quarter of year 1 (a total of nine quarters) is$1,401,275. (The concepts and spreadsheet functions for calculating present value, netpresent value, and discount rate are reviewed in Supplement A.)

$1,750,000

1.0259= $1,401,275

3. The project NPV is the sum of the discounted cash flows for each of the periods, or$8,002,819. (Note that in the spreadsheet we have rounded the numbers to the nearest$1,000.)


e x h i b i t 4 . 3 CI-700 Project Schedule from Inception through Market Withdrawal

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The NPV of this project, according to the base-case model, is positive, so the model supportsand is consistent with the decision to proceed with development. Such modeling also can beused to support major investment decisions. Say, for example, that Polaroid were decidingbetween two different production facilities with different ramp-up, production, and supportcosts. The team could develop a model for each of the two scenarios and then compare theNPVs. The scenario with the higher NPV would better support the investment decision. Wenow consider sensitivity analysis as a technique for studying multiple scenarios for ongoingproduct development decisions.

S E N S I T I V I T Y A N A L Y S I S T O U N D E R S T A N DP R O J E C T T R A D E - O F F SSensitivity analysis uses the financial model to answer “what if” questions by calculating thechange in NPV corresponding to a change in the factors included in the model. As an exam-ple, consider the sensitivity of NPV to changes in development cost. By making incrementalchanges to develop cost while holding other factors constant, we can see the incrementalimpact on project NPV. For example, what will be the change in NPV if the development costis decreased by 20 percent? A 20 percent decrease would lower the total development spend-ing form $5 million to $4 million. If development time remains one year, then the spendingper quarter would decrease from $1.25 million to $1 million. This change is simply enteredin the model and the resulting NPV calculated.


e x h i b i t 4 . 4Merging the Project Financials and Schedule into a Cash Flow Report

e x h i b i t 4 . 5CI-700 Development Cost Sensitivity

CHANGE IN DEVELOPMENT CHANGE IN CHANGE IN

DEVELOPMENT COST ($ DEVELOPMENT CHANG IN NPV ($ NPV ($ COST (%) THOUSANDS) COST ($ THOUSANDS) NPV (%) THOUSANDS) THOUSANDS)

50 7,500 2,500 −29.4 5,791 −2,41220 6,000 1,000 −11.8 7,238 −96410 5,500 500 −5.9 7,721 −482

Base case 5,000 Base case 0.0 8,203 0−10 4,500 −500 5.9 8,685 482−20 4,000 −1,000 11.8 9,167 964−30 2,500 −2,500 29.4 10,615 2,412

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A 20 percent decrease in development cost will increase NPV to $9,167,000. This repre-sents a dollar increase of $964,000 and a percentage increase of 11.8 in NPV. This is anextremely simple case: we assume we can achieve the same project goals by spending $1 mil-lion less on development and we therefore have increased the project value by the presentvalue of $1 million in savings accrued over a one-year period of time. The CI-700 develop-ment cost sensitivity analysis for a range of changes is shown in Exhibit 4.5.

Many other scenarios can be developed for the project including the following:

1. Project development time. Consider the impact of a 25 percent increase in the pro-ject development time. This would raise the development time from four to five quar-ters and delay the start of the production ramp-up, marketing efforts, and productsales.

2. Sales volume. Increasing sales is a powerful way to increase profit. Of course, adecrease in sales can result in significant loss. Consider, for example, the impact of a25 percent increase and a 25 percent decrease on the profitability of the new product.

3. Product cost or sales price. Consider that a $1 increase in price or a $1 decrease in costresults in a $1 increase in profit. Of course, the $1 increase in price may have a significantimpact on demand. Scenarios relating to these parameters are often useful to study.

4. Development cost. A dollar spent or saved on development cost is worth the pre-sent value of that dollar to the value of the project.

Financial modeling and sensitivity analysis are powerful tools for supporting product devel-opment decisions, but these techniques have important limitations. Many argue that rigorousfinancial analyses are required to bring discipline and control to the product developmentprocess. Others argue that financial analysis only focuses on measurable quantities and that itis often extremely difficult to predict these values accurately. The analysis is only as good asthe assumptions built into the model, so these limitations must be considered. Possibly moresignificant are those that argue that activities associated with economic modeling can be veryexpensive and may significantly reduce the productivity associated with the real productdevelopment activities. Their point is that potentially productive development time is devot-ed to preparation of analyses and meetings and the cumulative effect of this planning andreview time can significantly increase development costs.

Development teams must understand the strengths and limitations of the techniques andrefrain from developing a stifling bureaucracy around the development of new products. Newproduct development should be a process that nurtures innovation and creativity. The purposeof economic modeling is simply to ensure that the team is making decisions that are eco-nomically sound.


Before we detail the hows and whys of designing and producing products, itis useful to reflect (or, perhaps more accurately, to editorialize) on the issue of productdesign from the user’s standpoint. In recent years, companies have been so caught up withtechnological efforts and advances—especially in the field of electronics—that somewherealong the line, consumers were forgotten. Designing for aesthetics and for the user is gener-ally termed industrial design. IDEO is one of the most successful industrial design firms inthe world. The unique process used at the company is described in the Opening vignette titled“IDEO Product Development—Can You Learn Creativity?”

Industrial design is probably the area most abused by manufacturers. When frustratedwith products—setting the VCR, working on the car, adjusting a computerized furnace ther-mostat, or operating a credit card telephone at the airport—most of us have said to ourselves,“The blankety-blank person who designed this should be made to use it!” Often parts areinaccessible, operation is too complicated, or there is no logic to setting or controlling theunit. Sometimes even worse conditions exist: metal edges are sharp and consumers cut their

D E S I G N I N G F O R T H E C U S T O M E R

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hands trying to reach for adjustment or repairs. Many products have too many technologi-cal features—far more than necessary. Most purchasers of electronic products cannot fullyoperate them and use only a small number of the available features. This has occurredbecause computer chips are inexpensive and adding more controls has negligible cost.Including an alarm clock or a calculator on a microwave oven costs little. But do you needit? What happens when you lose the operator’s manual to any of these complex devices?Why is it that the “Help” icon on your computer provides so little help? Where is the voiceof the customer?

Q U A L I T Y F U N C T I O N D E P L O Y M E N TOne approach to getting the voice of the customer into the design specification of a productis quality function deployment (QFD).4 This approach, which uses interfunctional teamsfrom marketing, design engineering, and manufacturing, has been credited by Toyota MotorCorporation for reducing costs on its cars by more than 60 percent by significantly shorteningdesign times.

The QFD process begins with studying and listening to customers to determine the char-acteristics of a superior product. Through market research, the consumers’ product needs andpreferences are defined and broken down into categories called customer requirements. Oneexample is an auto manufacturer that would like to improve the design of a car door. Throughcustomer surveys and interviews, it determines that two important customer requirements ina car door are that it “stays open on a hill” and is “easy to close from the outside.” After thecustomer requirements are defined, they are weighted based on their relative importance tothe customer. Next the consumer is asked to compare and rate the company’s products withthe products of competitors. This process helps the company determine the product charac-teristics that are important to the consumer and to evaluate its product in relation to others.The end result is a better understanding and focus on product characteristics that requireimprovement.

Customer requirement information forms the basis for a matrix called the house of quality(see Exhibit 4.6). By building a house of quality matrix, the cross-functional QFD team canuse customer feedback to make engineering, marketing, and design decisions. The matrixhelps the team to translate customer requirements into concrete operating or engineeringgoals. The important product characteristics and goals for improvement are jointly agreed onand detailed in the house. This process encourages the different departments to work closelytogether, and it results in a better understanding of one another’s goals and issues. However,the most important benefit of the house of quality is that it helps the team to focus on buildinga product that satisfies customers.

The first step in building the house of quality is to develop a list of customer requirementsfor the product. These requirements should be ranked in order of importance. Customers arethen asked to compare the company’s product to the competition. Next a set of technical char-acteristics of the product is developed. These technical characteristics should relate directly tocustomer requirements. An evaluation of these characteristics should support or refute cus-tomer perception of the product. These data are then used to evaluate the strengths and weak-nesses of the product in terms of technical characteristics.

V A L U E A N A L Y S I S / V A L U E E N G I N E E R I N GAnother way to consider the customer in designing products is by analyzing the “value” theysee in the end product. Because it is so important that value be designed into products, webriefly describe value analysis and value engineering. The purpose of value analysis/valueengineering (VA/VE) is to simplify products and processes. Its objective is to achieve equiv-alent or better performance at a lower cost while maintaining all functional requirementsdefined by the customer. VA/VE does this by identifying and eliminating unnecessary cost.Technically, VA deals with products already in production and is used to analyze productspecifications and requirements as shown in production documents and purchase requests.Typically, purchasing departments use VA as a cost reduction technique. Performed before the


Quality functiondeployment (QFD)

House of quality

Value analysis/valueengineering (VA/VE)

Vol. VII “Manufacturing Quality

Featuring Honda”

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production stage, value engineering is considered a cost-avoidance method. In practice, how-ever, there is a looping back and forth between the two for a given product. This occursbecause new materials, processes, and so forth require the application of VA techniquesto products that have previously undergone VE. The VA/VE analysis approach involvesbrainstorming such questions as

Does the item have any design features that are not necessary?

Can two or more parts be combined into one?

How can we cut down the weight?

Are there nonstandard parts that can be eliminated?

In the following section we describe a more formal approach that is often used to guidethe process of designing and improving the design of products.


e x h i b i t 4 . 6 Completed House of Quality Matrix for a Car Door

Correlation:

Strong positivePositive Negative Strong negative

Customer requirements

Importance to customer

Technical characteristics

Ene

rgy

need

ed to

open

doo

r

Doo

r se

al

resi

stan

ce

Che

ck f

orce

on

leve

l gr

ound

Ene

rgy

need

ed to

cl

ose

door

Aco

ustic

tr

ansm

issi

on, w

indo

w

Wat

er r

esis

tanc

e

Competitive evaluation

1 2 3 4 5

Importance weighting

Target values

7

5

3

3

2

6 6 9 2 3

AB

AB

A B

AB

A B

Importance scale:� 9 � 3 � 1

Red

uce

ener

gy

leve

l to

7.5

ft/l

b

Mai

ntai

n cu

rren

t le

vel

Red

uce

forc

e to

9

lb.

Red

uce

ener

gy to

7.

5 ft

/lb

Mai

ntai

ncu

rren

t lev

el

Mai

ntai

ncu

rren

t lev

el

5 4 3 2 1

BA

BAB A B A

BAB

A

XX

X

X � UsA � Comp. AB � Comp. B(5 is best)

Easy to close

Stays open on a hill

Easy to open

Doesn't leak in rain

No road noise

10

Technical evaluation(5 is best)

X

X

X

X

X

X

X

X

Strong Medium Small

SOURCE: BASED ON J. R. HAUSER AND D. CLAUSING. “THE HOUSE OF QUALITY,” HARVARD BUSINESS REVIEW, MAY–JUNE 1988, PP. 62–73.

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Vol. VIII “Robotics and Technology

Featuring Genesis Systems Group”

RAPID PROTOTYPING COMBINED WITH

DFMA TOOLS NOT ONLY CAN DETERMINE

IF A PRODUCT WILL PERFORM ITS DESIGNED

FUNCTIONS, BUT HOW WELL AND FOR HOW

LONG. USED EARLY IN THE DESIGN CYCLE, IT LEADS TO MORE ROBUST DESIGNS FOR

MANUFACTURE, ASSEMBLY, AND PRODUCT

USE, AND ALLOWS CRITICAL CHANGES TO

BE MADE BEFORE EXPENSIVE TOOLING IS

APPLIED. A PRODUCT’S ESTHETICS AND

FUNCTIONALITY ARE CONSIDERED JOINTLY

AND RESULT IN PRODUCTS CONSTRUCTED

WITH OPTIMAL FUNCTIONALITY, CORRECT

MATERIALS, AND EFFICIENT ASSEMBLY.

The word design has many different meanings. To some it means the aestheticdesign of a product, such as the external shape of a car or the color, texture, and shape of thecasing of a can opener. In another sense, design can mean establishing the basic parametersof a system. For example, before considering any details, the design of a power plant mightmean establishing the characteristics of the various units such as generators, pumps, boilers,connecting pipes, and so forth.

Yet another interpretation of the word design is the detailing of the materials, shapes, andtolerance of the individual parts of a product. This is the concern of this section. It is an activ-ity that starts with sketches of parts and assemblies and then progresses to the computer-aideddesign (CAD) workstation (described in the supplement on Operations Technology at the endof the book), where assembly drawings and detailed part drawings are produced.Traditionally, these drawings are then passed to the manufacturing and assembly engineers,whose job it is to optimize the processes used to produce the final product. Frequently, at thisstage manufacturing and assembly problems are encountered and requests are made fordesign changes. Often these design changes are major and result in considerable additionalexpense and delays in the final product release.

Traditionally, the attitude of designers has been “We design it; you build it;” This has nowbeen termed the “over-the-wall approach,” where the designer is sitting on one side of thewall and throwing the design over the wall to the manufacturing engineers. These manufac-turing engineers then have to deal with the problems that arise because they were notinvolved in the design effort. One way to overcome this problem is to consult the manufac-turing engineers during the design stage. The resulting teamwork avoids many of the prob-lems that will arise. These concurrent engineering teams require analysis tools to help themstudy proposed designs and evaluate them from the point of view of manufacturing difficultyand cost.

H O W D O E S D E S I G N F O R M A N U F A C T U R I N GA N D A S S E M B L Y ( D F M A ) W O R K ?Let’s follow an example from the conceptual design stage.5 Exhibit 4.7 represents a motordrive assembly that is required to sense and control its position on two steel guide rails. Thismight be the motor that controls a power window in a drive-through window at McDonald’s,for example. The motor must be fully enclosed and have a removable cover for access toadjust the position sensor. A major requirement is a rigid base designed to slide up and down

D E S I G N I N G P R O D U C T S F O RM A N U F A C T U R E A N D A S S E M B L Y

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the guide rails, which will both support the motor and locate the sensor. The motor and sen-sor have wires connecting to a power supply and control unit.

A proposed solution is shown in Exhibit 4.8. The base has two bushing inserts so that theholes will not wear out. The motor is secured to the base with two screws and a hole acceptsthe cylindrical sensor, which is held in place with a set screw. To provide the required covers,an end plate is screwed to two stand-offs, which are screwed into the base. To keep the wiresfrom shorting out on the metal cover, should they become worn, a plastic bushing is fitted to


e x h i b i t 4 . 7 Configuration of Required Motor Drive Assembly

3.25"Attached to screw drive

Guide rails

Connecting wires

Motor-drivenassembly insidecover

Controlled gap

e x h i b i t 4 . 8 Proposed Motor Drive Design

Cover 16 gaugesteel, paintedsoldered seams4.5 � 2.75 � 24

Cover screw (4)0.12 dia � 0.3

Bush (2)brass, impregnatedpowder metal0.5 dia � 0.8

Motor2.75 dia � 4.75

Plastic bushing0.7 dia 0.4

End platel.c. steel, painted4.5 � 2.5 � 1.3

Motor screw (2)0.2 dia � 0.6

Set screw0.06 � 0.12

Basealuminum, machined4 � 21.2 � 1

Sensor0.187 � 1 Stand-off

l.c. steel, machined0.5 dia � 2

End plate screw (2)0.2 dia � 0.5

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the end plate, through which the wires pass. Finally, a box-shaped cover slides over the wholeassembly from below the base and is held in place by four screws, two passing into the baseand two passing into the end cover.

The current design has 19 parts that must be assembled to make the motor drive. Theseparts consist of the two subassemblies—the motor and the sensor—an additional eight mainparts (cover, base, two bushings, two stand-offs, a plastic bushing, and the end plate), andnine screws.

The greatest improvements related to DFMA arise from simplification of the product byreducing the number of separate parts. In order to guide the designer in reducing the partcount, the methodology provides three criteria against which each part must be examined asit is added to the product during assembly:

1. During the operation of the product, does the part move relative to all other partsalready assembled?

2. Must the part be of a different material than or be isolated from other parts alreadyassembled?

3. Must the part be separate from all other parts to allow the disassembly of the productfor adjustment or maintenance?

Application of these criteria to the proposed design would proceed as follows:

1. Base. Because this is the first part to be assembled, there are no other parts withwhich to combine, so it is theoretically a necessary part.

2. Bushings (2). These do not satisfy the second criterion. Theoretically, the base andbushings could be of the same material.

3. Motor. The motor is a subassembly purchased from a supplier. The criteria donot apply.

4. Motor screws (2). In most cases, separate fasteners are not needed, because a fas-tening arrangement integral to the design (for example, snapping the part into place)is usually possible.

5. Sensor. This is another standard subassembly.6. Set screw. Similar to 4, this should not be necessary.7. Standoffs (2). These do not meet the second criterion; they could be incorporated

into the base.8. End plate. This must be separate to allow disassembly (apply criterion three).9. End plate screws (2). These should not be necessary.10. Plastic bushing. Could be of the same material as, and therefore combined with,

the end plate.11. Cover. Could be combined with the end plate.12. Cover screws (4). Not necessary.

From this analysis, it can be seen that if the motor and sensor subassemblies could bearranged to snap or screw into the base, and if a plastic cover could be designed to snap on,only 4 separate items would be needed instead of 19. These four items represent the theoret-ical minimum number needed to satisfy the constraints of the product design.

At this point, it is up to the design team to justify why the parts above the minimum shouldbe included. Justification may be due to practical, technical, or economic considerations. Inthis example, it could be argued that two screws are needed to secure the motor and that oneset screw is needed to hold the sensor, because any alternatives would be impractical for alow-volume product such as this. However, the design of these screws could be improved byproviding them with pilot points to facilitate assembly.

Exhibit 4.9 is a drawing of a redesigned motor drive assembly that uses only seven sepa-rate parts. Notice how the parts have been eliminated. The new plastic cover is designed tosnap onto the base plate. This new product is much simpler to assemble and should be muchless expensive due to the reduced number of parts.


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There is strong evidence that generating a steady stream of new products to mar-ket is extremely important to competitiveness. To succeed, firms must respond to changingcustomer needs and the moves of their competitors. The ability to identify opportunities,mount the development effort, and bring to market new products and processes quickly is crit-ical. Firms also must bring new products and processes to market efficiently. Because the num-ber of new products and new process technologies has increased while model lives and lifecycles have shrunk, firms must mount more development projects than previously, and theseprojects must use substantially fewer resources per project.

In the U.S. automobile market, for example, the growth of models and market segmentsover the last 25 years has meant that an auto firm must initiate close to four times as manydevelopment projects simply to maintain its market share position. But smaller volumes

M E A S U R I N G P R O D U C T D E V E L O P M E N TP E R F O R M A N C E

e x h i b i t 4 . 1 0 Performance Measures for Development Projects

REPRINTED WITH THE PERMISSION OF THE FREE PRESS, A DIVISION OF SIMON & SCHUSTER ADULT PUBLISHING GROUP FROM S. C. WHEELWRIGHT AND K. B.CLARK, REVOLUTIONIZING PRODUCT DEVELOPMENT QUANTUM LEAPS IN SPEED, EFFICIENCY, AND QUALITY, PP. 6–8. COPYRIGHT © 1992 BY STEVEN C.WHEELWRIGHT AND KIM B. CLARK. ALL RIGHTS RESERVED.

PERFORMANCE IMPACT ON

DIMENSION MEASURES COMPETITIVENESS

Time to market Frequency of new product introductions Responsiveness to customers/competitors

Time from initial concept to market introduction Quality of design—close to market

Number started and number completed Frequency of projects—model life

Actual versus plan

Percentage of sales coming from new products

Productivity Engineering hours per project Number of projects—freshness and

Cost of materials and tooling per project breadth of line

Actual versus plan Frequency of projects—economics ofdevelopment

Quality Conformance—reliability in use Reputation—customer loyalty

Design—performance and customer satisfaction Relative attractiveness to customers—

Yield—factory and field market share

Profitability—cost of ongoing service

e x h i b i t 4 . 9 Redesign of Motor Drive Assembly Following Design for Assembly (DFA) Analysis

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Contract manufacturer An organization capable of manufacturingand/or purchasing all the components needed to produce a finishedproduct or device.

Core competence The one thing that a firm can do better than itscompetitors. The goal is to have a core competency that yields along-term competitive advantage to the company.

Concurrent engineering Emphasizes cross-functional integration andconcurrent development of a product and its associated processes.

Quality function deployment (QFD) A process that helps a compa-ny determine the product characteristics important to the consumerand to evaluate its own product in relation to others.

House of quality A matrix that helps a product design team translatecustomer requirements into operating and engineering goals.

Value analysis/value engineering (VA/VE) Analysis with the pur-pose of simplifying products and processes by achieving equivalentor better performance at a lower cost.

S O L V E D P R O B L E M S

SOLVED PROBLEM 1VidMark, a manufacturer of cells phones, is developing a new model (VidPhone X70) that will bereleased on the market when development is complete. This phone will be revolutionary in that itwill allow the user to place video phone calls. VidMark is concerned about the development cost andtime. They are also worried about market estimates of the sales of the new VidPhone X70. The costestimates and forecast are given the table below.

Development Cost $2,00,000

Development Time 2 years

Ramp-up Cost $750,000

Marketing and Support Cost $500,000/year

Unit Production Cost $75

Unit Price $135

Sales and Production VolumeYear 3 40,000Year 4 50,000Year 5 40,000

Use the data above to develop a base case analysis. The project schedule is shown below withtimings of the cash flows.

Product development is a major challenge that directly impacts the long-rangesuccess of a firm. Effectively managing the process requires an integrated effort involving allthe functional areas of the firm. In this chapter, a generic process for developing products hasbeen discussed. How this generic process is modified for various types of products is consid-ered. An economic plan that ties the timing of the various product development activities tothe project budget is essential for making good decisions as the process progresses. In thechapter, we also gave some insight into how the customer view may be incorporated into theproduct design process. Designing a product that can be produced efficiently is an interestingengineering exercise that we briefly introduce in the chapter. Finally, we consider variousmeasures that are useful for monitoring a firm’s product design activities.

K E Y T E R M S

C O N C L U S I O N

per model and shorter design lives mean resource requirements must drop dramatically.Remaining competitive requires efficient engineering, design, and development activities.

Measures of product development success can be categorized into those that relate to thespeed and frequency of bringing new products online, to the productivity of the actual devel-opment process, and to the quality of the actual products introduced (see Exhibit 4.10). Takentogether, time, quality, and productivity define the performance of development, and in com-bination with other activities—sales, manufacturing, advertising, and customer service—determine the market impact of the project and its profitability.

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There are several questions that need to be answered for VidMark on this project

a. What are the yearly cash flows and their present value (discounted at 12%) of this project? Whatis the net present value?

b. What is the impact on VidMark if their sales estimates are off by 20%?c. What is the impact on VidMark if their unit production cost is $85?d. VidMark thinks that they can cut the development time in half by spending an extra $1,500,000

on development for this project. If the product is launched a year earlier then the product will stillhave a 3 year life but the forecast starting in year 2 will be 48,000, 60,0000, and 50,000. Is itworth it to VidMark to spend the extra money on development?

Solutiona. Start by building the base case scenario (analysis is in 000).

PROJECT SCHEDULE 1 2 3 4 5VIDPHONE X 70 YEAR YEAR YEAR YEAR YEAR

Development −$1,000 −$1,000

Ramp-up −$750

Marketing and Support −$500 −$500 −$500 -$500

Production Volume 40 50 40

Unit Production Cost (dollars) −$75 −$75 −$75

Production Costs −$3,000 −$3,750 −$3,000

Sales Volume 40 50 40

Unit Price (dollars) $135 $135 $135

Sales Revenue $5,400 $6,750 $5,400

Period Cash Flow −$1,000 −$2,250 $1,900 $2,500 $1,900

PV Year 1 r = 12% −$1,000 −$2,009 $1,515 $1,779 $1,207

Project NPV $1,493

The cash flows and present value of the cash flows are shown in the bolded rows above. The pro-ject NPV under the base case is $1.493 million dollars.

b. If sales are reduced by 20% then project NPV drops $378,000

PROJECT SCHEDULE 1 2 3 4 5VIDPHONE X70 YEAR YEAR YEAR YEAR YEAR

Period Cash Flow −$1,000 −$2,250 $1,420 $1,900 $1,420

PV Year 1 r = 12 −$1,000 −$2,009 $1,132 $1,352 $902

Project NPV $378

If sales are increased by 20% then project NPV goes up to $2.607 M. A change of 20% either wayhas a large impact on the NPV.


Period Cash Flow −$1,000 −$2,250 $2,380 $3,100 $2,380PV Year 1 r = 12 −$1,000 −$2,009 $1,897 $2,207 $1,513

Project NPV $2,607

Project Schedule 1 2 3 4 5

VidPhone X70 Year Year Year Year Year

Development

Ramp-up

Marketing and Support

Production and Sales


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c. Increased unit production costs.


Period Cash Flow −$1,000 −$2,250 $1,500 $2,000 $1,500

PV Year 1 r = 12 −$1,000 −$2,009 $1,196 $1,424 $953

Project NPV $564

The cash flows are severely affected by the increased unit production cost. Increased future cashoutflow of $1.3 M (130,000 units * $10 increase) cause a decrease in net present value of$929,000 ($1.493 M − $.564 M). However, it still appears to be worth developing the new phone.

d. Here are the changes proposed by VidMark

Development Cost $3,500,000Development Time 1 years

Ramp-up Cost $750,000Marketing and Support Cost $500,000/year

Unit Production Cost $75Unit Price $135Sales and Production Volume

Year 2 48,000Year 3 60,000Year 4 50,000

Use the data above to develop a base case analysis. The project schedule is shown below with tim-ings of cash flows.

It appears that VidMark is better off to take 2 years to develop their new VidPhone X70 because theNPV of the base case is $1.493 million dollars versus the fast development NPV of $733,000 (seetable below).

PROJECT SCHEDULE 1 2 3 4VIDPHONE X70 YEAR YEAR YEAR YEAR

Development −$3,500 −$1,000

Ramp-up −$750

Marketing and Support −$500 −$500 −$500 −$500

Production Volume 48 60 50

Unit Production Cost (dollars) −$75 −$75 −$75

Production Costs −$3,600 −$4,500 −$3,750

Sales Volume 48 60 50

Unit Price (dollars) $135 $135 $135

Sales Revenue $6,480 $8,100 $6,750

Period Cash Flow −$4,750 $1,380 $3,100 $2,500

PV Year 1 r = 12 −$4,750 $1,232 $2,471 $1,779

Project NPV $733

R E V I E W A N D D I S C U S S I O N Q U E S T I O N S1 Describe the generic product development process described in the chapter. How does the process

change for “technology-push” products?

Project Schedule 1 2 3 4

VidPhone X70 Year Year Year Year

Development

Ramp-up




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2 Discuss the product design philosophy behind industrial design and design for manufacture andassembly. Which one do you think is more important in a customer-focused product development?

3 Discuss design-based incrementalism, which is frequent product redesign throughout the prod-uct’s life. What are the pros and cons of this idea?

4 What factors must be traded off by product development before introducing a new product?5 How does the QFD approach help? What are some limitations of the QFD approach?

P R O B L E M S1 The Tuff Wheels was getting ready to start their development project for a new product to be

added to its small motorized vehicle line for children. The new product is called the Kiddy Dozer.It will look a miniature bulldozer, complete with caterpillar tracks and a blade. Tuff Wheels hasforecasted the demand and the cost to develop and produced the new Kiddy Dozer. The tablebelow contains the relevant information for this project.

Development Cost $1,000,000Estimated Development time 9 months

Pilot Testing $200,000

Ramp-up Cost $400,000Marketing and Support Cost $150,000 per year

Sales and Production Volume 60,000 per year

Unit Production Cost $100Unit Price $170Interest rate 8%

Tuff Wheels has also provided the project plan shown below. As can be seen in the project planthe company thinks that the product life will be three years until a new product must be created.

a. What are the yearly cash flows and their present value (discounted at 8%) of this project?What is the net present value?

b. What is the impact on NPV for the Kiddy Dozer if the actual sales are 50,000 per year or70,000 per year?

c. What is the effect caused by changing the discount rate to 9%, 10%, or 11%?2 Perot Corporation is developing a new CPU chip based on a new type of technology. Their new

chip the Patay2 chip will take 2 years to develop. However, because chip manufactures will beable to copy the technology it will have a market life of 2 years after it is introduced. Perotexpects to be able to price the chip higher in the first year and they anticipate a significant pro-duction cost reduction after the first year as well. The relevant information for developing andselling the Patay2 is given below.

PATAY2 CHIP PRODUCT ESTIMATES

Development Cost $20,000,000Pilot Testing $5,000,000Debug $3,000,000Ramp-up Cost $3,000,000Advance Marketing $5,000,000Marketing and Support Cost $1,000,000 per yearUnit Production Cost Year 1 $655.00Unit Production Cost Year 2 $545.00Unit Price Year 1 $820.00Unit Price Year 2 $650.00Sales and Production Volume Year 1 250,000Sales and Production Volume Year 2 150,000Interest rate 10%

Project Schedule Year 1 Year 2 Year 3 Year 4Kiddy Dozer q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4

DevelopmentPilot TestingRamp-upMarketing and SupportProduction and Sales


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a. What are the yearly cash flows and their present value (discounted at 10%) of this project?What is the net present value?

b. Perot’s engineers have determined that if they spend 10 million more on development it willallow them to add even more advanced features. Having a more advanced chip will allowthem to price the chip $50 higher in both years ($870 for year 1 and $700 for year 2.) Is itworth the additional investment?

c. If sales are only 200,000 the first year and 100,000 the second year would Perot still do theproject?

3 Pick a product and list issues that need to be considered in its design and manufacture. The prod-uct can be something like a stereo, telephone, desk, or kitchen appliance. Consider the functionaland aesthetic aspects of design as well as the important concerns for manufacturing.

4 The following is a partial house of quality for a golf country club. Provide an importance weight-ing from your perspective (or that of a golfing friend) in the unshaded areas. If you can, usingthe QFD approach, compare it to a club where you or your friends play.

Patay2 Chip Project Timing

Development

Patay2 Chip

Debug

Pilot Testing

Ramp-up


Advance Marketing


1st 2nd 1st 2nd 1st 2nd 1st 2ndhalf half half half half half half half

Project Schedule Year 1 Year 2 Year 3 Year 4


Physical Aspects

Manicured grounds

Easy access

Challenging

Service Facilities

Restaurant facilities

Good food

Good service

Good layout

Plush locker room

Helpful service attendants

Tournament Facilities

Good tournament prize

Types of players

Fair handicapping system

Perception Issues

Prestigious

Phys

ical

Asp

ects

C

ours

e lo

catio

n

G

roun

ds m

aint

enan

ce

L

ands

capi

ng

P

in p

lace

men

t

C

ours

e tu

ning

Tee

plac

emen

t

Serv

ice

Faci

litie

s

C

usto

mer

-tra

ined

atte

ndan

ts

Top-

qual

ity f

ood

H

ighl

y ra

ted

chef

s

Attr

activ

e re

stau

rant

Tour

nam

ent A

ctiv

ities

C

allo

way

han

dica

ppin

g

E

xciti

ng d

oor

priz

es

Perc

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n Is

sues

I

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only

Type

s of

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sts

Inc

ome

leve

l

Cel

ebri

ty

WHATs versus HOWsStrong Relationship:

Medium Relationship:Weak Relationship:

3. See ISM.

4. See ISM.

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C A S E : T H E B E S T - E N G I N E E R E D P A R T I S N O P A R T

Putting together NCR Corp.’s new 2760 electroniccash register is a snap. In fact, William R. Sprague can do it in lessthan two minutes—blindfolded. To get that kind of easy assembly,Sprague, a senior manufacturing engineer at NCR, insisted that thepoint-of-sale terminal be designed so that its parts fit together withno screws or bolts.

The entire terminal consists of just 15 vendor-produced compo-nents. That’s 85 percent fewer parts, from 65 percent fewer suppli-ers, than in the company’s previous low-end model, the 2160. Andthe terminal takes only 25 percent as much time to assemble.Installation and maintenance are also a breeze, says Sprague. “Thesimplicity flows through to all of the downstream activities, includ-ing field service.”

The new NCR product is one of the best examples to date of thepayoffs possible from a new engineering approach called designfor manufacturability, mercifully shortened to DFM. Other DFMenthusiasts include Ford, General Motors, IBM, Motorola, Perkin-Elmer, and Whirlpool. Since 1981, General Electric Co. has usedDFM in more than 100 development programs, from major appli-ances to gearboxes for jet engines. GE figures that the concept hasnetted $200 million in benefits, either from cost savings or fromincreased market shares.

NUTS TO SCREWS

One U.S. champion of DFM is Geoffrey Boothroyd, a professor ofindustrial and manufacturing engineering at the University ofRhode Island and the cofounder of Boothroyd Dewhurst Inc. Thistiny Wakefield, Rhode Island, company has developed several com-puter programs that analyze designs for ease of manufacturing.

The biggest gains, notes Boothroyd, come from eliminatingscrews and other fasteners. On a supplier’s invoice, screws andbolts may run mere pennies apiece, and collectively they accountfor only about 5 percent of a typical product’s bill of materials. Buttack on all of the associated costs, such as the time needed to aligncomponents while screws are inserted and tightened, and the priceof using those mundane parts can pile up to 75 percent of totalassembly costs. “Fasteners should be the first thing to design out ofa product,” he says.

Had screws been included in the design of NCR’s 2760, calcu-lates Sprague, the total cost over the lifetime of the model wouldhave been $12,500—per screw. “The huge impact of little things likescrews, primarily on overhead costs, just gets lost,” he says. That’sunderstandable, he admits, because for new-product development

projects “the overriding factor is hitting the market window. It’s bet-ter to be on time and over budget than on budget but late.”

But NCR got its simplified terminal to market in record timewithout overlooking the little details. The product was formallyintroduced last January, just 24 months after development began.Design was a paperless, interdepartmental effort from the very start.The product remained a computer model until all members of theteam—from design engineering, manufacturing, purchasing,customer service, and key suppliers—were satisfied.

That way, the printed circuit boards, the molds for its plastichousing, and other elements could all be developed simultaneously.This eliminated the usual lag after designers throw a new product“over the wall” to manufacturing, who then must figure out how tomake it. “Breaking down the walls between design and manufac-turing to facilitate simultaneous engineering,” Sprague declares,“was the real breakthrough.”

The design process began with a mechanical computer-aidedengineering program that allowed the team to fashion three-dimensional models of each part on a computer screen. The soft-ware also analyzed the overall product and its various elements forperformance and durability. Then the simulated components wereassembled on a computer workstation’s screen to assure that theywould fit together properly. As the design evolved, it was checkedperiodically with Boothroyd Dewhurst’s DFM software. Thisprompted several changes that trimmed the parts count from aninitial 28 to the final 15.

NO MOCK-UP

After everyone on the team gave their thumbs-up, the data for theparts were electronically transferred directly into computer-aidedmanufacturing systems at the various suppliers. The NCR designerswere so confident everything would work as intended that theydidn’t bother making a mock-up.

DFM can be a powerful weapon against foreign competition.Several years ago, IBM used Boothroyd Dewhurst’s software toanalyze dot-matrix printers it was sourcing from Japan—and foundit could do substantially better. Its Proprinter has 65 percent fewerparts and slashed assembly time by 90 percent. “Almost anythingmade in Japan,” insists Professor Boothroyd, “can be improvedupon with DFM—often impressively.”

Q U E S T I O NWhat development problems has the NCR approach overcome?

5 The purpose of this system design exercise is to gain experience in setting up a manufacturingprocess. (We suggest that this be done as a team project.) Assignment:a. Get one Ping-Pong paddle.b. Specify the type of equipment and raw materials you would need to manufacture that paddle,

from the receipt of seasoned wood to packaging for shipment.c. Assume that one unit of each type of equipment is available to you. Further assume that you

have a stock of seasoned wood and other materials needed to produce and box 100 paddles.Making reasonable assumptions about times and distances where necessary,(1) Develop an assembly drawing for the paddle.(2) Prepare an assembly chart for the paddle.(3) Develop a process flowchart for the paddle.(4) Develop a route sheet for the paddle.

5. See ISM.

SOURCE: O. PORT, “THE BEST-ENGINEERED PART IS NO PART AT ALL,” BUSINESS WEEK, MAY 8, 1989, P. 150. REPRINTED WITH PERMISSION.

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F O O T N O T E S1 Excerpt from T. Peters, “Beating the Great Blight of Dullness,” Forbes ASAP (undated).

2 Adapted from Karl T. Ulrich and Steven D. Eppinger, Product Design and Development, 3rd ed., (New York: McGraw-Hill/Irwin,2004), pp. 12–25.

3 Adapted from id., pp. 308–19.

4 The term quality is actually a mistranslation of the Japanese word for qualities, because QFD is widely used in the context of qual-ity management.

5 Example adapted from G. Boothroyd, P. Dewhurst, and W. Knight, Product Design for Manufacture and Assembly (New York:Marcel Dekker, 1994), pp. 5–10.


S E L E C T E D B I B L I O G R A P H YAdler, P. S.; A. Mandelbaum; V. Nguyen; and Elizabeth Schwerer.

“Getting the Most out of Your Product Development Process.”Harvard Business Review, March–April 1996, pp. 134–52.

Boothroyd, G.; P. Dewhurt; and W. Knight. Product Design forManufacture and Assembly, 2nd edition. New York: MarcelDekker, Inc., 2002.

Cooper, R. G. Winning at New Products: Accelerating the Process fromIdea to Launch. Reading, MA: Perseins Books, 2001.

Huthwaite, B. Design for Competitiveness: A Concurrent Engineer-ing Handbook. Institute for Competitive Design, 530 N. Pine,Rochester, Michigan, 1991.

Petroski, H. Invention by Design: How Engineers Get from Thought toThing. Boston, MA: Harvard University Press, 1996.

Ulrich, Karl L., and Steven D. Eppinger. Product Design andDevelopment. New York: McGraw-Hill/Irwin, 2004.

Wheelwright, S. C., and K. B. Clark. Revolutionizing ProductDevelopment. New York: The Free Press, 1992.

______. Leading Product Development. New York: The Free Press,1995.

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