1. Developing Products and Services Chapter 15

2. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 2 1. Define Product Design and Product Development Process.

3. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 3 Product Design and Development  Product Design – The characteristics or features of a product or service that determine its ability to meet the needs of the user.  Product Development Process– The overall process of strategy, organization, concept generation, product and marketing plan creation and evaluation, and commercialization of a new product. © Product Development and Management Association

4. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 4 2. What are four reasons for developing products and services?

5. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 5 Four Reasons for Developing New Products and Services  New products or services can give firms a competitive advantage in the marketplace.  New products or services provide benefits to the firm.  Companies develop new products or services to exploit existing capabilities.  Companies can use new product development to block out competitors.

6. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 6 3. What are the six dimensions of the product design process?

7. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 7 Product Design Dimensions  Repeatability  Testability  Serviceability  Product volumes  Product costs  Match between the design and existing capabilities

8. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 8 Product Design Dimensions  Repeatability  Consistent production  Tolerance to manufacturing variations (robustness)  Testability  Ease with which critical components or functions can be tested during production  Serviceability  Ease of repair, service, and evaluation

9. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 9 Product Design Dimensions  Product Volumes  Expanding firm’s operations by building facilities, hiring workers, buying new equipment, or planning with key suppliers  Product Costs  Obvious costs – Easiest to see and manage  Hidden costs – Not easy to track but can have a major impact Number of parts in a product Engineering changes Transportation costs

10. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 10 Product Design Dimensions  Match with Existing Capabilities  Product design flexibility Easy to add features? Easy to upgrade?  Process flexibility Share processes / parts? Will upgrades make current operations obsolete?

11. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 11 4. What are five phases of the development process?

12. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 12 Development Process  Concept development phase – The company identifies ideas for new or revised products and services.  Planning phase – The company begins to address the feasibility of a product or service.  Design and development phase – The company starts to invest heavily in the development effort and builds and evaluates prototypes.

13. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 13 Development Process  Commercial preparation phase – The firms start to invest heavily in the operations and supply chain resources needed to support the new product or service.  Launch phase – For products, this means “filling up” the supply chain with products. For services, it means making the services available to the target marketplace.

14. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 14 Development Process Phases Table 15.1

15. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 15 5. Define Sequential development and concurrent engineering.

16. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 16 Sequential Development vs. Concurrent Engineering  Sequential development – A process in which a product or service idea must clear specific hurdles before it can go on to the next development phase.  Concurrent engineering – A process where activities in different development stages are allowed to overlap with one another, shortening the total development time.

17. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 17 Concurrent Engineering Figure 15.1

18. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 18 6. What are the various organizational roles in the product and service development?

19. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 19 Organizational Roles  Engineering – Provide the expertise.  Marketing – Understanding the marketplace.  Accounting – Play the role of “scorekeeper.”  Finance – Judge the financial impact and determine how to acquire the needed capital.  Designers – Handle product design and create “identities” for companies, environments, and service experiences.  Purchasing – Identify the best suppliers and sign them up early in the process. Act as a consultant for materials.  Suppliers – Bring opportunities for improvement, reduce financial risks, save time in development.

20. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 20 DMADV  Steps:  Define – Measure – Analyze – Design – Verify Define the project goals and customer deliverables Measure and determine customer needs and specifications Analyze the product or process options to meet the customer needs Design the product or process Verify the results

21. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 21 7. Define Quality Function Deployment (QFD).

22. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 22 Quality Function Deployment  Quality function deployment – a widely used approach that translates customer needs into product and service designs that guide the corresponding process requirements.  A graphical tool used to help organizations move from vague notions of what customers want to specific engineering and operational requirements  Also called the House of Quality

23. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 23 Quality Function Deployment  QFD Matrix:  Left side: Shows customer requirements and their relative importance to target customers.  Along the top: Lists specific product characteristics.  Main body: Shows how each of the product characteristics does or does not support the customer requirements.  Roof: Shows synergies between some of the features.

24. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 24 Quality Function Deployment QFD Matrix for a Cell Phone Figure 15.2

25. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 25 8. What are the four phases of the quality function deployment (QFD)?

26. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 26 Phases of QFD  Product planning  Part deployment  Process planning  Production planning

27. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 27 Quality Function Deployment Using QFD Matrices to move from Customer Requirements to Process Specifications. Figure 15.3

28. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 28 9. Define Price and Cost.

29. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 29 5- 29 Price versus Cost Cost Tieiness Price – Amount of money a seller agrees to accept in return for something, like a product or service. Cost – A scarce resource given up in order to obtain a current or future benefit.

30. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 30 5- 30 Paying for Value Cost includes all resource outlays over the life of the product or service – The cost is not necessarily monetary – Increasing cost detracts from value – While most value attributes enhance value, cost is almost always viewed as an overriding negative factor.

31. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 31 5- 31 Profitability and Cost Net income is in the numerator of Profit Margin, Return on Assets, and Return on Equity Net Income = Net Sales - Cost of Goods Sold – Selling and Administrative Costs – Depreciation- Interest Paid – Taxes Reduced Costs Higher Net Income Greater Profitability

32. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 32 5- 32 Price vs. Total Cost: Customer Perspective  Non-Price dimensions of Cost  Shipping/Distribution  Repairs and maintenance  Related expenditures (insurance, supplies, etc.)

33. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 33 5- 33 Price vs. Total Cost: Customer Perspective  Non-financial costs  Quality, flexibility, response time  Non-financial costs are difficult to include in decision- making  They are difficult to quantify  In tradeoffs, quantifiable measures often win  Firms struggle to incorporate non-monetary costs (and benefits) into decision-making  Ignoring them implicitly says they are zero  The balanced scorecard (coming later) is an approach to include non- financial issues.

34. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 34 10. What are the types of costs?

35. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 35 5- 35 Types of Costs  Expected costs: Forecasted payments for future benefits.  Actual costs: Past payments for currently owned resources.  Out-of-pocket costs: Cash payments made for resources.  Product costs: Costs of resources used to make products.  Period costs: Costs of resources used in nonproduction elements of a business.  Total costs: Costs of all resources obtained in a particular period.

36. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 36 11. What are some important cost formulae?

37. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 37 Costs  Total Cost  Average Total Cost  Average Variable Cost  Marginal Cost

38. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 38 Average Costs  Can be Great for comparing current costs to historic.  Can be Great for making comparisons with competitors.  Can be Dangerous because there is no “average” product or “average” customer.  Can be Dangerous because they can lead to ignoring important details.

39. Costs OutputFCVCTCATCAVCMC 120250 230 318 513

40. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 40 Assigning Operations Costs Direct (value chain) and indirect cost generators need to be assigned and analyzed Resource Cost: What the business spent on a particular resource

41. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 41 12. What is a cost object?

42. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 42 Assigning Operations Costs Cost object: an item for which costs are measured or assigned.

43. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 43  Direct Tracing: Costs (e.g., direct labor & materials) are physically associated with a cost object  For example: direct labor or direct materials  Or the link may be made by observation Assigning Operations Costs

44. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 44 Assigning Operations Costs  Direct Tracing example:  A product requires eight hours of labor to assemble It uses $1,000 in materials Labor costs are $100 per hour Product Cost = $1,000 + (8 * $100) = $1,800 for direct labor and material

45. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 45 13. State two types of drivers that can be used to assign costs to cost objects.

46. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 46 Assigning Operations Costs  Driver Tracing – A resource (cost) driver is used to provide the link between the cost and the cost object  Resource drivers measure demands placed on resources by activities and are used to assign costs of resources to activities

47. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 47 Assigning Operations Costs  Activity drivers: Measure demands that cost objects place on activities  Activity Drivers are used to assign the costs of associated activities to cost objects

48. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 48 14. What are the components of Product costs?

49. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 49 5- 49 Components of Product Cost  Production costs: associated with actual production.  Nonproduction costs: associated with selling and administration.  Direct materials: materials that can be traced directly to the good or service being produced.  Direct labor: labor that can be traced directly to the good or service being produced.  Overhead: all other nondirect costs.

50. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 50 15. Define Variance Analysis.

51. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 51 Putting Cost Information to Work for Operations: Standards and Variances  Standards  Are what should happen in terms of... Quantity (output or usage per unit of time) Price (price per unit)  Actuals  What actually got used in production May be more or less than standard  Variance Analysis  The comparison of standards to actuals in order to assess operating performance

52. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 52 16. What are the steps in calculating variance analysis?

53. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 53 Putting Cost Information to Work for Operations: Standards and Variances Example: Company produced units at a total cost of $23.14 per batch Their standards tell them it should only have cost them $18.00 per batch What went wrong? Did they pay too much for material?? Or use too much material??

54. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 54 5-54 Variance Analysis Exercise  Bill Howe is a project supervisor for Regal Homes, a builder of new houses. As the project supervisor, Bill must keep a careful eye on the number of worker- hours put into the construction of a new house. The standard number of worker-hours to complete a house is 1075 and the standard hourly wage is $20.00. the current house has taken only 1010 worker-hours and the workers are under contract for $20.00 per hour. What are the price, usage, and total variances for this house?

55. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 55 5- 55 Variance Analysis  Helps in determining where things did not go according to plan.  Can be used for many kinds of resources, including  Materials  Labor  Overhead

56. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 56 Variance Analysis  When and how to update standards can be a big decision  Line managers may not want to update quantity standards if they are getting better (sandbagging)  Detecting the variance is the first step, understanding them can be much more complicated  Are negative price variations due to poor practices or just generally rising prices?

57. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 57 17. Define Beak-even Analysis.

58. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 58 Breakeven Analysis  Breakeven analysis is an analytical process that compares the fixed and variable costs of alternatives in order to identify the best alternative for a given volume of output.  Fixed costs are costs that are not affected by volume.  Variable costs are costs that increase or decrease as units produced increase or decrease.

59. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 59 Breakeven Analysis  The total cost curves are assumed to be linear and can be created by using the basic formula for a line: y = a + bn Where y is the total cost for producing n units, a is the fixed cost, and b is the variable cost per unit.

60. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 60 Breakeven Analysis Example Insert Exhibit 5.7 Three alternatives:

61. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 61 Breakeven Analysis Insert Exhibit 5.8 WEEZL is the low-cost alternative for volumes below 230,508. Market Probe is the low-cost alternative for volumes between 230,508 and 387,097 Prophecy is the low-cost alternative for volumes greater than 387,097

62. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 62 5-62 Break-Even Analysis Exercise - 1  A& F Tax service wishes to store data electronically, rather than in hard copy format. The owner has collected cost information on three different approaches to scanning and storing documents. All involve leased equipment with all hardware and software maintenance provided. Annual cost information for the alternatives is presented below: AlternativeFixed Cost ($)Variable Cost ($) 110000.02 28000.08 35000.25

63. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall15 - 63 5-63 Break-Even Analysis Exercise - 2  Identify the breakeven points for the three alternatives. If A&F Tax expects to scan 1500 documents in the upcoming year, which alternative should be selected?