Supply Chain Management: From Vision to Implementation

Chapter 4: New Product Development Process: Managing the Idea Infrastructure

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Chapter 4: Learning Objectives

1. Describe the new product development process and how it affects company and SC success.

2. List the risks involved in the new product process. Explain how to mitigate these risks.

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Chapter 4: Learning Objectives

3. Describe the marketing process and discuss its role in the new product process.

4. Define target costing and explain its role in developing new products and services.

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Chapter 4: Learning Objectives

5. Describe the finance process and discuss its role in the new product process.

6. Discuss EVA, profitability, and cash flow as key financial metrics for organizations.

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New Product Development

New product development is risky and expensive. More than 9 out of 10 products fail.

New product development is cross-functional: Marketing identifies unfilled customer needs R&D conceptualizes and develops the product Finance verifies that it is economically viable

SC leaders rely on teaming which includes suppliers and customers.

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Customer Satisfaction Cycle

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Mitigating Risk

Companies are faced with increasing levels of risk in today’s market.

Time Compression – product life cycles are being reduced, this increases risk because: New products must continually be in development Less time to capture development costs

Cost – new product development is expensive with costs regularly exceeding $100 million 40% of all quality problems stem from poor design 60-80% of a product's cost is determined during design

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Intel’s Plan to Mitigate Risk

Intel regularly faces product life cycles that are less than 6 months.

Integrated circuit development cost can exceed $30 million, requires $1 billion market to justify expense.

To mitigate risk, Intel analyzes 8 risk factors:

Design Manufacturability

Cost Quality

Legal Issues Supply Base

Supply Availability Environmental, Health, and Safety Impacts

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Intel’s Plan to Mitigate Risk Intel uses a “scorecard” to add visibility to risk in

new product development. Additional actions taken:

Clear “owner” for each risk reduction plan Cross-functional teams Specific timetables are established for risk reduction

progress Progress is regularly reported to top management High risk aspects are highlighted not glossed over

Results: Nearly eliminated surprises during development

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Intel’s Risk Scorecard

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Early Supplier Involvement (ESI)

ESI is a key element of innovation strategies. ESI accounts for one-third of the reduction in

labor-hours and 4-5 months of the shorter development cycle in the auto industry.

Products introduced on-time but 50% over budget, realized only a 4% reduction in profit.

Products introduced on budget but six months late experience a 33% decrease in profits.

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Early Supplier Involvement (ESI)

ESI reduces risk when used in conjunction with New Product Development Teams Reduces costly misunderstandings Uses supplier competencies during design Suppliers may have access to pertinent customer

feedback Suppliers may be aware of trends in technology

or demand

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“Design for” Considerations

New Product Development could consider: Design for Manufacturability – ease of production Design for Purchasing – support the product from the

existing supply base Design for Logistics – ease of distribution Design for Environment – minimize environment impact Design for Disassembly – disassemble, recycle, and reuse Design for Reuse – new design using existing parts

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Modular Design

Modular products can be manufacturer in “pieces and parts” from a variety of manufacturers.

Modularity is facilitated by standardization Reduces the risk of supplier dependency Increases customer choice in terms of options

Creates opportunity for niche competitors

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Marketing and the Customer Marketing’s job is to “get into the head” of the

customer. Customer information is used in planning:

Product - design of goods and services including both tangible and intangible elements

Price - determine the value of the need which is satisfied by the product

Place - having the product where it is needed, when it is needed, and in the correct quantities

Promotion - effective advertisement and sales techniques Product Positioning relies on promotion and design

to create niche appeal in a market segment

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The Marketing Process

Strengths and Weaknesses

Core Competencies

Cash Flow Position

Research and Development

Customer Relationships

Opportunities and Threats

Competitors

New Markets

Technology Trends

Government Regulations

The marketing process begins with understanding the company’s goals, strategy, image, and completive position.

Entails SWOT analysis

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New Product Development (NPD)

New product development begins with the recognition of some unmet customer need and a potential market large enough to justify exploration.

NPD can proceed either in a sequential or concurrent fashion. Sequential is the traditional “over the wall” approach to

NPD. Sequential is time consuming and inefficient Sequential results in lost opportunities to leverage

supplier competencies in the design process.

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Concurrent NPD

Advocated by most supply chain leaders Uses cross-functional teams to develop new

products with targeted cost and features. Typical teams will include managers from

marketing, R&D, engineering, production, purchasing.

Many companies include customers, suppliers and service providers in NPD teams.

Use of target pricing and target costing

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Pricing to Meet Customer Demand

Cost of DevelopmentCost of MaterialsLaborLogistics

PackagingEquipmentUtilitiesSales and Marketing

Expense

Customers determine the value of the need that is satisfied, this is the “Target Price” for new products.

Target Cost is the Target Price minus profit margin Target Cost must include:

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Sequential Product Development

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Determinants of Target Price

TargetPrice

Estimated Cost Structureof Product/Service

CompetitivePricing

Historic CostStructure

Market ResearchData

Market Conditions Price Elasticity

Perceived ValueVersus Competition

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Target Costing and Target Pricing

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Competitive Target Costing - Example

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Target Cost Breakdown

Once the target cost has been determined, component level costs may be calculated.

Cross-functional teams again are employed: Operations - knowledge of processes employed Purchasing - supplier and parts knowledge NPD Team - new design knowledge Finance - knowledge of cost accounting Also may include members from Packaging,

Engineering, Logistics, Suppliers, and Customers

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Importance of Design on Total Cost

While the total cost of design might only be 5% of the total product cost, 70% of total product costs are committed to during the design phase.

It is therefore important to “get it right the first time”

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Strategic Tracking & Reporting Areas Target - Has a target cost been determined that acknowledges

both the margin requirements and the competitiveness of the products?

Team - Are cross-functional cost advisory teams chartered to identify relevant issues and competitors and to drive cost of goods to meet or beat the targets?

Activity Coordination - Are all the sub-teams meeting the timetables, and merging results as necessary?

Value and Features - Are we retaining the key features identified as critical to the customers as we refine the design and cost?

Progress - How are we progressing in our plan to get to best-in-class and target COGS?

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Strategic Tracking & Reporting Areas

Manufacturing Roadmap - Is there a manufacturing roadmap for the product?

Suppliers - Have our key suppliers been identified? Risks - Have key risks in cost, supply, timing, pricing, and so

on been identified and a plan developed for mitigating these risks?

Launch - For new products, will the product/offer be at best-in-class COGS when launched?

Communication - Have we communicated key news to top management, so that we continue to have their support to proceed, and don’t have any surprises?

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The Role of Finance

Finance and Accounting are organization’s scorekeepers

Communicate performance results throughout the organization and the outside world

Finance and Accounting may be imbedded into other areas of the organization but generally maintain a direct reporting relationship to corporate finance Maintain objectivity and loyalty to the overall

organization rather than a particular business or function

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Reporting Relationships

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Measures of Profit

Operating profit represents how much money, before tax, a company makes from its ongoing business of selling goods and services.

Profit before tax represents the sum of operating profits plus or minus gains and losses from other activities. Includes investments, interest expense, and other

financing activities

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Profit and Loss StatementCost CategorySalesCost of GoodsGross ProfitG & AOperating ProfitNon-operating cost

(interest expense)

Profit before taxTaxesProfit after tax

(000’s)

$20,000 (1,250) 7,500

(2,500) 5,000

(1,250)

3,750 (1,250)

$2,500

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Cash Flow

Cash flows in to a company when it collects on receivables, borrows money, or sells stock.

Cash flows out from a company when it acquires plant and equipment, purchases raw material, produces goods, markets goods, repays investors, or repays debt.

Of interest is not only the aggregate amount of these flows but their timing.

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Cash Flow Cycle

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Income Statement and Cash Flows

While the income statement shows a pretax profit of $160,000, the statement of cash flows shows that we would not have enough cash to finance operations.

Managing cash flows and profit are critical for long term survival.

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Economic Value-Added (EVA) EVA considers how much money the company

makes from operations after taxes, less the cost of capital for the money tied up to make the product.

Gives a longer-term perspective on whether a project is generating or destroying value.

Goes beyond Net Present Value by considering timing of cash flows and the cost of capital tied up in accounts receivable, inventory, and related assets.

EVA = Operating Profit – Taxes – (Total Capital Employed X Company’s Cost of Capital)

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A Return to the Opening Story

Based on what you have now read and discussed:1. If you were in Charlene’s situation, what questions

would you ask marketing, finance, and new product development?

2. What do you think the organization structure, reporting relationships, and reward systems at Frozen Delight look like? Are this issues relevant to what is happening here?

3. What are some of the mechanisms within the organization that can be used to help these functions, and others within the company, work more closely towards common goals?

Supply Chain Management: From Vision to Implementation

Supplement D: Evaluating the Return on a New Product

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Net Present Value

Time-Value-of-Money Concept $1 today is worth more than $1 in the future

Discounts future cash flows in terms of present value to determine the net value added to the company by a project.

Considers: Forecasts of revenues and costs Expected life cycle or products and technology Industry Trends

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Present Value

An organization will receive $500 two years from now. At an interest rate of 10 percent, what is the present value of this future payment? periods ofnumber i

rateinterest r

i period at timeCash C

:Where

r)(1

C ValuePresent

i

i

i

$413.22 ValuePresent

)1.(1

500 ValuePresent

2

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Future Value

An organization invests $500 for 5 years at an interest rate of 15 percent. What is the future value of this original $500? periods ofnumber T

rateinterest r

investment initial C

:Where

r)-(1 X C Value Future

o

o T

$1005.68 Vale Future

.15) -(1 X 500 Value Future 5

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Net Present Value

Cost Initial-Outflows)Cash Future of ValuePresent - InflowsCash Future of Value(Present NPV

The value of future cash flows minus the present value of the cost of the investment.

The greater the NPV, the better the investment Negative NPVs represent projects that do not breakeven