Product Development Economics

Teaching materials to accompany:Product Design and Development

Chapter 13Karl T. Ulrich and Steven D. Eppinger2nd Edition, Irwin McGraw-Hill, 2000.

Product Design and DevelopmentKarl T. Ulrich and Steven D. Eppinger2nd edition, Irwin McGraw-Hill, 2000.

Chapter Table of Contents1. Introduction2. Development Processes and Organizations3. Product Planning4. Identifying Customer Needs5. Product Specifications6. Concept Generation7. Concept Selection8. Concept Testing9. Product Architecture10. Industrial Design11. Design for Manufacturing12. Prototyping13. Product Development Economics14. Managing Projects

Product Development Process

PlanningPlanning ConceptDevelopment

ConceptDevelopment

System-LevelDesign

System-LevelDesign

DetailDesignDetail

DesignTesting andRefinement

Testing andRefinement

ProductionRamp-Up

ProductionRamp-Up

• Go/No-Go Decision Gates

• Sensitivity and Trade-off Analysis

Product Development Economics Example:Polaroid Color Photo Printer U

sed with P

ermission

This item

is no longer manufactured by the P

oloroid Corporation

Product Development Cash FlowC

umul

ativ

e C

ash

Inflo

w o

r Out

flow

($)

InvestmentPaybackTime

DevelopmentTime

Sales Revenue

Operating Costs

Operating Profit

Investment (–)

Time

Break EvenTime

Project Financial Analysis(also Business Case Analysis or Product Economics)

• Most common method is NP�V analysis of project cash flows.

• Base case model computes nominal NPV.

• Sensitivity and trade-off analysis supports development decisions.

• Qualitative factors also influence decisions.

NPV =period cash flow

(1 + discount rate) periodperiodsΣ

NPV =C

(1 + r) iΣN

i

i = 1

Net Present Value

Inputs for NPV Base Case• Development cost and timing• Testing cost and timing• Tooling investment and timing• Ramp-up cost and timing• Marketing and support cost and timing• Sales volume and lifetime• Unit production cost• Unit revenue• Discount rate

Example: Stanley Hammer• Designed in 1995 by

Product Genesis for Stanley Tools

• Contractor GradeTM

• Graphite composite shaft

• Soft rubber grip

WSJ April 14, 1995

Inputs for Hammer Base Case• Development cost and timing

• Testing cost and timing

• Tooling investment and timing

• Ramp-up cost and timing

• Marketing and support cost and timing

• Sales volume and lifetime

• Unit production cost

• Unit revenue

• Discount rate

$120k, 9 months

$100k, 1 year

$200k, 6 months

$50k, 3 months

$250k + $80k/year for 2 years

200k units/year, 5 years (actually not flat)

$4/unit + $2/unit overhead

$12/unit wholesale

10%/year

Excel Spreadsheet

Model