New product development costing

Developing a product costing model and

performance measuring system for a new product

Carles Debart

Product Costing and Financial Management

DM944, University of Strathclyde, Glasgow, UK

MSc Global Innovation Management

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Content 1. Introduction ........................................................................................................................... 2

1.1 Background ...................................................................................................................... 2

1.2 New product description ................................................................................................. 2

1.3 Discussion of the appropriate costing model .................................................................. 3

2. Product costing model ........................................................................................................... 4

2.1 Bill of Materials ................................................................................................................ 4

2.2 Lifecycle costs .................................................................................................................. 6

2.3 Building the model ........................................................................................................... 7

2.4 Sales scenarios ................................................................................................................. 9

2.5 Driving improvements through target costing principles .............................................. 11

3. Performance management systems .................................................................................... 15

3.1 Introduction to performance measurement systems ................................................... 15

3.2 New product development performance ...................................................................... 15

3.3. Role of supply chain performance in new product development ................................ 16

3.4 Performance management models for NPD within supply chain ................................. 16

4. References ........................................................................................................................... 18

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1. Introduction

The purpose of this report is to build a product costing model for a new product development in the

context of a large multinational company. The key points to be addressed are to model the cost

elements of the product family, develop a costing model for various sales volume scenarios and

identify room of improvement using the model. Moreover, in order to manage the new product

development, a performance management system needs to be implemented and discussion about

existing methods and their suitability for the supply chain is sought.

In order to build the case study, all the references to Ikea have been taken to establish a starting

point and for educational purposes only.

1.1 Background

Ikea is a Dutch multinational company with origin in Sweden, famous worldwide because of his

approach of ready-to-assemble furniture, appliances and home accessories. Ikea is known for

focusing on cost control, operational excellence and continuous product development. This

approach has allowed them to continuously reduce their prices (between 2 or 3% per year) and

expanding successfully all over the world.

Ikea has been criticized for being the third-largest consumer of wood in the world, after The Home

Depot and Lowe’s. To clean their image, the commandment has decided to launch an

unprecedented family of eco-friendly products that will reinforce their alignment with the vision of

being a more of environmental friendly company.

1.2 New product description

Ikea’s marketing department has identified three possible options for this unprecedented product

family: bicycles, greenhouses, windmills. After some market research and a carefully selection

criteria (see figure 1), bicycles were chosen as the best way to accomplish the above mentioned

goal. However, although this product will be used as marketing strategy and lies away from core

competencies of the business (furniture), it needs to be designed and development in such a way

that won’t damage Ikea’s finances. This is of a great importance especially when we take into

account how competitive is the bicycle industry. For this reason, a new product costing model needs

to be deployed to guarantee that the entire project will be profitable.

The project will have a lifetime of 3 years, and after that time it will be reviewed for possible

extension. The new product will be a hybrid unisex bicycle (suitable for city and off-road) called

Bikea, with special focus on design, usability and low maintenance. Ikea will make use of their team

of talented designers to create a model that will make an impact on the market, while maintaining a

low cost. The biggest technological challenge is to build the frame, activity that will be externalised

to a manufacturer in Taiwan in order to limit the initial investment and possible risk. The rest of the

components will be taken from several different suppliers located in China. The assembly, quality

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control, packaging and delivering will be done in a refurbished warehouse near Ikea’s headquarters

in Netherlands.

Figure 1: Evaluation criteria for the new product development

1.3 Discussion of the appropriate costing model

Despite being the traditional costing the most used costing model in the past, especially in the

manufacturing industry whose activities consists of a series of common or repetitive tasks, over the

last 20 years has gained a lot of detractors. Their main argument relies on the fact that it is not

sufficiently accurate for new manufacturing environment. The high adoption of automation, the

lower workforce required and the market globalisation puts standard costing into a tight spot. It is

agreed by researchers that standard costing is a model suitable for cost control but not for cost

reduction, which is a key point in the current manufacturing environment.

New methodologies appeared to improve the accuracy of traditional costing methods. Activity-

Based Costing (ABC) is one of the most widely adopted costing methods for manufacturing industry

nowadays. The aim of ABC is to calculate costs and performance of each activity involved to

manufacture a product. According to Turney (1996), a cost for each activity is set according to the

use of the companies’ resources and then, each product is allocated a cost regarding those activities

involved in its manufacture. However, ABC shows some pitfalls. ABC method can be resource

consuming method to deploy, and as it is argued by Gunasekaran (1999), it requires a deep

Evaluation Criteria Weighting Windmill Bicycle Greenhouse Notes

Rate between 1 - 10 5% 3 10 10

Rate between 1 - 10 10% 7 8 9

Rate between 1 - 10 15% 8 6 5

Rate between 1 - 10 10% 4 10 4

Rate between 1 - 10 15% 8 7 7

Rate between 1 - 10 5% 3 8 7

Rate between 1 - 10 5% 8 8 8

Rate between 1 - 10 5% 4 5 6

Rate between 1 - 10 20% 6 10 7

Rate between 1 - 10 5% 9 9 10

Rate between 1 - 10 5% 8 6 10

Totals 100% 6,45 8,05 7,05

Competit ive Evaluation - Is the product similar to other products on the market? If so, have we identified our products competitive advantage?

Value - Can the product deliver value to the end user? Are customers willing to pay for the product?

Strategic Alignment - Does the product fall in line with our strategic objectives? Can we use existing infrastructure to produce the new product?

Demand - Is there a need for the product on the market? Does it follow market or industry trends?

Financial Feasibility - Can we afford the cost of development? , is the likelihood of a positive financial return high?

Launch - Will the product be easy to launch? Are the financial resources in place to allow for a successful product launch?

Usability - Is the product user friendly? Can it be widely used?

Implications - will the launch of the new product have any positive implications on existing product lines?

Innovation - Is the product new to the market? Is there anything else on the market that is similar?

Market Growth - Is there growth in the market? Is there room in the market for this product?

Barriers to Entry - Have barriers been considered (legal or otherwise)?

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knowledge of organization’s processes and activities and it implies a high level of critical decision

making when activities and costs need to be mapped into the model.

Moreover, ABC needs to be deployed very carefully in order to select each cost driver that will lead

into correct cost estimations (Baykasoglu and Kaplanoglu, 2008). However, when it is applied

correctly, gives clear ideas on how activities and departments perform across the entire

organization, delivers better control tools for overheads costs and facilitates the identification of

cost reduction initiatives.

However, both traditional costing and ABC methodologies (and other similar approaches) have to

main flaws. The first one is that the product price will be based on its cost, which is a problem

because we cannot guarantee that the costumer will be willing to pay for that. It can happen that

our product includes functionalities that are irrelevant to the customer’s point of view and that will

raise the price with no reason. This problem is addresses by target costing methodologies. The

second flaw is that costs are allocated as current costs, but there are certainly other costs in new

product development without which is not possible to launch a new product to the market (like R&D

costs). Moreover, other costs incurred in the product’s life must be taken into account, like those

related to after-sales services or disposal costs. This is particularly addressed in lifecycle costing.

Ikea value proposition is to give good quality products at unbeatable prices, thus target costing is

certainly the best costing model for this purpose. However, as the bicycle project is not strategically

aligned with the current product lines, high investments have to be made in R&D, facilities and after-

sales services such as warranty management and repairing services. To input all this costs in a

manageable way, the lifecycle costing method is highly advisable. In conclusion, a hybrid costing

method will be deployed for bicycle project at Ikea, mixing the lifecycle costing with a target costing

approach.

2. Product costing model In this section, the hybrid lifecycle target costing method will be depicted step by step, identifying

and arguing the inputs and parameters to justify its utility.

2.1 Bill of Materials When we want to make profit from a product it is mandatory to take into account that the total

revenue will exceed the total costs incurred in the project, even if those costs are incurred before,

along or after the product is produced. In essence, all costs should be taken into account when

drawing the profitability model. Moreover, costs are linked. For example, more attention to design

can reduce manufacturing costs in the future. In the same way, more training can lead into

improvements on employee’s efficiency and thus, labour reduction.

The most straightforward cost of all is the bill of materials (BOM), where all the component’s cost of

the Bikea are detailed (Figure 2):

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Bikea

Component Comments Unitary cost (€) % of cost

chain Steel 1,1 0,59%

Bar stem Aluminium 2,5 1,35%

Seat post Aluminium rims, steel hubs 2,6 1,41%

Pedals Plastic 2,7 1,46%

Lights LED 2,8 1,51%

Shifters Plastic 3,6 1,95%

Saddle Plastic/foam 3,7 2,00%

Fender Plastic 3,7 2,00%

Handle bar Aluminium 3,9 2,11%

Kickstand Steel 4,1 2,22%

Brakes Steel 4,4 2,38%

Headset Steel 5,3 2,87%

Carrier Leather 6,2 3,35%

Tires OEM Taiwan aluminium 6,3 3,41%

Bottom bracket Sealed cartridge 6,4 3,46%

Fork Steel 12,1 6,54%

Drive train Steel 26,2 14,17%

Wheels Aluminium rims, steel hubs 37,9 20,50%

Frame OEM Taiwan aluminium 49,4 26,72%

Total 184,9€ 100%

Figure 2: Bill of materials for Bikea

The next charts shows in a more visual way which are the costs that have more impact in the final

cost in the bill of materials (figure 3). Those are the frame, the wheels, drive train and the fork:

Figure 3: Visual inspection of % of each component in the total cost

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2.2 Lifecycle costs

The next step is to identify all of the costs associated with the product life-cycle of the Bikea project:

1. R&D: Bikea project will consume HR resources from Ikea workforce. Designers will work on the

innovative frame design over the first half year. Once a successful design is achieved and approved

by marketing department, it will be sent to the Taiwan manufacturer to start production. In the

second half of the first year, some designers will remain involved part time to verify and improve the

manufacturability of the design, if it is needed. As the project has a lifecycle of 3 years, no other

models are planned for years 2 or 3, however some other costs will be allocated in those years to

improve existing models (10.000 € per year). The whole project’s R&D is estimated in € 2 Million,

which is fixed a cost.

2. Facilities expenses: Ikea has decided not to build new facilities for this project but reusing an

underused warehouse. The budget will be mainly used for the setup of this old warehouse to a

convenient place to assemble bicycles. The cost is fixed and is committed in the first year rising

600.000€, but will be paid in three instalments over the 3 years. Moreover there will be an

associated a yearly cost for depreciation of the whole place of 10%.

3. Production: All the cost incurred during the manufacture process of Bikea are taken into account

in this section. As Bikea manufacture process is mainly assembly of the components into the frame,

the associated costs are:

- Component: costs for each Bikea extracted from the bill of materials (variable cost).

- Labour cost: Ikea will make use of his workforce to adapt the number of employees to the

production conditions in order to maximize efficiency. In that way, labour cost (assembly of the

bicycles) can be considered as a variable cost. It is estimated that the gross man hour cost will be

20€ and one bicycle assembly will take 1 hour.

- Maintenance: These costs have to be taken into account as expenses for the correct development

of manufacture process. Maintenance has a fixed and variable nature: fixed because some cost are

incurred even if no Bikea is produced (maintenance of the building and facilities) and variable

associated to the wear of tools during the assembly process. Those proportions have been defined

as follows: fixed cost of 150,000€ over the three years plus 1€ of cost per Bikea produced.

- Utilities: these costs follow a similar cost pattern as maintenance, with fixed and variable costs:

250,000€ per year of fixed cost (€ 0.75 Million over the three years) plus 3€ per each Bikea

produced.

- Insurance: this cost is related to the insurance cost of the warehouse where the assembly will be

carried out. It is a fixed cost of 75,000 € over the three years.

4. Marketing: Although is seems it has a fixed cost nature (we may think that it is independent of the

number of Bikea sold), marketing activities go beyond promotion and advertisement. One of the

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main tasks for this department is assure accessibility of products (how products are easily reached

by the costumers) and this is certainly dependable on the number of Bikea being produced and

showed in the stores. Taking everything into account, a fixed cost for this department is budgeted as

follows: € 3 Million the first year, € 2 Million for the second year, and €1 Million for the last year.

This budget distribution meets the demand of acquiring awareness of the product as soon as

possible. Regarding the variable cost of accessibility, it has been allocated 5€ per Bikea.

5. Distribution: Again, a semi-variable cost with a fixed component of 250,000 € per year plus an

average variable cost of distribution of 10€ per bicycle

6. Customer service: The cost of having a small space in each of Ikea stores dedicated to after-sale

service and repairing is € 0.35 Million per year. Moreover, Ikea is very committed with client

satisfaction and offers free of charge adjustment of any Bikea after one months of use. It has been

calculated to have a variable cost of 7€ per unit sold in terms of labour.

7. Additional overheads: Bikea project will make use of some Ikea resources, as it will be a part of

the existing product line. Those costs are mainly administration, software licences, patents

registration. Some budget is reserved as well for lawsuits if patents are found to be broken by the

competency. These costs are fixed and are forecasted to rise up to 225,000€ during the whole life-

cycle.

8. End of the life-cycle: If Ikea management decide to quit the project after the 3 initial years, the

costs involved in shutting down the warehouse and other related cost (waste management.) are

estimated in 250,000€ and represent a fixed cost for the final year.

2.3 Building the model Once we have identified and analysed all the associated cost for the life-cycle of the Bikea project,

we can implement an structured table mapping all of those cost allocated across time (for fixed

costs) or allocated to product (for variable costs). We can draw some interesting conclusion from

cost table. Firstly, the variable cost associated to one Bikea has increased nearly 50€ from the initial

number drawn from the Bill of materials. That give us an idea on how important and what is the

impact of giving an efficient customer service. Lifecycle costing method allows us to identify all of

these costs that may have been unnoticed with other simpler costing methods.

Secondly, we can understand how expenses are committed during the whole duration of the project.

For example, the costs for the first year is nearly double that the other two years together. That is

interesting from a cash flow point of view because allows to envision how deep is the “first year

hole” in the project finances. However, product costing decisions such as selling price and margins

have to be forecasted taking into account the whole lifecycle of the project instead of one particular

year’s results or forecast.

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Figure 4: Fixed and variable costs distributed through the lifecycle of the project

Fixed cost (€) Variable cost (€)

1st year 2nd year 3rd year lifecycle per unit

R&D

Design 2.000.000 0 0 2.000.000 -

Improvements 0 10.000 10.000 20.000 -

Total R&D 2.000.000 10.000 10.000 2.020.000 -

Facilities expenses

Fitting-out 200.000 200.000 200.000 600.000 -

Depreciation 20.000 20.000 20.000 60.000 -

Total facilites expenses 220.000 220.000 220.000 660.000 -

Production

BOM - - - - 184,9

Labour cost - - - - 20,0

Maintenance 50.000 50.000 50.000 150.000 1,0

Utilities 250.000 250.000 250.000 750.000 3,0

Insurance 25.000 25.000 25.000 75.000 -

Total production costs 325.000 325.000 325.000 975.000 208,9

Marketing

Awareness 3.000.000 2.000.000 1.000.000 6.000.000 -

Accessibility - - - - 5,0

Total marketing costs 3.000.000 2.000.000 1.000.000 6.000.000 5,0

Distribution

Logistic management 250.000 250.000 250.000 750.000 -

Average shipping - - - - 10,0

Total distribution costs 250.000 250.000 250.000 750.000 10,0

Customer service

Reparing workshop 350.000 350.000 350.000 1.050.000 -

Free 1st month adjustment - - - - 7,0

Total customer service costs 350.000 350.000 350.000 1.050.000 7,0

Additional overheads

Administration 65.000 65.000 65.000 195.000 -

Patents 12.000 - - 12.000 -

Lawsuits - 4.000 8.000 12.000 -

Software licenses 2.000 2.000 2.000 6.000 -

Total overhead cost 79.000 71.000 75.000 225.000 -

End of life-cycle project

Decommissioning - - 200.000 200.000 -

Waste management - - 50.000 50.000 -

Total EOC costs - - 250.000 250.000 -

Total accumulated costs 6.224.000 3.226.000 2.230.000 11.680.000 230,9

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2.4 Sales scenarios To assess the profitability of the Bikea project, the marketing department has carried out a deep

market research. As a result of this three different sales scenarios have been identified: worse case,

best case, and average case. These sales forecast are shown in the next figure:

Figure 5: Sales scenarios forecasted by the marketing department

The costing department together with the marketing department have agreed on the minimum

profitability margins that any product line of Ikea has to meet: 30%. The next step is to calculate, for

each of the forecasted scenarios, which will be the total cost of one Bikea, which are the

percentages of each cost attributable to one sold Bikea and whether the target margins are met. The

market department, after comparing the competence, evaluating the targeted segment, assessing

the features included in the product and aligning it with the price strategy of the company has

decided to launch the Bikea for 419€. With that price and the costing table for each sales scenario

(see Figure 7) we can assess the total profits and margins for one unit of Bikea.

Figure 6: Profits and margins per unit sold for each scenario based on Figure 7 detailed cost

1st year 2nd year 3rd yearTotal

lifecycle

Scenarios

Best 50.000 75.000 45.000 170.000

Average 35.000 55.000 30.000 120.000

Worst 20.000 25.000 15.000 60.000

020.00040.00060.00080.000

100.000120.000140.000160.000180.000

Un

its

so

ld

Forecasted sales scenarios

Cost allocation per unit, turnover and margins (€)

Best Average Worse

Selling price 419,00 419,00 419,00

Expenses

R&D 11,88 16,83 33,67

Facilities 3,88 5,50 11,00

Marketing 40,29 55,00 105,00

Distribution 14,41 16,25 22,50

Customer service 13,18 15,75 24,50

Additional overheads 1,32 1,88 3,75

End of lifeclye 1,47 2,08 4,17

Production costs 214,64 217,03 225,15

Profit total 117,92 88,68 -10,73

Profit margin 28,14% 21,17% -4,77%

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Figure 7: Detailed cost per unit.

From both tables above, we can draw the conclusion that the product costing has not met the

requirements established by the marketing department regarding sales and profit margins. In any of

the three scenarios the targeted 30% of profit margin is met and moreover, in the case of the worst

scenario losses are expected. Marketing department is very confident with their forecasts and

hence, has required the costing department to reduce expenses in order to meet a minimum profit

margin of 30% for the average case and no losses in the worst case.

Fixed cost Variable cost (€) Cost per unit for each scenario (€)

lifecycle per unit Best Average Worse

R&D

Design 2.000.000 - 11,76 16,67 33,33

Improvements 20.000 - 0,12 0,17 0,33

Total R&D 2.020.000 - 11,88 16,83 33,67

Facilities expenses

Fitting-out 600.000 - 3,53 5,00 10,00

Depreciation 60.000 - 0,35 0,50 1,00

Total facilites expenses 660.000 - 3,88 5,50 11,00

Production

BOM - 184,9 184,90 184,90 184,90

Labour cost - 20,0 20,00 20,00 20,00

Maintenance 150.000 1,0 1,88 2,25 3,50

Utilities 750.000 3,0 7,41 9,25 15,50

Insurance 75.000 - 0,44 0,63 1,25

Total production costs 975.000 208,9 214,64 217,03 225,15

Marketing

Awareness 6.000.000 - 35,29 50,00 100,00

Accessibility - 5,0 5,00 5,00 5,00

Total marketing costs 6.000.000 5,0 40,29 55,00 105,00

Distribution

Logistic management 750.000 - 4,41 6,25 12,50

Average shipping - 10,0 10,00 10,00 10,00

Total distribution costs 750.000 10,0 14,41 16,25 22,50

Customer service

Reparing workshop 1.050.000 - 6,18 8,75 17,50

Free 1st month adjustment - 7,0 7,00 7,00 7,00

Total customer service costs 1.050.000 7,0 13,18 15,75 24,50

Additional overheads

Administration 195.000 - 1,15 1,63 3,25

Patents 12.000 - 0,07 0,10 0,20

Lawsuits 12.000 - 0,07 0,10 0,20

Software licenses 6.000 - 0,04 0,05 0,10

Total overhead cost 225.000 - 1,32 1,88 3,75

End of life-cycle project

Decommissioning 200.000 - 1,18 1,67 3,33

Waste management 50.000 - 0,29 0,42 0,83

Total EOC costs 250.000 - 1,47 2,08 4,17

Total accumulated costs 11.680.000 230,9 301,08 330,32 429,7

Attributable to fixed costs 70,18 99,42 198,83

Attributable to variable costs 230,90 230,90 230,90

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2.5 Driving improvements through target costing principles The restrictions imposed by the marketing department on the price of Bikea are driven by the need

of an answer to the following questions:

1. What is/are the segments that we want to target with our product?

2. What characteristics are the customers want in the product?

3. What is the price the customers would pay for the product?

4. What is the competence regarding our product?

5. What is the cost of advertising the product?

The conclusion drawn to the answers of these questions is that often engineers, management and

accountants work in a forward way, calculating the costs, adding a mark-up and finally, establishing a

selling price. Target costing approach is right the opposite: establishing a price that customers will be

willing to pay and then work backwards to find out the cost (features included in the product) taking

into account the profit margins. The target costing model is clearly self-explains in the following

figure:

Figure 8: Summarized flow of target costing principles. Source: MIT Sloan Management Review

Target costing is not mutually exclusive with any other costing method, nor is with the lifecycle

costing method developed for the Bikea Project, and In fact they are both often presented together

in hybrid forms. The next steps based in target costing principles have been identified and will allow

the costing department to meet the requirements set by marketing:

1. R&D: Although one may think that the expense on R&D is high and would be room for

improvement, the costing department agrees that is a key point of the whole development of Bikea

project cut down should be made. Moreover, some TQM improvements will be implemented to

achieve a lower manufacturability cost and lower rate of failure, which will lead into customer

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service cost reduction. Hence, there will be allocated 30000€ per year in TQM activities, which

implies a growth of 4,5% in the whole R&D budget.

2. Facilities expenses: The marketing department in has put emphasis in the most likely scenario

(average) which is nearly 30% less than the best case scenario. In that way facilities will be optimized

for the production of this this forecast. This leads into savings of 30% (198000€).

3. Production: Thanks to the use of QFD methodologies, some features initially included in the bike

won’t be any longer included in the improved version, as they don’t add value to the customers:

carrier, kickstand and fender are removed (saving 14€ per unit). Wheels are downgraded (saving 5€

per unit) and thanks to TQM the same quality frame can be produced for 3€ less. In total, BOM

materials has been reduced from 184,9€ to 162,9€.

Through the improved design in manufacturability, assembling time will be reduced. Labour cost per

unit will decrease to 15€.

As the facilities have been scaled down, maintenance is less costly now (30% less) achieving a total

savings of 45000€ in the whole lifecycle. In the same way we save 30% in utilities and insurance.

4. Marketing: No cost reduction is considered.

5. Distribution: Designers have found a way to ship batches of 5 bicycles for container; hence the

cost per unit has decreased in 50%. Logistic management will be integrated in Ikea’s normal product

lines, which implies savings of 150000€.

6. Customer service: Average free 1st month adjustment will be reduced in 2€ as the design has been

improved and the fixed cost associated to repairing booths in Ikea’s shop will be reduced in a 30%.

7. Additional overheads: Administration overheads will be again integrated in Ikea’s administration

departments, saving up to 50% of the total cost.

8. End of life-cycle project: The end of life-cycle project will be externalised to a specialized company

that will allow saving 50% of the decommissioning and waste management cost.

As a summary of improvements driven by target costing can be summarized as follows:

-The total fixed costs for entire lifecycle of the project have been reduced from to € 11.68 Million to

€ 10.83 Million (- 9,2%)

-The variable cost has been cut down from the initial 230,9€ to 196,9 € ( -8.5%)

The next tables (Figure 9) show the detailed new costing and the allocation of each cost (variable

and fixed) to each unit according to sales forecast scenarios, as well as (Figure 10) total profits and

margins for the improved costing model:

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Fixed cost (€) Var cost (€) Cost per unit for each scenario (€)

1st year 2nd year 3rd year lifecycle per unit Best Average Worse

R&D

Design 2.000.000 0 0 2.000.000 - 11,76 16,67 33,33

Improvements 30.000 40.000 40.000 110.000 - 0,65 0,92 1,83

Total R&D 2.030.000 40.000 40.000 2.110.000 - 12,41 17,58 35,17

Facilities expenses

Fitting-out 140.000 140.000 140.000 420.000 - 2,47 3,50 7,00

Depreciation 14.000 14.000 14.000 42.000 - 0,25 0,35 0,70

Total facilites expenses 154.000 154.000 154.000 462.000 - 2,72 3,85 7,70

Production

BOM - - - - 162,9 162,90 162,90 162,90

Labour cost - - - - 15,0 15,00 15,00 15,00

Maintenance 35.000 35.000 35.000 105.000 1,0 1,62 1,88 2,75

Utilities 175.000 175.000 175.000 525.000 3,0 6,09 7,38 11,75

Insurance 17.500 17.500 17.500 52.500 - 0,31 0,44 0,88

Total production costs 227.500 227.500 227.500 682.500 181,9 185,91 187,59 193,28

Marketing

Awareness 3.000.000 2.000.000 1.000.000 6.000.000 - 35,29 50,00 100,00

Accessibility - - - - 5,0 5,00 5,00 5,00

Total marketing costs 3.000.000 2.000.000 1.000.000 6.000.000 5,0 40,29 55,00 105,00

Distribution

Logistic management 200.000 200.000 200.000 600.000 - 3,53 5,00 10,00

Average shipping - - - - 5,0 5,00 5,00 5,00

Total distribution costs 200.000 200.000 200.000 600.000 5,0 8,53 10,00 15,00

Customer service

Reparing workshop 245.000 245.000 245.000 735.000 - 4,32 6,13 12,25

Free 1st month adjustment - - - - 5,0 5,00 5,00 5,00

Total customer service costs 245.000 245.000 245.000 735.000 5,0 9,32 11,13 17,25

Additional overheads

Administration 32.500 32.500 32.500 97.500 - 0,57 0,81 1,63

Patents 6.000 - - 6.000 - 0,04 0,05 0,10

Lawsuits - 2.000 4.000 6.000 - 0,04 0,05 0,10

Software licenses 1.000 1.000 1.000 3.000 - 0,02 0,03 0,05

Total overhead cost 39.500 35.500 37.500 112.500 - 0,66 0,94 1,88

End of life-cycle project

Decommissioning - - 100.000 100.000 - 0,59 0,83 1,67

Waste management - - 25.000 25.000 - 0,15 0,21 0,42

Total EOC costs - - 125.000 125.000 - 0,74 1,04 2,08

Total accumulated costs 5.896.000 2.902.000 1.904.000 10.827.000 196,9 260,59 287,13 377,4

Attribut. to fixed costs 63,69 90,23 180,45

Attribut. to variable costs 196,90 196,90 196,90

Figure 9: Improved costing model and detailed cost per unit in each scenario.

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Figure 10: New figures for profit and margins

The improvements introduced thanks to the costing model have enabled to meet marketing’s

requirements. In the worst case scenario the profit margin stands up to 21%, while in the average

scenario we reach 31%. Next figures show in a more visual way how are the costs finally allocated

per unit:

Figure 11: Profit and total cost allocation per unit for each sales scenario.

Cost allocation per unit, turnover and margins (€)

Best Average Worse

Selling price 419,00 419,00 419,00

Expenses

R&D 12,41 17,58 35,17

Facilities 2,72 3,85 7,70

Marketing 40,29 55,00 105,00

Distribution 8,53 10,00 15,00

Customer service 9,32 11,13 17,25

Additional overheads 0,66 0,94 1,88

End of lifeclye 0,74 1,04 2,08

Production costs 185,91 187,59 193,28

Profit total 158,41 131,88 41,65

Profit margin 37,81% 31,47% 21,55%

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3. Performance management systems

3.1 Introduction to performance measurement systems There have been several approaches to performance measurement in the past. Going back to 80s,

researchers agree that more integrated performance measurement systems were needed to match

with the tendency of globalisation that emerged from the aim of companies to be more competitive.

Hence, from that point we have been testimonies of the birth of many frameworks and models such

as the SMART and the performance measurement questionnaire (Bititci et. al 2005).

A more recent approach to performance measurement appeared with the birth of the balance

scorecard (1996) and the European business excellence model EFQM (1998). Both models give clues

in terms of what kind of measurements should be deployed and what conclusions should be

extracted from them. In 1998, the EPSRC established the concept of integrated performance

measurement systems, which was developed upon the balance scorecard and the EFQM models

(Bititci et. al 2005). Since then, other hybrid frameworks have used approaches from the above

mentioned models. Examples of this are the performance measurement systems and the

measurement workbooks.

Apart from the more generalist frameworks mentioned above, there have been other performance

measurement systems more focused in certain business areas and processes such as production and

planning, product development process, human resources or even for service management.

In conclusion, all the performance measurement systems, both the generalist and the more business

focused, should have in common a set of characteristics such as being balanced (regarding the

requirement of the stakeholders), being integrative (different measures need to be interlinked),

informing of the strategy (useful as an input for the strategy), deploying strategy (being able to

communicate business’ strategy), focusing on activities that deliver valuable (principle of the EFQM),

including competencies and stakeholder contribution (Bititci et. al 2005).

3.2 New product development performance There is consensus among the researchers that product development is one of the most important

things in the future sustainability of any company, and especially those in the technological field.

New product development is becoming, as most of other business areas and processes within

companies, a more globalised activity where changes occur fast due to constantly changing

customer’s needs (Goffin and Mitchell 2005).

Product development is, as any other process in a business, able to measured and improved.

Although researchers have deeply analysed the product development process and contributed to

understand it, most of the companies are still reluctant to measure their product development

processes because the challenges that implies: complexity, uncertainty, intensive decision making,

short financial term vision, shorten time to market approaches, etc. This is the reason why

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performance measurement within product development has been historically limited to cost and

time only, forgiving maybe the most important aspect, value of creation (Koller et al. 2005).

Other challenges that an effective performance management system for product development

should consider are for example: the different capabilities and activities that are required within the

organization in order to be successful, the alignment of business strategy with the product and with

customer needs, the alignment between the product development strategy and the business

strategy, competitive advantage (in the long term) and the rise of competitive environment among

customers and suppliers (Cedergren, S. 2008).

3.3. Role of supply chain performance in new product development

How can an effective performance supply chain help in the new product development? Take the

example of Inditex, the clothes fashion empire, where the perfectly fitted and extremely efficient

supply chain has been the true clue for its tremendous success. Although it doesn’t stands as high

technological new product development (as clothes cannot be considered) it is useful to illustrate

how the clothes development is boosted by its supply chain, able to supply the market with low cost

and high speed service. Another key point is its vertical integration and how coordinated are the

different departments associated to product development. As an example, it is interesting to note

that they can respond to a new market need within two weeks. Vertical integration plays an

important role as well, as stocks are just around 7% of the incomes. This integration strategy allows

the company to reduce costs and acquire some flexibility, reducing in that way the potential

negative impact of uncertainty during product development and the presences of specific actives

along the chain value.

Furthermore, Inditex takes the concept of supply chain to the extreme by establishing the role of

shops away from the “end of the chain” concept to a more “place to get user’s feedback” concept.

To do, shops are technologically equipped and staff trained to retrieve invaluable design information

that customer’s hint at during their visits. Inditex has certainly grown thanks to the competitive

advantages that its supply chain has brought, making it a clear example of an extended enterprise.

According to Childe (1998) an extended enterprise is a conceptual business unit or system that

consists of a purchasing company and suppliers who collaborate in such a way as to maximise the

returns to each partner. That means that the extended enterprise is a knowledge-based organization

that uses the distributed resources and capabilities through the supply chain in order to maximize

the competitive advantage and performance of the entire organization (Bititci et. al 2005), including

of course the product development processes.

3.4 Performance management models for NPD within supply chain As it has been argued in the section before, supply chain management (and extended enterprise

methodologies that emanate from it), allow companies to take advantage from its network of

suppliers through upstream and downstream linkages that produce a value in the form a new

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product or service to ultimately meet or exceed customer expectations. In practise, there are some

models that are specifically designed to manage performance of those extended enterprises. For

example, Gunasekeran et al. (2001) presents that the measures are arranged in three different levels

(strategic, tactical and operational) through the supply chain: plan and source performance,

production performance, deliver performance and client satisfaction. This model is in essence very

similar to the supply chain operations reference SCOR model and its six key activities (plan, source,

make, deliver, return and enables). Another model was introduced by Beamon (1999) and argues

that a framework for supply chain measurement should tackle at least one measure for each of the

following steps: resource measure, output measure and flexibility measure. In addition, Kochar and

Zhang (2002) proposed a model in which each company have its owns performance measurement

system that asses how coordinated and synchronised are companies between them in a given

network.

The essence of all these frameworks is to bring up to the surface the same measures proposed for

traditional single enterprise measuring systems (balance scorecard, EFQM, IPMS, performance

prism, smart pyradmid, etc) but suited to the supply chain. It is interesting to note how aligned is

the supply chain management goal’s with the new product development’s goals. The following list,

extracted from CIPS (2010) highlights the most prominent ones:

1. Reducing the non-value-adding activities through the supply chain (processing, inventory, waste) 2. Reducing cycle times to support innovation and fast new product development. 3. Enhancing quality through collaborative quality management, TQM initiatives, supplier motivation and supplier commitment 4. Reducing total costs through better coordination and planning increased plant capacity utilisation, waste reduction, less inspections and defects. 5. Optimising the balance of service levels and costs 6. Improving supply chain communication to boost all the above mentioned goals

As a conclusion, we provide a table linking those supply chain goals (according to their number) with

typical performance indicators associated to new product development (Slack et al. 2007)

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4. References

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transportation company: A case study”, Int. J. Production Economics, Vol. 116, pp. 308-324.

Beamon, M. (1999), “Measuring supply chain performance”, International Journal of Operations &

Production Management, Vol. 19 No. 3, pp. 275-92.

Bititci, U.S. et al., (2005). Measuring and managing performance in extended enterprises.

International Journal of Operations & Production Management, 25(4), pp.333–353.

Cedergren, S., (2008). Modeling Performance in Complex Product Development. Product

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Childe, S.J. (1998), “The extended enterprise: a concept for co-operation”, Production Planning and

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