Assignment 1 and 2

Copyright Information (bibliographic) Document Type: Book Chapter Title of book: Operations and Supply Chain Management (15 th Edition) Author of book: F. Robert Jacobs, Richard B. Chase Chapter Title: Chapter 3 Design of Products and Services Author of Chapter: F. Robert Jacobs, Richard B. Chase Year: 2018 Publisher: McGraw-Hill Education Place of Publishing: United States of America The copyright law of the United States (Title 17, United States Code) governs the making of photocopies or other reproductions of copyrighted materials. Under certain conditions specified in the law, libraries and archives are authorized to furnish a photocopy or other reproduction. One of these specified conditions is that the photocopy or reproduction is not to be used for any purpose other than private study, scholarship, or research. If a user makes a request for, or later uses, a photocopy or reproduction for purposes in excess of fair use that user may be liable for copyright infringement. Learning Objectives L03-1 Know the issues associated with product design and the typical processes used by companies. L03-2 Illustrate how different criteria can impact the design of a product. L03-3 Contrast how service products can have different design criteria compared to manufactured products. L03'-4 Evaluate the economic impact of a new product on a company. L03-5 Illustrate how product development is measured in a company. IDEO (prbnoupced "ey'e'~ciee"oh'l)Js the woricl~s most·.·. ce1~6ratecj. design "~~ddnnovatic511 .. <:~(lsultarl2;. •.rts t1ltlmate· C:re~ti~n is the process of creativity. itself. <•·fo~. co-founder;Davias;M, •Kell€!Y and ~is .. colleagues;· ::~rNJv6f i< ·1s·~~ray, ·b~~j~§t6r~ ili9f;is a ~tience;·'·ci nd the :~~1n05t.;i~~6rtantfa(~H~tBbr~~~!h~;fLi~s(www.ideo.

~it'.~6rl'iJ~~:·fti~Jocus·•~f\h~<·2orriffi~h}H~ pu~ely on the •1:Cle~i9H·;6j11~-# ~rod u~f~,§el;Vices;··a~d .oilier. interac­ ~;rtiye:~~~~f i~§~~~ d~sir~~.·by:custbrn~rs. ·• >J\i.J~J;?s~~pe:c.?:f~.6r~g~S~· .•. ~)lthe··•coni~any ranges ·~•.· fr~n1'.Pr~Jecls r~iatedfo~;~r;tM~bilify 0ith ·Ford Motor J~\CB~·b~fi)/lt~1tfi~1~~y~16'p~efit'·~f~igifal .• healthcare 'Ja'~p~.tt}af~i~~";p.~dpl~·t~~~abilify:t~f}a'cktheir mood, :·;'i1e~p.;~nctb'r~ath1~5§ne~~:·Rcith~r:'tha~Jhinking· of •.:(l~~f~:rij~~. ·~· n~e~f :~h52~5~)~~6it1!1g.~ ..s~t ·of steps, ONE OF MANY COLLABORATIVE <; ' 1B~Qse.es.tlie~~ClCEl~~(~§ (}~~rla~pi~gthb~ght spaces. DESIGN SESSIONS IN IDEO's ; ~+~~se~/~~~~s~~~~}efeftedt~ a~f-6110&§:< MUNICH OFFICE. ·· •· '1~g~;r~tii5i1dhe,prib1eni()rb~~()'rtfa1ityt~~tmofiJ~i~~~t~~:hee. C:t'toranew design; Courtesy ofIDEO ',:'l , ·~ .>····•· 1a~citfo}1....,.~here···rnoae1 protetYpes, vl~!J~l.f5ic:tures, oF.quantil:ativ'e ·analysis· is · •· 1 9'9n~t6·t~st1d~a~;~·· • lmpl~mentation-where ideas are made. into new products and services. 42 Human desjra.bility, business vi.ability, and technical feasibifitY are tf;le o.a~jc t~n'eis of the IDEO de'signthir\king t)rckess, and.innovation requir~~~hejntegraticmofthe~e · ten(;lts: On~ of IDEO's e~rly. ~esign projects Vjas 'Apple C:ci'~pYter·~·fir~t 111ouse;.~ ?trik­ ing and b.~autifµI design that,has endured the test of time. ·· . . . . . Designing new products and getting them to market quickly is the challenge facing manufactur­ ers in industries as diverse as computer chips and potato chips. Customers of computer chip manufacturers, such as computer companies, need ever-more-powerful semiconductors for their evolving product lines. Food producers need to provide their grocery store customers with new taste sensations to sustain or enlarge their retail market share. How manufactured products are designed and how the process to produce them is selected are the topics of this chapter. PRODUCT DESIGN Companies continuously bring new products to market as customer needs and wants change.

Product design is integral to the success of many companies and differs significantly depend­ ing on the industry. For consumer products, understanding consumer preferences and mar­ ket testing prospective products are very important activities. For pharmaceuticals, extensive clinical tests are often required that involve carefully controlled experiments to test both the safety and the effectiveness of a potential product. Companies that specialize in the design of products have highly developed processes to support the activities needed for an industry.

In today's world, companies often outsource major functions (such as product design) rather than support these functions in-house. Companies that specialize in designing and man­ ufacturing products for other companies have become very successful. The producing compa­ nies are called and they have become successful in industries such as electronic products, clothing, drugs, plastics, and custom manufacturing. A simple defini­ tion of a contract manufacturer is an organization that performs manufacturing and/or pur­ chasing needed to produce a product or device not for itself, but as a service to another firm.

The use of contract manufacturers has dramatically changed the way traditional manufac­ turing companies now operate. Depending on the situation, contract manufacturers will take various roles for a company. For example, in the automobile industry, contract manufacturers produce many of the parts and subassemblies, such as the seats and other interior parts, the headlight and taillight assemblies, and the electronic equipment such as radio/CD and GPS navigation systems. The actual automobiles are often built regionally in the countries where the 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 manu­ facturing partners for success.

Given the potential advantages of using contract manufacturers for producing products and employing specialized design firms for designing their products, a firm must decide what its core competency should be. A company's is the one thing that it can do better than its competitors. A core competency can be anything from product design to sus­ tained dedication of a firm's employees. The goal is to have a core competency that yields a long-term competitive advantage to the company. As an example, consider Honda's expertise in engines. Honda has been able to exploit this core 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 has been claimed that Volvo's core competency is safety.

A core competency 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. Know the issues associated with product design and typical processes used by companies.

An organization that performs manufacturing and/or purchasing needed to produce a product or device not for itself, but as a service to another firm.

The one thing that a firm can do better than its competitors. The goal is to have a core competency that yields a long-term competitive advantage to the company. 43 44 Section 1 Strategy, Products, and Capacity A good example is Black & Decker, the U.S. manu­ facturer of tools. Black & Decker's core technological competency is in 200-to 600-watt electric motors. All of its products are modifications of this basic technol­ ogy (with the exception of workbenches, flashlights, battery-charging systems, toaster ovens, and coffee percolators). The company produces products for three markets:

I. The home workshop market. In the home work­ shop market, small electric motors are used to pro­ duce drills, circular saws, sanders, routers, rotary tools, polishers, and drivers. 2. The home cleaning and maintenance market. In © Victor J. Blue/Bloomberg via Getty Images the home cleaning and maintenance market, small electric motors are used to produce handheld and full-size vacuum cleaners, hedge trimmers, edge trimmers, lawn mowers, leaf blowers, and pressure sprayers. 3. The kitchen appliance market. In the kitchen appliance market, small electric motors are used to produce can openers, food processors, blenders, breadmakers, and fans.

The real challenge for a firm is to decide exactly how the various functions critical to suc­ cess will be handled. At one extreme is the fully vertically integrated firm where all activities from the design to the fabrication of the individual parts are handled in-house. At the other extreme is a company that only sells products and outsources all the design and manufactur­ ing functions.

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

Apple Computer designs the iPhone but subcontracts the fabrication of these devices (while maintaining ownership of the intellectual property).

Tesla Motors has developed an all electric car that has a range of 265 miles, the range of a typical gasoline powered car. In the past, electric cars were considered a big fire risk due to their large batteries. So Tesla developed small cylindrical batteries that are distributed to reduce the risk of fire. In addition, the new Tesla's supercharging technology reduces the time required to recharge the battery to the point where soon it may take no longer to recharge a Tesla that it takes to fill the gasoline tank in a regu­ lar car. Tesla's network of charging stations along major highways makes their cars practical for longer road trips. The company's new innovations related to self-driving technology may totally change the way we think about automobile transportation in the future.

A pharmaceutical company may purchase information on genetic targets from a genomics company, contract with a specialist in combinatorial chemistry for rapid synthesis and screening of candidate compounds, and even utilize a contract research organization to conduct clinical trials but retain ownership of the intellectual prop­ erty (patents, experimental data, trademarks, etc.) of the drug that eventually comes to market. Product Development Process We begin by defining a generic product development process that describes the basic steps needed to design a product. This process represents the basic sequence of steps or activi­ ties that a firm employs to conceive, design, and bring a product to market. Many of these tasks involve intellectual rather than physical activities. Some firms define and follow a precise and detailed development process, while others may not even be able to describe their processes. Every organization employs a process that is different from that of every other organization; in fact, the same organization may follow different processes for differ­ ent product groups. 45 Design of Products and Services Chapter 3 The Generic Product Development Process. Six phases are shown, including the tasks and responsibilities of the key functions of the organization for each phase. Phase 1: Phase 3: Phase 5: Concept Phase 2: System- Detail Phase 4: Testing Production Phase 0: Planning Development Level Design Design and Refinement Ramp-Up Marketing • Articulate market Collect customer Develop plan for Develop mar- Develop Place early opportunity. needs. product options keting plan. promotion production • Define market Identify lead and extended and launch with key segments. users. product family.

materials. customers.

Identify competi- Set target sales Facilitate field tive products. price point(s).

testing.

Design • Consider product • Investigate feasi- Generate alter­ • Define part Test perfor- Evaluate early platform and bility of product native product geometry.

mance, life, production architecture. concepts. architectures. • Choose and reliability.

output.

• Assess new Develop indus- Define major materials. Obtain regula­ technologies. trial design subsystems and • Assign tory approvals.

concepts. interfaces.

tolerances. Implement Build and test Refine industrial • Complete design experimental design. industrial changes.

prototypes. design control documentation.

Manufacturing Identify production constraints.

Set supply chain strategy. • Estimate manu­ facturing cost.

• Assess produc­ tion feasibility. • Identify sup­ pliers for key components. Perform make- buy analysis.

Define final assembly scheme.

Set target costs. Define piece- part production processes.

Design tooling.

Define quality assurance processes.

Begin procure­ ment of long- lead tooling. Facilitate sup­ plier ramp-up.

Refine fab­ rication and assembly processes.

Train workforce.

Refine quality assurance processes. • Begin opera­ tion of entire production system.

Other Functions • Research: Dem- Finance:

Facili­ • Finance: Facili- Sales: Develop onstrate available tate economic tate make-buy sales plan.

technologies. analysis. analysis.

Finance: Provide Legal: lnves- Service: Identify planning goals. tigate patent service issues.

General Manage- issues.

ment: Allocate project resources. Our generic product development process consists of six phases, as illustrated in Exhibit 3.1. The process begins with a planning phase, which is the link to advanced research and technology development activities. The output of the planning phase is the project's mis­ sion statement, which is the input required to begin the concept development phase and serves as a guide to the development team. The conclusion of the product development process is the product launch, at which time the product becomes available for purchase in the marketplace.

Exhibit 3.1 identifies the key activities and responsibilities of the different functions of the firm during each development phase. Because of their continuous involvement in the process, we articulate 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. 46 Section 1 Strategy, Products, and Capacity KEY IDEA Executing this development process within a firm is often organized using project management techniques. These techniques are described in the next chapter. The six phases of the generic development process are the following: Phase 0: Planning. The planning activity is often referred to as "phase zero" because it precedes the project approval and launch of the actual product development process. This phase begins with corporate strategy and includes assessment of technology developments and market objectives. The output of the planning phase is the project mission statement, which specifies 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 concepts are 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 the product architecture and the decomposition of the product into subsystems and compo­ nents. The final assembly scheme (which we discuss later in the chapter) for the produc­ tion system is usually defined during this phase as well. The output of this phase usually includes a geometric layout of the product, a functional specification of each of the prod­ uct's subsystems, and a preliminary process flow diagram for the final assembly process. Phase 3: Detail design. This phase includes the complete specification of the geometry, materials, and tolerances of all the unique parts in the product and the identification of all the standard parts to be purchased from suppliers. A process plan is established, and tooling is designed for each part to be fabricated within the production system. The output of this phase is the drawings or computer files describing the geometry of each part and its production tooling, the specifications of purchased parts, and the process plans for the fabrication 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 the production version of the product but not necessarily fabricated with the actual processes to be used in production. Prototypes are tested to determine whether the product will work as designed and whether the product satisfies customer needs. Phase 5: Production ramp-up. In the production ramp-up phase, the product is made using the intended production system. The purpose of the ramp-up is to train the workforce and to work out any remaining problems in the production processes. Products produced during 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 to ongoing production is usually gradual. At some point in the transition, the product is launched and becomes available for widespread distribution.

The development process described in Exhibit 3.1 is generic, and particular processes will differ in accordance with a firm's unique context. The generic process is most like the process used in a mm*et-pull situation. This is when a firm begins product development with a market opportunity and then uses whatever available technologies are required to satisfy the market need (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 push products, platform products, process-intensive products, customized products, high-risk products, 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 are summarized in Exhibit 3.2. Tech no Io g y- Push Products In developing technology-push products, a firm begins with a new proprietary technology and looks for an appropriate market in which to apply this technology (that is, the technology "pushes" development). Gore-Tex, an expanded 47 Design of Products and Services Chapter 3 Summary of Variants of Generic Product Development Process Process Type Description Distinct Features Examples Generic (market-pull products) The team begins with a Process generally includes dis­ Sporting goods, furniture, market opportunity and tinct planning, concept develop­ tools selects appropriate tech­ ment, system-level design, detail nologies to meet customer design, testing and refinement, needs and production phases Technology-push products The team begins with a Planning phase involves matching new technology, then finds technology and market; concept an appropriate market development assumes a given Platform products The team assumes that the new product will be built around an established technology Concept development assumes a proven technology platform Gore-Tex rainwear, Tyvek envelopes Consumer electronics, computers, printers Process-intensive products Characteristics of the prod­ Either an existing production pro­Snack foods, breakfast uct are highly constrained cess must be specified from the cereals, chemicals, by the production process start or both product and process semiconductors must be developed together from the start Customized products New products are slight Similarity of projects allows for a Motors, switches, batteries, variations of existing streamlined and highly structured containers development High-risk products Technical or market uncer­ Risks are identified early and Pharmaceuticals, space tainties create high risks of tracked throughout the process; systems failure analysis and testing activities take place as early as possible Quick-build products Rapid modeling and Detail design and testing phases Software, cellular phones prototyping enables many are repeated a number of times design-build-test cycles until the product is completed or time/budget runs out Complex systems System must be decom­ Subsystems and components Airplanes, jet engines, posed into several are developed by many teams automobiles subsystems and many working in parallel, followed by components system integration and validation Teflon sheet manufactured by W. L. Gore & Associates, is a good example of tech­ nology push. The company has developed dozens of products incorporating Gore­ Tex, including artificial veins for vascular surgery, insulation for high-performance electric cables, fabric for outerwear, den­ tal floss, and liners for bagpipe bags. Platform Products A platform product is built around a preexisting tech­ nological subsystem (a technology plat­ form). Examples include the hybrid motor used in the Toyota Prius (as shown in the photo to the right), the Apple iOS operat­ ing system, and the video imaging system used in Canon cameras. Huge investments were made in developing these platforms, TOYOTA HYBRID HSD CUTAWAY DEMONSTRATION CAR AT PARIS MOTOR SHOW 2010. and therefore every attempt is made to Focus Technotogy!Atomy 48 Section I Strategy, Products, and Capacity KEY IDEA The product development process needs to be adapted depending on marketand product characteristics. incorporate them into several different products. In some sense, platform products are very similar to technology-push products in that the team begins the development effort with an assumption that the product concept will embody a particular technology. The primary differ­ ence is that a technology platform has already demonstrated its usefulness in the marketplace in meeting customer needs. The firm, in many cases, can assume that the technology also will be useful in related markets.

Products built on technology platforms are much simpler to develop than if the technology were developed from scratch. For this reason, and because of the possible sharing of costs across several products, a firm may be able to offer a platform product in markets that could not justify the development of a unique technology. Process -1 ntens Ive Products Examples of process-intensive products include semiconductors, foods, chemicals, and paper. For these products, the production process has an impact on properties of the product so that product design cannot be separated from the production process design.

In many cases, process-intensive products are produced at very high volumes and are bulk, rather than discrete, goods. Often, the new product and new process are developed simultaneously. For example, creating a new shape of breakfast cereal or snack food requires both product and process development activities. In other cases, the existing process will constrain the product design by the capabilities of the process. This might be true of a new paper product to be made in a particular paper mill or a new semiconductor device to be made in an existing wafer fabrication facility, for example.

Custom ized Prod uct s Customized products are slight variations of standard configurations and are typically developed in response to a specific order by a customer.

Examples include switches, motors, batteries, and containers. Developing these products consists primarily of setting values of design variables such as physical dimensions and materials. Companies can become very good at quickly producing these custom products using a highly structured design and development process structured around the capabilities of the process to be used. High· RI s k Products High-risk products are those that entail unusually large uncertainties 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 steps to address the largest risks in the early stages of product development. This usually requires completing some design and test activities earlier in the process. For example, if there is high uncertainty related to the technical performance of the product, it makes sense to build working models of the key features and to test these earlier in the process. Multiple solution paths may be explored in parallel to ensure that one of the solutions succeeds. Design reviews must assess levels of risk on a regular basis, with the expectation that risk is being reduced over time and not postponed. Q u I ck· Bu I I d Prod uct s For the development of some products, such as software and many electronic products, building and testing prototype models has become such a rapid process that the design-build-test cycle can be repeated many times. Following concept development in this 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 the fast prototyping cycle by using the result of each cycle to learn how to modify the priorities for the next cycle. Customers may even be involved in the testing process. When time or budget runs out, usually all of the high- and medium-priority features have been incorporated into the evolving product, and the low-priority features may be omitted until the next product generation. Com p I ex Systems Larger-scale products such as automobiles and airplanes are complex systems composed of many interacting subsystems and components. When developing complex systems, modifications to the generic product development process address a number 49 Design of Products and Services Chapter 3 Google Virtual Reality Cardboard The Google Cardboard is a simple cardboard viewer that is used with your smartphone so you can experience virtual reality. The simple $20 product was bought by over 5 mil­ lion people in less than a year. You can virtually travel to locations all over the world, even totally imaginary places.

Special Cardboard apps like Chair In A Room, Vrse, Lamper VR: Firefly Rescue, Caaaaardboard!, and Proton Pulse allow you to better understand science and nature by putting you in the center ofthe action. The gadget is the winner of many design innovation awards. of system-level issues. The concept development phase considers the architecture of the entire system, and multiple architectures may be considered as competing concepts for the overall system. The system-level design becomes critical. During this phase, the system is decomposed into subsystems, and these are decomposed further into many components. Teams are assigned to develop each component. Additional teams are assigned the special challenge of integrating Concurrent components into the subsystems, and then integrating these into the overall system. Detail design of the components is a highly parallel process, often referred to as Emphasizes cross­ with many separate development teams working at once. System engineering functional integration and specialists manage the interactions across the components and subsystems. The testing and concurrent development refinement phase includes not only system integration but extensive testing and validation of of a product and its the product. associated processes. PRODUCT DESIGN CRITERIA In this section, we illustrate how different criteria can impact the design of a product. The most fundamental criteria are those that relate directly to what the customer wants. Matching a product's design with the desire of the target customer group is essential from a market­ ing view. Value is another criterion that we address in this section. This criterion involves designing the product so that it can be produced at a low cost while maintaining those features desired by the customer. Next, criteria related to the manufacturability of the product are essential to having a low-cost manufacturing process. Finally, we address the environmental impact of a product and how this relates to product design. Designing for the Customer Before we detail the hows and whys of designing and producing products, it is useful to reflect (or, perhaps more accurately, to editorialize) on the issue of product design from the user's standpoint. In recent years, companies have been so caught up with technological efforts and advances-especially in the field of electronics-that somewhere along the line, consumers were forgotten. Designing for aesthetics and for the user is generally termed industrial design. IDEO is one of the most successful industrial design firms in the world. The unique concepts used at the company are described in the chapter's opening vignette titled "IDEO, A Design and Innovation Firm." Illustrate how different criteria can impact the design of a product. 50 Section 1 Strategy, Products, and Capacity function deployment (QFD) A 13rocess that helps a company determine the product characteristics important to the consumer and to evaluate its own product in relation to others. Quality Function Deployment One approach to getting the voice of the customer into the design specification of a product is This approach, which uses interfunctional teams from marketing, design engineering, and manufacturing, has been credited by Toyota Motor Corporation for reducing costs on its cars by more than 60 percent by significantly shortening design 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 and preferences are defined and broken down into categories called customer requirements. One example is an auto manufacturer that would like to improve the design of a car door. Through customer surveys and interviews, it determines that two important customer requirements in a car door are that it "stays open on a hill" and is "easy to close from the outside." After the customer requirements are defined, they are weighted based on their relative importance to the customer. Next, the consumer is asked to compare and rate the company's products with the products of competitors. This process helps the company determine the product char­ acteristics that are important to the consumer and to evaluate its product in relation to oth­ ers. The end result is a better understanding and focus on product characteristics that require improvement. QFD INVOLVES CONVERTING THE EXPECTATIONS AND DEMANDS OF CUSTOMERS INTO CLEAR OBJECTIVES, WHICH ARE THEN TRANSLATED INTO VEHICLE SPECIFICATIONS. FOR EXAMPLE, TOPSPEED FOUND THAT PASSENGERS BECAME UNCOMFORTABLE IF THE CAR ROLLED MORE THAN TWO DEGREES AND SIDE ACCELERATION EXCEEDED 13.2 FEET PER SECOND SQUARED. THESE DATA WERE USED TO HELP DEFINE DESIGN CRITERIA FOR THE CHASSIS ENGINEERS. Courtesy of Topspeed.com/ Fordlmoges House A matrix that helps a product design team translate customer requirements into operating and engineering goals. Customer requirement information forms the basis for a matrix called the (see Exhibit 3.3). By building a house of quality matrix, the cross-functional QFD team can use customer feedback to make engineering, marketing, and design decisions. The matrix helps the team translate customer requirements into concrete operating or engineering goals.

The important product characteristics and goals for improvement are jointly agreed on and detailed in the house. This process encourages the different departments to work closely together, 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 focus on building a product that satisfies customers. The first step in building the house of quality is to develop a list of customer requirements for the product. These requirements should be ranked in order of importance. Customers are then 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 to customer requirements. An evaluation of these characteristics should support or refute 51 Design of Products and Services Chapter 3 Completed House of Quality Matrix for a Car Door * Strong negative o:i Competitive >2 8 evaluation B c: (.) " "O "O c: 0 "O "O a .::! X=Us " "' '-' 0 u '-' - " •Vj "' ....

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A=Comp.A 0 u ·~ c: 0 '" u J:: .... '-' c: »-o " B =Comp. B ..:< "O ~.g ·~·a ... u c: ~'-' ... c: ... ­"''" Technical characteristics ::l"' (5 is best) o.~ Customer 0 c: '-'" ]8 c: 0 0"' c: 0.. " "' requirements u bfj DJu Q ~ DJ 0 ~ -, 8 ... Target values ..."' e.u~ :::> o:i o:i "'~ "' > c: c:"' ~ J:: c: c: 2 c: 2 "'t­ ·a,....,. ·a .......

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@ Strong positive 0 Positive x Negative customer perception of the product. These data are then used to evaluate the strengths and weaknesses of the product in terms of technical characteristics. Value Analysis/Value Engineering Another way to consider customers in designing products is by analyzing the "value" they see in the end product. Because it is so important that value be designed into products, we briefly describe value analysis and value engineering. The purpose of is to simplify products and processes. Its objective is to achieve equiva­ lent or better performance at a lower cost while maintaining all functional requirements defined 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 product specifications and requirements as shown in production documents and purchase requests.

Typically, purchasing departments use VA as a cost reduction technique. Performed before the 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 occurs because new materials, processes, and so forth require the application of VA techniques to products Analysis with the purpose of simplifying products and processes by achieving equivalent or better performance at a lower cost. 52 Section 1 Strategy, Products, and Capacity r KEY IDEA . QFD and VA/VE are. intended to ensure that what the customer wants is considered in the design of a product. KEY IDEA DFMA is oriented toward the engineering ofthe product wit.h an emphasis on reducing production cost. that have previously undergone VE. The VANE analysis approach involves brainstorming 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?

Can any nonstandard parts be eliminated?

In the following section, we describe a more formal approach that is often used to guide the process of designing and improving the design of products. Designing Products for Manufacture and Assembly The word design has many different meanings. To some, it means the aesthetic design of a product, such as the external shape of a car or the color, texture, and shape of the casing of a can opener. In another sense, design can mean establishing the basic parameters of a system.

For example, before considering any details, the design of a power plant might mean estab­ lishing 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, and toler­ ance of the individual parts of a product. This is the concern of this section. It is an activity that starts with sketches of parts and assemblies and then progresses to the computer-aided design (CAD) workstation (described in Appendix B on Operations Technology), where assembly draw­ ings 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 this stage manufacturing and assembly problems are encountered and requests are made for design changes. Often, these design changes are major and result in considerable additional expense and delays in the final product release.

Traditionally, the attitude of designers has been "We design it; you build it." This has now been termed the "over-the-wall approach," where the designer is sitting on one side of the wall and throwing the design over the wall to the manufacturing engineers. These manufacturing engineers then have to deal with the prob­ lems that arise because they were not involved in the design effort. One way to overcome this problem is to consult the manufacturing engineers during the design stage. The resulting teamwork avoids many of the problems that will arise. These concurrent engineering teams require analysis tools to help them study proposed designs and evaluate them from the point of view of manufacturing difficulty and cost. How Does Design for Manufacturing and Assembly (DFMA) Work 7 Let's follow an example from the conceptual design stage. Exhibit 3 .4 represents a motor drive assembly that is required to sense and control its position on two steel guide rails. This might 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 to adjust the position sensor. A major requirement is a rigid base designed to slide up and down the guide rails, which will both support the motor and locate the sensor. The motor and sensor have wires connecting to a power supply and control unit. CAD DESIGNER WORKING AT COMPUTER MONITORS IN OFFICE. © Monty Rakusen/Getty Images RF 53 Design of Products and Services Chapter 3 Configuration of Required Motor Drive Assembly 3.25" Attached to screw drive Guide rails Motor-driven assembly inside cover Proposed Motor Drive Design Cover screw (4) 0.12 dia x 0.3 Bush (2) End plate I.e. steel, painted 4.5 x 2.5 x 1.3 'f brass, impregnated 1 powder metal 0.5 dia x 0.8 Plastic bushing 0.7 dia x 0.4 Cover 16-gauge steel. painted soldered seams 4.5 x 2.75 x 24 Set screw 0.06 x 0.12 Base aluminum, machined 4 x 21.2 x 1 Sensor 0.187 x 1 Motor screw (2) 0.2 dia x 0.6 End plate screw (2) · · · 0.2 dia x 0.5 A proposed solution is shown in Exhibit 3.5. The base has two bushing inserts so that the holes will not wear out. The motor is secured to the base with two screws, and a hole accepts the 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 wires from shorting out on the metal cover, should they become worn, a plastic bushing is fitted to the end plate, through which the wires pass. Finally, a box-shaped cover slides over the whole assembly from below the base and is held in place by four screws, two passing into the base and two passing into the end cover. 54 Section 1 Strategy, Products, and Capacity The incorporation of environmental considerations into the design and development of products or services.

These concerns relate to the entire life cycle, including materials, manufacturing, distribution, and the eventual disposal of waste. The current design has 19 parts that must be assembled to make the motor drive. These parts consist of the two subassemblies-the motor and the sensor-an additional eight main parts (cover, base, two bushings, two stand-offs, a plastic bushing, and the end plate), and nine screws.

The greatest improvements related to DFMA arise from simplification of the product by reducing the number of separate parts. In order to guide the designer in reducing the part count, the methodology provides three criteria against which each part must be examined as it is added to the product during assembly: 1. During the operation of the product, does the part move relative to all other parts already assembled? 2. Must the part be of a different material than, or be isolated from, other parts already assembled? 3. Must the part be separate from all other parts to allow the disassembly of the product for 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 with which to combine, so it is theoretically a necessary part. 2. Bushings (2). These do not satisfy the second criterion. Theoretically, the base and bushings could be of the same material. 3. Motor. The motor is a subassembly purchased from a supplier. The criteria do not 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 be arranged 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 theoreti­ cal 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 should be included. Justification may be based on practical, technical, or economic considerations.

In this example, it could be argued that two screws are needed to secure the motor and that one set screw is needed to hold the sensor, because any alternatives would be impractical for a low-volume product such as this. However, the design of these screws could be improved by providing them with pilot points to facilitate assembly.

Exhibit 3.6 is a drawing of a redesigned motor drive assembly that uses only seven separate parts. Notice how the parts have been eliminated. The new plastic cover is designed to snap on to the base plate. This new product is much simpler to assemble and should be much less expensive due to the reduced number of parts. Eco des ig n is the incorporation of environmental considerations in the design and development of products or services. Ecodesign is an extension of the other important 55 Design of Products and Services Chapter 3 Redesign of Motor Drive Assembly Following Design for Assembly (DFA) Analysis requirements considered in the design process such as quality, costs, manufacturability, functionality, durability, ergonomics, and aesthetics. As a result, ecodesigned products are innovative, have better environmental performance, and are of a quality at least equal to the market standard. This makes the use of ecodesign increasingly important for business and leads to clear advantages for those companies incorporating ecodesign. Ecodesign adopts an integrated approach to the relationship between products and services and the environment on three levels:

The whole life cycle of the product or service is considered.

The environmental impacts of a product arise not only during its manufacturing and use or when it has become waste, but throughout its entire life cycle. It includes the extraction and transport of resources needed to manufacture the product, the manufacturing processes, distribution, use and maintenance, reuse, and the treatment of its waste.

The product is considered as a system. All the elements needed to develop the product's function (consumables, packaging, energy networks) must also be taken into account.

A multicriteria approach is considered. All different environ­ mental impacts that can be generated by a product system along its life cycle are assessed in order to avoid trade-offs between different impact categories (for example, resource depletion, greenhouse effect, and toxicity).

BIOBAG BIODEGRADABLE AND COMPOSTABLE PLASTIC BAGS ON A ROLL ARE USED FOR CARRYING PRODUCE AT The application of ecodesign can benefit business, users, and soci­ BERKELEY'S FARMERS' MARKET. TEXT ON THE BAG SAYS ety at the same time because it responds to the common interest of "THIS BAG IS CERTIFIED COMPOSTABLE. USE, REUSE, THEN obtaining more efficient products in an economic as well as envi­ COMPOST." ECOLOGY CENTER'S BERKELEY FARMERS' ronmental dimension. The producer manufactures a product using MARKET PRIDES ITSELF ON BEING A "ZERO WASTE ZONE" fewer materials; using less water, energy, and so on; and generating AND PROHIBITING GENETICALLY MODIFIED FOODS. less waste to be managed. Consequently, the manufacturing costs are Green Stock Media!Alamy reduced. The user buys a more reliable and durable product that will need less energy or consumables to function and can be easily repaired when necessary. Soci­ ety will benefit by increasing the future availability of resources for other products or services and by preventing possible environmental damage, thereby saving any corresponding treat­ ment or remediation costs. 56 Section 1 Strategy, Products, and Capacity In addition, European regulations recognize and emphasize producers' responsibility in minimizing the environmental impacts of their products and services. Ecodesign can help producers to manage that responsibility and comply with product-related legislation. DESIGNING SERVICE PRODUCTS Contrast how service products can have different design criteria compared to manufactured products. GUESTS HAVE THEIR AUTOGRAPH BOOKS SIGNED AND PICTURES TAKEN WITH MICKEY MOUSE AT WALT DISNEY WORLD'S MAGIC KINGDOM IN LAKE BUENA VISTA, FLORIDA. As we saw in the last section, the detailed design of manufactured products is focused on reducing the number of parts in the item and designing the item in such a way that it can be efficiently produced. Service products are very different because direct customer involvement in the process introduces significant variability in the process in terms of both the time that it takes to serve a customer and the level of knowledge required of the firm's employees. Ques­ tions that should be addressed in the design of a service include: How will this variability be addressed? and What are the implications for operational cost and the customer service experience?

An important issue when developing a new service or changing an existing one is the ques­ tion of how different the new service is compared to the current services offered by the firm.

Here are three general factors to consider when determining this: 1. Similarity to current services. This means that the new service should fit into the current service experience for the customer. For example, Disneyland has started positioning employees with cameras around the park at memorable locations offer­ ing to take pictures of visitors that can be viewed online later. As a part of the greater service experience of making dreams come true and recording them, this has a good service experience fit. However, some services, like a car wash with a restaurant in the waiting area, are less complementary. 2. Similarity to current processes. Even the greatest service ideas require operational support to execute. One example of this is when grocery stores decided to offer home delivery. Even though this seemed like a logical extension of the service expe­ rience, it required completely new operational skills, such as selecting perishables for customers and delivering frozen foods. 3. Financial justification. Designing and implementing a new service is costly and should be financially justified. Although this is often thought of in a positive sense of making a profit, it can just as well be introducing a new service in order to keep from losing valued customers. Complexity and Divergence A useful way of analyzing the process similarity for new service development is by specifying the complexity and divergence of the proposed service process relative to the basic service process. Complexity is the number of steps involved in a service and the possible actions that can be taken at each step. Divergence is the number of ways a customer/ service provider interaction can vary at each step according to the needs and abilities of each. The result may be a combination of higher complexity/divergence on some steps and lower complexity/ divergence on others. This can be used to determine different resource requirements such as worker skills, layout, and process controls. For example, the hypothetical family restaurant considered in Exhibit 3.7 is considering whether to change the service to create a new process format. Relative to the current process, a minimum service format would have lower complexity/divergence, while an upscale format imagebroker!Alamy would have higher complexity/divergence. Design of Products and Services Chapter 3 57 Process Alternatives for a Family Restaurant Lower Complexity I Process Name Divergence Current Process Higher Complexity I Divergence Reservations No reservations Take reservation Specific table selection Seating Guests seat themselves Host shows guests Maitre d escorts guests to seats, pulls out the table chairs, and places napkins in their laps Menus No menu Menus on the table Recite menu; describe entrees and specials Bread No bread offered at the Serve bread and Assortment of hot breads and hors table butter d'oeuvres Ordering Guests select their food Take orders At table; taken personally by maitre d from buffet line Salads Salad bar Prepare orders Individually prepared at table Entrees Entrees offered on the Entree ( 15 choices) Expand to 20 choices; add flaming or sizzling buffet dishes, deboning fish at the table Desserts Dessert bar Dessert (6 choices) Expand to 12 choices Beverages Guests get their drinks from Beverage (6 Add exotic coffees, wine list, liqueurs the drink station choices) Service during the meal No service Serve orders Separate-course service; hand-grind pepper Payment Paid at entry to buffet Collect payment Choice of payment, including house accounts Table clearing Guests are asked to clear Table attendant Table attendant clears table throughout the the table themselves clears table at the meal end ECONOMIC ANALYSIS OF PRODUCT DEVELOPMENT PROJECTS Consider the case of a product development team in the midst of developing a new photo­ graph printer, the CI-700. The CI-700 would produce large-scale, full-color pictures from digital images. The primary markets for the product are the graphic arts, insurance, and real estate industries. During the CI-700's development, the team faces several decisions that it knows could have a significant impact on the product's profitability:

Should the team take more time for development in order to make the product available on multiple computer "platforms," or would a delay in bringing the CI-700 to market be too costly?

Should the product use proprietary print media or commonly available premium­ quality print media?

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

It is important to remember that economic analysis can capture only those factors that are mea­ surable and that projects often have both positive and negative implications that are difficult to quantify. Also, it is difficult for an economic analysis to capture the characteristics of a dynamic and 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 a new market opportunity? Should we proceed with the implementation of a selected concept? Should we launch the product we have developed? These decisions typi­ cally arise at the end of each phase of development. Evaluate the economic impact of a new product on a company 58 Section 1 Strategy, Products, and Capacity KEY IDEA 1 , ~· . ' I In developing these U models, it is best to start with a simple model and then expand the analysis if needed. 2. Operational design and development decisions. Operational decisions involve ques­ tions such as: Should we spend $100,000 to hire an outside firm to develop this component in order to save two months of development time? Should we launch the product in four months 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 finan­ cial implications of a product development project. In the following, we describe how to con­ struct this model. Build a Base-Case Financial Model Constructing the base-case model consists of estimating the timing and magnitude of future cash flows and then computing the net present value (NPV) of those cash flows. The timing and magnitude of the cash flows are estimated by merging the project schedule with the proj­ ect budget, sales volume forecasts, and estimated production costs. The level of detail of cash flows should be coarse enough to be convenient to work with, yet contain enough detail to facilitate effective decision making. The most basic categories of cash flow for a typical new product development project are:

Development cost (all remaining design, testing, and refinement costs up to production ramp-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 typi­ cally used in practice, but conceptually it is identical to more complex models. The numerical values of the cash flows come from budgets and other estimates obtained from the develop­ ment team, the manufacturing organization, and the marketing organization. We will illustrate the approach by using data similar to what might have been used by the Canon team develop­ ing the CI-700.

The following are cost estimates that we will use for our sample model: Development cost Ramp-up cost Marketing and support cost Unit production cost Sales and production volume Unit price $5 million $2 million $1 million/year $400/unit 20,000 units/year $800/unit KEY IDEA In this section, we assume you have done this type of analysis before. Ifyou are notfamiliar with this analysis process, you should study Appendix C to learn how it works. For our model, we assume that all revenue and expenses that have occurred prior to today are sunk costs and are irrelevant to NPV calculations. For those of you not familiar with NPV calculations, see Appendix C 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 3.8 shows the project 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 to be 5 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 the spreadsheet are the different cash flow categories, while the columns represent successive time periods. To keep things simple, we assume that the rate of cash flow for any category is constant across any time period. For example, total development spending of $5 million over one year is allocated equally to each of the four quarters. In practice, of course, the values can Design of Products and Services Chapter 3 59 CI-700 Project Schedule from Inception through Market Withdrawal Cl-700 Project Schedule 01 02 Development Ramp.up Marketing and support Production and sales Year3 Ye:ar4 JJ ~~""8~ cve!r 10 01 02 03 2 I Cl-700 Project Schedule 31 Development TJ Ramp-up ,2,J Marketing and support 11~,:~·::::·i~ :~:~:::ds) 01 Year 2 Year 3 Year 4 m oo ~ ~ m oo ~ ~ m oo ~ Year 1 02 03 04 01 10;'if! Development co~ }2j Ramp-up cost JBl Market,ing a.nd s~pport c~st 141 Production volume J§'.l Vnit production cost 16}Production cost Jij Sales volume ,JB 1 Unit price 19,jS:ales revenue 20 i -1,250 ·1,250 -1,250 ·1,250 ' • 1 · 000 • 1 :~sii -250 -250 -250 -250 -250 -250 -250 .250 -250 -250 -250 I s.ooo s,ooo s,ooo' s.ooo, s.ooo' s.ooo' s,ooo s:ooo s,ooo s.ooo~ s,ooo l -o.4 -o.4 -o.4 -0.4 -o.4 -0.4 -o.4 ·0.4 -o.4 -o.4 -0.4 I -2,000 -2,000 -2,000 -2,000 -2,000 -2,000 -2,000 -2,000 -2,000 -2,000 ·2,000 ,1 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 . 0.8 0 8 0.8 0 8 0.8 0.8 0.8 0 B 0.8 0.8 0.8 I 4~4~4~4~4~4~4~4~4~4~4~~ Merging the Project Financials and Schedule into a Cash Flow Report -1,250 -1,220 ·1,190 ·2,089 -1,132 1,547 1,509 1,472 1,436 1,401 1,367 1,334 1,301 1,269 1,239 1,208 8,203 be arranged in any way that best represents the team's forecast of the cash flows. We multiply 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 produc­ tion cost in each period. Exhibit 3.9 illustrates the resulting spreadsheet.

Computing the NPV requires that the net cash flow for each period be determined, and then that this cash flow be converted to its present value (its value in today's dollars), as shown in the last few rows of Exhibit 3.10. 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 percent per quarter) back to the first quarter of year 1 (a total of nine quarters) is $1,401,27 5. (The concepts and spreadsheet functions for calculating present value, net present value, and discount rate are reviewed in Appendix C.) $1, 750,000 = $1 401 275 1.025 9 , ' 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 $1,000.) 60 Section 1 Strategy, Products, and Capacity CI-700 Development Cost Sensitivity Change In Change in Change Development Development Cost Development Cost Change in NPV in NPV Cost(%) ($ thousands) ($thousands) NPV(%) ($ thousands) ($ thousands) 50 7,500 2,500 -29.4 5,793 -2.410 -964 20 6,000 1,000 -11.8 7,239 10 5,500 500 -5.9 7,721 -482 ~ KEY IDEA . Some companies f call this "what If" analysis. Answering these "what If" questions can be useful for understanding how sensitive an analysis is to cost and profit assumptions. 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 10,613 2.410 The NPV of this project, according to the base-case model, is positive, so the model sup­ ports and is consistent with the decision to proceed with development. Such modeling also can be used to support major investment decisions. Say, for example, the development team was deciding between two different production facilities with different ramp-up, production, and support costs. The team could develop a model for each of the two scenarios and then compare the NPV s. The scenario with the higher NPV would better support the investment decision. We now consider sensitivity analysis as a technique for studying multiple scenarios for ongoing product development decisions. Sensitivity Analysis to Understand Project Trade-Offs Sensitivity analysis uses the financial model to answer "what if' questions by calculating the change 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 incremental changes to development cost while holding other factors constant, we can see the incremental impact on project NPV. For example, what will be the change in NPV if the development cost is decreased by 20 percent? A 20 percent decrease would lower the total development spend­ ing from $5 million to $4 million. If development time remains one year, then the spending per quarter would decrease from $1.25 million to $1 million. This change is simply entered in the model, and the resulting NPV is calculated.

A 20 percent decrease in development cost will increase NPV to $9,167,000. This rep­ resents a dollar increase of $964,000 and a percentage increase of 11.8 in NPV. This is an extremely simple case: We assume we can achieve the same project goals by spending $1 million less on development, and we therefore have increased the project value by the present value 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 3.10.

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 proj­ ect development time. This would raise the development time from four to five quarters and delay the start of the production ramp-up, marketing efforts, and product sales. 2. Sales volume. Increasing sales is a powerful way to increase profit. Of course, a decrease in sales can result in significant loss. Consider, for example, the impact of a 25 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 cost results in a $1 increase in profit. Of course, the $1 increase in price may have a significant impact 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 pres­ ent value of that dollar to the value of the project. 61 Design of Products and Services Chapter 3 Financial modeling and sens1tiv1ty analysis are powerful tools for supporting prod­ uct development decisions, but these techniques have important limitations. Many argue that rigorous financial analyses are required to bring discipline and control to the prod­ uct development process. Others argue that financial analysis only focuses on measurable quantities and that it is often extremely difficult to predict these values accurately. The analysis is only as good as the assumptions built into the model, so these limitations must be considered. Then there are those that argue, perhaps more significantly, that activities associated with economic modeling can be very expensive and may significantly reduce the productivity associated with the real product development activities. Their point is that potentially productive development time is devoted to preparation of analyses and meet­ ings and the cumulative effect of this planning and review time can significantly increase development costs.

Development teams must understand the strengths and limitations of the techniques and refrain from developing a stifling bureaucracy around the development of new products.

New-product development should be a process that nurtures innovation and creativity. The purpose of economic modeling is simply to ensure that the team is making decisions that are economically sound. Time-to-market A measure of product development success.

There are two measures here: the frequency of new product introductions, and the time from initial concept to market introduction.

A measure of how well resources are used. According to Goldratt's definition (see Chapter 23), all the actions that bring a company closer to its goals. EASURING PRODUCT DEVELOPMENT PERFORMANCE There is strong evidence that generating a steady stream of new products to market is extremely important to competitiveness. To succeed, firms must respond to changing cus­ tomer 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 critical.

Firms also must bring new products and processes to market efficiently. Because the number of new products and new process technologies has increased while model lives and life cycles have shrunk, firms must mount more development projects than previously, and these projects must use substantially fewer resources per project.

In the U.S. automobile market, for example, the growth of models and market seg­ ments over the last 25 years has meant that an auto firm must initiate close to four times as many development projects simply to maintain its market share position. But smaller volumes per model and shorter design lives mean resource requirements must drop dra­ matically. Remaining competitive requires efficient engineering, design, and develop­ ment activities.

Measures of product development success can be categorized into those that relate to the speed and frequency of bringing new products online, to the productivity of the actual development process, and to the quality of the actual products introduced. The following are generic descriptions of typical measures: market-There are two aspects to this, the frequency of new product intro­ ductions and the time from initial concept to market introduction. Lv--~rnc~n measures as the number of engineering hours, the cost of materi­ als, and tooling costs are used in these measures. Often, comparison of actual versus planned costs are used.

Qualit3·-Measures that relate to the reliability of the product in use (referred to as the product's performance features compared to customer expectations (referred to as and the ability of a factory or service pro­ cess to produce the product or time-to-market, for example).

Taken together, time, productivity, and quality define the performance of development, and in combination with other activities-sales, manufacturing, advertising, and customer service- determine the market impact of the project and its profitability. Illustrate how product development is measured in a company.

Measures that relate to the reliability of the product in use (referred to as conformance quality), the product's performance features compared to customer expectations (referred to as design quality), and the ability of a factory or service process to produce the product {defects per million opportunities or delivery speed, for example). Conformance The degree to which the product or service design specifications are met. Design The inherent value of the product in the marketplace. Defects per million A metric used to describe the variability of a process. 62 Section 1 Strategy, Products, and Capacity ' Concept Connections l.tO 3-1 Know the issues associateCI with groCluet Clesign anCI tlie tygical processes useCI 6~ comganies. Summary • Product development is a major challenge that directly impacts the long-range success of a firm.

• Effectively managing the process requires an integrated effort involving all the functional areas of the firm.

• Many companies today outsource product design to companies that specialize in different industries. The use of contract manufacturers has changed the way many companies now operate. Key Terms Contract manufacturer An organization that performs manufacturing and/or purchasing needed to produce a product or device not for itself, but as a service to another firm. Core competency The one thing that a firm can do better than its competitors. The goal is to have a core • An issue is often deciding what a firm's core com­ petency should be to yield a long-term competitive advantage to the company.

• Product development is a multistep process that is unique to each organization. Typical steps in the pro­ cess are planning, concepts development, system-level design, design detail, testing and refinement, and pro­ duction ramp-up.

competency that yields a long-term competitive advan­ tage to the company.

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

1£0 B-2 Illustrate how Clifferent criteria can impact ttie Clesign of a proCluct. Summary • Different sets of criteria drive the design of a prod­ uct. Criteria that relate to customer wants are funda­ mental, while other criteria related to the cost of the Terms Quality function deployment (QFD) A process that helps a company determine the product characteristics impor­ tant to the consumer and to evaluate its own product in relation to others. House of quality A matrix that helps a product design team translate customer requirements into operating and engineering goals. Value analysis I value engineering (VA/VE) Analysis with the purpose of simplifying products and processes product, its manufacturability, and the impact on the environment are also important.

by achieving equivalent or better performance at a lower cost.

Ecodesign The incorporation of environmental consid­ erations into the design and development of products or services. These concerns relate to the entire life cycle, including materials, manufacturing, distribution, and the eventual disposal of waste.

~ ~ tli© a-a Gontrast ho.w serntice proClucts can have Clifferent Clesign criteria compar.eCI to manufactureCI proCluctS. Summary • Service products are different because direct customer involvement in the process introduces variability in terms of both the time it takes to serve a customer and the level ofknowledge required of the firm's employees.

• Fitting the service experience to the expectations of the customer will drive what needs to be done opera­ tionally to provide the service. . • Financial justification of service features must be done to ensure that customers can be retained while the company is making a profit from expected activities. -- of Products and Services 3 63 -1t1 S-!4 Evaluate tfie economic imgact oti a new groCf qct o·q a comgany. · . ­ Economic analysis that consists of estimating the timing and magnitude of future cash flows is used to understand the financial implications of a prod­ uct development project. Typical flows include - development cost, ramp-up cost, marketing and sup­ port cost, production cost, and sales revenue.

• Sensitivity analysis can be used to answer "what if'' questions that relate to project timing and costs. _;m S-5 Illustrate How groauct Cle.velogment is measureCI in a comgany: Summary • Generating a steady stream of new products to market is important to the competitiveness of the firm.

• Measures that relate to the time it takes to bring a product to market, costs related to engineering and Terms time-to-market A measure of product development suc­ cess. There are two measures here: the frequency of new product introductions, and the time from initial concept to market introduction. Productivity A measure of how well resources are used. According to Goldratt's definition (see Chapter 23), all the actions that bring a company closer to its goals. quality Measures that relate to the reliability of the product in use (referred to as conformance quality), the product's performance features compared to customer production, and the quality of the product can be used to evaluate product development success.

expectations (referred to as design quality), and the ability of a factory or service process to produce the product (defects per million opportunities or delivery speed, for example). Conformance quality The degree to which the product or service design specifications are met.

Design quality The inherent value of the product in the marketplace.

Defects per million opportunities (DPMO) A metric used to describe the variability of a process.

Solved Problem L03-4 VidMark, a manufacturer of cell phones, is currently developing a new model (VidPhone X70) that will be released on the market when development is complete. This phone will will allow the user to place ultra high definition video phone calls. VidMark is concerned about the development cost and time. It is also worried about market estimates of the sales of the new VidPhone X70. The cost estimates and forecast are given in the following table. Development Cost $2,000,000 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 Volume Year 3 40,000 Year 4 50,000 Year 5 40,000 64 Section 1 Strategy, Products, and Capacity Use the given data to develop a base-case analysis. The project schedule is shown as follows with timings of the cash flows. Project Schedule Year Year Year Year Year VidPhone X70 1 2 3 4 5 Development Ramp-up Marketing and Support Production Volume Several questions need to be answered for VidMark about this project:

a. What are the yearly cash flows and their present value (discounted at 12 percent) of this project? What is the net present value? b. What is the impact on VidMark if sales estimates are off by 20 percent? (Assume that VidMark reduces production volume to correspond to the new sales numbers.) c. What is the impact on VidMark if unit production cost is $85? (Assume sales estimates are accurate.) d. VidMark thinks it 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 still have a 3-year life but the forecasts starting in year 2 will be 48,000, 60,000, and 50,000. Is it worth it to VidMark to spend the extra money on development? (Assume the ramp-up, marketing and support costs will start in year 1.) Solution a. Start by building the base-case scenario (analysis is in OOOs). Project Schedule VidPhone X70 Year 1 Year 2 Year 3 Year 4 Year 5 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%) -$893 -$1,794 $1,352 $1,589 $1,078 NPV $1,333 The cash flows and present value of the cash flows are shown. The project NPV under the base case is $1.333 million. b. Ifsales are reduced by 20 percent, then project NPV drops to $337 ,000.

Project Schedule Year Year Year Year Year VidPhone X70 1 2 3 4 5 Period Cash Flow -$1,000 -$2,250 $1.420 $1,900 $1.420 PV Year 1 (r = 12%) -$893 -$1,794 $1,011 $1,207 $806 Project NPV $337 65 Design of Products and Services Chapter 3 Ifsales are increased by 20 percent, then project NPV goes up to $2.328 million. A change of 20 percent either way has a large impact on the NPV. Project Schedule Year Year Year Year Year VidPhone X70 1 2 3 4 5 Period Cash Flow -$1,000 -$2,250 $2,380 $3,100 $2,380 PV Year 1 (r = 12%) -$893 -$1,794 $1,694 $1,970 $1,350 $2,328 c. Increased unit production costs:

Project Schedule Year Year Year Year Year VidPhone X70 1 2 3 4 5 Period Cash Flow -$1,000 -$2,250 $1,500 $2,000 $1,500 PVYear 1(r=12%) -$893 -$1,794 $1,068 $1,271 $851 Project NPV $503 The cash flows are severely affected by the increased unit production cost. Increased future cash outflow of $1.3 million ( 130,000 units *$10 increase) causes a decrease in net present value of $830,000 ($1.333 million -$0.503 million). However, it still appears to be worth developing the new phone. d. Here are the changes proposed by VidMark:

Development Cost Development Time Ramp-up Cost Marketing and Support Cost Unit Production Cost Unit Price Sales and Production Volume Year 2 Year 3 __)'g9r,1 ________________________ $3,500,000 1 year $750,000 $500,000/year $75 $135 48,000 60,000 -~~------- ____ 5Q,_Q_()_Q_ Use this data to develop a base-case analysis. The project schedule is shown as follows with timings of cash flows. Project Schedule Year Year Year Year VidPhone X70 1 2 3 4 Development Ramp-up Marketing and Support Production Volume 66 Section 1 Strategy, Products, and Capacity It appears that VidMark is better off to take a fast approach to develop its new VidPhone X70 because the NPV of the base case is $1.333 million versus the fast development NPV of $1.452 million (see the following table). Project Schedule Year Year Year Year VidPhone X70 1 2 3 4 Development -$3,500 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 Unit Price (dollars) $135 $135 $135 Sales Revenue $6,480 $8,100 $6,750 Period Cash Flow -$4,750 $2,380 $3,100 $2,500 PV Year 1 (r = 12%) -$4,241 $1,897 $2,207 $1,589 NPV $1,452 Discussion Questions L03-1 1. Describe the generic product development process described in the chapter. How does the process change for technology-push products? L03-2 2. How does the QFD approach help? What are some limitations of this approach? 3. Discuss the product design philosophy behind industrial design and design for manufac­ ture and assembly. Which one do you think is more important in a customer-focused prod­ uct development? 4. Discuss design-based incrementalism, which is frequent product redesign throughout the product's life. What are the pros and cons of this idea? L03-3 5. Do the concepts of complexity and divergence apply to an online sales company such as Dell Computer? L03-4 6. What factors must be traded off in the product development process before introducing a new product? L03-5 7. Coca-Cola is a well-established consumer products company with a strong position in the global market. The sales of its core soda products have remained relatively stable for decades, yet the company has continued to grow and has remained extremely profitable.

Discuss Coca-Cola's history in light of the statement that "generating a steady stream of new products to market is extremely important to competitiveness." Does Coca-Cola's suc­ cess disprove that statement? Is the company an exception to the rule or an example of its application? Objective Questions L03-1 1. Which phase of the generic development process involves construction and evaluation of multiple preproduction versions of the product? (Answer in Appendix D) 2. A process that emphasizes cross-functional integration and concurrent development of a product and its associated processes is known as __ . 3. Match the following product types to the appropriate product development description. 50 Design of Products and Services Chapter 3 67 ___ Technology-push A. Entail unusually large uncertainties about the technology or products market.

The development process takes steps to address those uncertainties. ___ Platform products B. A firm with a new proprietary technology seeks out a market where that technology can be applied. ___ Process-intensive products C. Uses a repeated prototyping cycle. Results from one cycle are used to modify priorities in the ensuing cycle. ___ High-risk products D. The production process has an impact on the product properties. Therefore, product design and process design cannot be separated. ___ Quick-build products E. Products are designed and built around a preexisting tech­ nological subsystem. 4. Designing products for aesthetics and with the user in mind is generally called what? L03-2 5. The first step in developing a house of quality is to develop a list of __ . 6. The purpose of value analysis/value engineering is to __ . L03-3 7. What is it about service processes that makes their design and operation so different from manufacturing processes? 8. What are the three general factors that determine the fit of a new or revised service process? L03-5 9. Measures of product development success can be organized into what three categories?

(Answer in Appendix D) 10. Tuff Wheels was getting ready to start its 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 like a miniature bulldozer, complete with caterpillar tracks and a blade.

Tuff Wheels has forecasted the demand and the cost to develop and produce the new Kiddy Dozer. The following table contains the relevant information for this project. Development Cost Estimated Development Time Pilot Testing Ramp-up Cost Marketing and Support Cost Sales and Production Volume Unit Production Cost Unit Price Interest Rate $1,000,000 9 months $200,000 $400,000 $150,000 per year 60,000 per year $100 $170 8% Tuff Wheels also has provided the project plan shown as follows. As can be seen in the project plan, the company thinks that the product life will be three years until a new prod­ uct must be created. Project Schedule Year1 Year 2 Year3 Year4 Kiddy Dozer 01 02 03 04 01 02 03 04 01 02 03 04 01 02 03 04 Development Pilot Testing Ramp-up Marketing and Support Production and Sales 68 Section 1 Strategy, Products, and Capacity a. What are the yearly cash flows and their present value (discounted at 8 percent) of this project? What is the net present value? b. What is the impact on NPV for the Kiddy Dozer if the actual unit sales are 50,000 per year or 70,000 per year? c. What is the effect caused by changing the discount rate to 9, 10, or 11 percent? 11. Perot Corporation is developing a new CPU chip based on a new type of technology. Its new chip, the Patay2 chip, will take two years to develop. However, because other chip manufacturers will be able to copy the technology, it will have a market life of two years after it is introduced. Perot expects to be able to price the chip higher in the first year, and it anticipates a significant production cost reduction after the first year as well. The rel­ evant information for developing and selling the Patay2 is given as follows. Patay2 Chip Product Estimates Development Cost Pilot Testing Debug Ramp-up Cost Advance Marketing Marketing and Support Cost Unit Production Cost Year 1 Unit Production Cost Year 2 Unit Price Year 1 Unit Price Year 2 Sales and Production Volume Year 1 Sales and Production Volume Year 2 Interest Rate $20,000,000 $5,000,000 $3,000,000 $3,000,000 $5,000,000 $1,000,000 per year $655.00 $545.00 $820.00 $650.00 250,000 150,000 10% Patay2 Chip Project Timing Project Schedule Year1 Year2 Year3 Year4 Patay2 Chip 1st 2nd 1st 2nd 1st 2nd 1st 2nd half half half half half half half half Development Pilot Testing Debug Ramp-up Advance Marketing Marketing and Support Production and Sales a. What are the yearly cash flows and their present value (discounted at 10 percent) of this project? What is the net present value? b. Perot's engineers have determined that spending $10 million more on development will allow them to add even more advanced features. Having a more advanced chip will allow them to price the chip $50 higher in both years ($870 for year 1 and $700 for year 2).

Is it worth the additional investment? c. Ifsales are only 200,000 the first year and 100,000 the second year, would Perot still do the project? 12. Pick a product and list issues that need to be considered in its design and manufacture.

The product can be something like a stereo, cell phone, desk, or kitchen appliance. Con­ sider the functional and aesthetic aspects of design as well as the important concerns for manufacturing. of Products and Services 3 69 13. The following chart is a partial house of quality for a golf country club. Provide an importance weighting from your perspective (or that of a golfing friend) in the unshaded areas. If you can, using the QFD approach, compare it to a club where you or your friends play. WHATs versus HOWs Strong Relationship: • Medium Relationship: 0 Weak Relationship: !:,. Phvsical Aspects Manicured !!rounds Easy access Challen!!in!!

Service Facilities Restaurant facilities Good food Good service Good lavout Plush locker room Helpful service attendants Tournament Facilities Good tournament Prize Tvnes of plavers Fair handicannin!! svstem Perception Issues Presti!!ious "' u OJ 0.. .:;: :;; u·u; >. ..c 0...

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.• ..·: "' c "' "" OJ) c " ~ c u c "' ·o.. "' c "' 0.. " "' "" ~ e ·25 "' N c "" ·c c " . $ ..., OJ) ~ ·g 2 in u c ... OJ "' > "' ·a OJ) v c "' "" ['; "' 0 ~ c: u OJ ;;:: .g .s 0 0 ; ..• :. ? :·: 11. ... 1. •.. I ... I:: ... I·.... Ii>. .. I ·. :; h:· I·· •.i ·. I. 1L I . .... .. ;. 1•8 /. ·. I•.' · ... ; ; I· 1.-•.. .; . I·· ... I• ; .... ; ..... .. .:• !; .... I. .' •. : : I ; ·.·.· : ,•:. ... ; . :: ... 1 .. I.• ..· .. .. Case: IKEA: Design and Pricing The Swedish retailer dominates markets in 32 countries, and now it's poised to conquer North America. Its battle plan: Keep making its offerings less expensive, without making them cheap.

Above all else, one factor accounts for IKEA's suc­ cess: good quality at a low price. IKEA sells house­ hold items that are cheap but not cheapo, at prices that typically run 30 to 50 percent below the competition's.

While the price of other companies' products tends to rise over time, IKEA says it has reduced its retail prices by a total of about 20 percent during the past four years.

At IKEA, the process of driving down costs starts the moment a new item is conceived and continues relent­ lessly throughout its production run. The price of a basic Poang chair, for example, has fallen from $149 in 2000 to $99 in 2001 to $79 today. IKEA expects the most recent price cut to increase Poang sales by 30 to 50 percent.

IKEA's corporate mantra is "Low price with mean­ ing." The goal is to make things less expensive without ever making customers feel cheap. Striking that balance demands a special kind of design, manufacturing, and distribution expertise. But IKEA pulls it off in its own distinctive way: tastefully, methodically, even cheerfully, and yet somehow differently than any other company anywhere. Here's a step-by-step guide to how IKEA designs, builds, and distributes the items that the entire world wants to buy. The Trofe mug is one of the most popular IKEA prod­ ucts. The story of the mug is an example of how IKEA works, from a co-worker's bright idea through to produc­ tion and sales. It is also a story about all the demands that customers place on IKEA. A low price tag is the obvious one, but other requirements include function, modern design, environmental considerations, and mak­ ing sure products have been manufactured under accept­ able working conditions. Both customers and co-workers must be able to rely on IKEA. 70 Section 1 Strategy, Products, and Capacity Step 1. Pick a Price Product Development-A sketch for a new product? Yes, but it's also a calculation of what that product will cost.

The low price begins at the drawing board.

The team behind each product consists of designers, product developers, and purchasers who get together to discuss design, materials, and suitable suppliers. Everyone contributes with their specialist knowledge. Purchasers, for example, use their contacts with suppliers all over the world via IKEA Trading Service Offices. Who can make this at the best quality for the right price at the right time?

When product developers were given the task of creat­ ing a new mug over five years ago, they were told how much it should cost in the stores. In the case of Troff, the price had to be incredibly low-five Swedish kronor!

This mug had to have a real knockout price.

To produce the right mug at the right price, the devel­ opers had to take into account materials, colors, and design. For example, the mug is made in green, blue, yel­ low, or white because these pigments cost less than other shades, such as red. Step 2. Choose a Manufacturer Suppliers and Purchasing-The task of developing products never ends. Working with suppliers, the mug was shortened and the handle changed so it stacks more efficiently, saving space for transport, warehousing, and store display-and, not least, in the customers' cupboards at home. IKEA is always keen to banish as much air as possible from its packaging. Packages should preferably be flat for efficient transport and storage.

One supplier, a factory in Romania, has worked with IKEA for 15 years. Long-term relationships help both par­ ties to build up a huge fund of knowledge about demands and expectations. That is why products are often devel­ oped in close cooperation with suppliers. In the case of Trofe, for example, the new size has rationalized produc­ tion by making better use of the space in the kiln during the firing process. That's cost-effective and saves time.

IKEA has introduced a code of conduct govern­ ing working conditions and environmental awareness among suppliers. This deals with matters such as health and safety in the workplace and forbids the use of child labor. The practical work of implementing this code of conduct is carried out by co-workers in IKEA Trading Service Offices worldwide. Many suppliers already meet the demands; others are working together with IKEA to carry out the necessary improvements. IKEA also works closely with external quality control and audit compa­ nies that check that IKEA and its suppliers live up to the requirements of the code of conduct.

The low price tag is crucial to the vision IKEA has of creating a better everyday life for many people. That is why IKEA works nonstop to reduce costs. But it's also a question of saving raw materials and, ultimately, the environment. The low-cost mug is one example of how environmental considerations can influence the develop­ ment of products. For example, the new mug is lighter in color-a move that cuts costs and is more environmen­ tally friendly. The less pigment that is used, the better.

The mug is also lead- and cadmium-free. Step 3. Design the Product With a price point and a manufacturer in place, IKEA once again uses internal competition to find a designer and select a design for production. The designer begins the design process by writing a brief that explains the product's price, its function, the materials to be used, and the fabricator's capabilities. The designer then sends the brief to IKEA's staff designers and freelancers, and refines promising designs until settling on the one to pro­ duce. The designer wants products to be like Swiss Army knives-to get maximum functionality at minimum cost. Step 4. Ship It Distribution and logistics are the lifeblood of IKEA and important pieces of the puzzle on the road to a low price.

IKEA strives to deliver the right number of goods to the right stores at the right time. It calculates the goods requirements and makes sure that deliveries are efficient.

Each pallet holds 2,024 mugs, which are transported from Romania by rail, road, and sea to IKEA distribution centers around the world. Transportation does, of course, have an effect on the environment, but IKEA is working toward reducing environmental impact.

Many of IKEA's products are bulky-for example, tables and chairs. IKEA pioneered the concept of flat.

The company's eureka moment occurred in 1956, when one of IKEA's first designers watched a customer trying to fit a table into his car. There was only one way to do it: Remove the legs. From that day forward, most IKEA products have been designed to ship disassembled, flat enough to be slipped into the cargo hatch of a station wagon or safely tied down on an auto's roof rack.

In IKEA's innately frugal corporate culture, where waste has been declared a "deadly sin," the flat pack­ age is also an excellent way to lower shipping costs by maximizing the use of space inside shipping containers.

The company estimates transport volume would be six times greater if its items were shipped assembled. From the design studio to the warehouse floor, IKEA employ­ ees' mantra is always the same: "We don't want to pay to ship air." Making things flat is an IKEA obsession. How many times can you redesign a simple fired-clay coffee mug?

IKEA's mug was redesigned three times-simply to maximize the number of them that could be stored on a pallet. Originally, only 864 mugs would fit. A redesign added a rim such as you'd find on a flowerpot, so that each pallet could hold 1,280 mugs. Yet another redesign created a shorter mug with a new handle, allowing 2,024 to squeeze onto a pallet. While the mug's sales price has of Products and Services 3 71 remained at 50 cents, shipping costs have been reduced by 60 percent, which is a significant savings, given that IKEA sells about 25 million of the mugs each year. Even better, the cost of production at IKEA' s Romanian factory also has fallen because the more compact mugs require less space in the kiln.

When you ship 25 million cubic meters of goods all over the globe, flat-pack frugality adds up. IKEA now uses a 65 percent average fill-rate target for all the con­ tainers it ships, and it hopes to increase that to 75 percent.

Meeting that goal will require further design changes and sometimes even sucking the air out of items (like IKEA's shrink-wrapped pillows, which look like giant crackers on store shelves). And, of course, flat packing shifts the cost of product assembly to the customer, saving even more. As IKEA has shifted more of its buying from Europe to the Far East, shipping time and costs have become an even more critical concern. Last year, China tied Sweden atop IKEA's list of supplier countries. The company has responded by creating a global network of distribu­ tion centers, most of which are near container ports and major truck and rail routes. There are 18 IKEA distribu­ tion centers worldwide-which handle about 70 percent of IKEA's total product line-and 4 more are under con­ struction. The other 30 percent of IKEA's products travel directly from supplier to store.

Sometimes, however, product components actually come together for the first time in the store. In the case of the Poang chair, the cushion comes from Poland and the frame from China. The two pieces are united only when the customer pulls each one off the shelf.

Step 5. Sell It IKEA sells a lot of expensive furniture, and in a traditional store this is relatively easy: Put a piece in a lush setting, let the customer fall prey to visions of wealth and comfort, then offer plenty of easy credit. But to keep prices low, IKEA needs to sell furniture and other products such as the mug without salespeople or conspicuous price reduc­ tions. The company asks customers to assemble their fur­ niture themselves. And IKEA doesn't want to ship it to you either. By any conventional measure, these are formidable hurdles to overcome. Yet they also explain why IKEA has worked so hard to create a separate world inside its stores-a kind of theme park masquerading as a furniture outlet-where normal rules and expectations don't apply. The Trofe mugs arrive at IKEA stores packed on pal­ lets. Any transportation packaging is collected for recy­ cling. Price tags have already been placed on the mugs at the suppliers. In-store display is important. It's not just a question of displaying mugs and other products. It's also about providing inspiration for smart interior solutions.

Customers contribute to the low prices at IKEA by select­ ing and collecting the products from the self-serve area, Source: Information about the Trofe coffee mug was obtained from www.ikea.com. taking them home, and using the instructions enclosed to assemble them. Many will have already chosen the prod­ ucts from the IKEA catalog, of which 110 million copies are printed in 34 different language versions.

When you walk through the door of an IKEA store, you enter a meticulously constructed virtual Sweden. The first thing you encounter is a company-sponsored child-care facility. Hungry? Have some of those Swedish meatballs and lingonberries. The layout of an IKEA store guides shoppers in a predetermined path past several realistic model homes, which convey an eerily lived-in impression but are open for customers to sit in. Information kiosks provide advice on home decor. Color-coordinated cards offer plenty of suggestions on offbeat uses for products.

But the emphasis is always on price. Low-priced prod­ ucts that IKEA calls BTis ("breathtaking items") are often perched on risers, framed by a huge yellow price tag. Nearby, shoppers will find other products-pricier, more design-oriented-as substitutes for the BTI.

The model homes suggest cheerful young people throwing dinner parties in hallways, using mismatched office chairs and narrow side tables. These aren't the aspirational images you'll find at Pottery Barn or Crate & Barrel. These are people who are living well in mod­ est circumstances-frugal folks who know the value of a comfortable place to sit.

IKEA says its biggest selling point is the price tag, but it can't hurt that getting through one of IKEA's huge stores takes a lot of time. The layout is blatantly manipulative-though in a friendly, knowing way, not unlike at Disneyland-but when customers finally arrive at the checkout counter, they've had plenty of time to fully consider their purchases.

IKEA products broadcast an ethos for living in the modern world: Don't buy an ugly pitcher if you can get a stylish one for the same price. If you organize your plas­ tic bags, you'll feel more in control of your life. It's left­ brain logic applied to the right-brain art of living well.

And if happiness involves dragging a cumbersome flat package off the shelf, standing in line at the checkout, hauling the box home, and spending hours assembling a kitchen cabinet, well, 260 million customers a year are willing to make that trade-off.

And, of course, next year it will be even cheaper.

Questions I. What are IKEA's competitive priorities? 2. Describe IKEA's process for developing a new product. 3. What are additional features of the IKEA concept (beyond its design process) that contribute to creat­ ing exceptional value for the customer? 4. What would be important criteria for selecting a site for an IKEA store? 72 Section 1 Strategy, Products, and Capacity Case: Dental Spa V{ould a warm paraffin hand treatment during your dental cleaning or dental treatment put you at ease and make the process more bearable? That is the idea behind the new "dental spa" services opening in major cities throughout the United States. Beyond calming music and comfortable chairs and flat-screen TVs mounted on the ceiling with sound from the noise-canceling headphones that block unpleasant dental noises, at the same time foot scrubs, pedicures, or other spa services are sometimes possible.

Two major trends have helped fuel the growth of dental spas: lessening of the painful associations of dentistry and the increased cosmetic focus of dentistry that goes along with other spa treatments.

Questions 1. Which one of the three new service requirements would a dental spa least likely pass: service experi­ ence fit, operational fit, or financial impact? Why? 2. What are some of the main areas of complexity and divergence in this kind of operation relative to the standard dental clinic? Practice Exam In each of the following statements, name the term defined or the items requested. Answers are listed at the bottom.

1. An organization capable of manufacturing or purchas­ ing all the components needed to produce a finished product or device. 2. The one thing that a company can do better than its competitors. 3. The six phases of the product development process. 4. A useful tool for the economic analysis of a product development project. 5. An approach that uses interfunctional teams to get input from the customer in design specification. 6. A matrix of information that helps a team translate customer requirements into operating or engineering goals. 7. The greatest improvements from this arise from sim­ plification of the product by reducing the number of separate parts. 8. The incorporation of environmental considerations into the design and development of products or services. UE!S:lpO:lt[ '8 A:1qrn:issu puu aurmpu1nuurn 101 ua!s:ia "l A:l!Iunb JO :isnoH ·9 iu:irndo1;iA:ip uop:iun1 Al!JUn() ·~ ;in1uA iu:is:i1d J:JN ·v dn-drnUJ uop:inpo1d 'aups:i1 'UE!S:lp lflll:JP 'UE!S;ip j;JA:lJ-lU:l)SAS '1u;irndOJ:lA:lp Jd:J:JUO;J 'EU!UUllJd "£ km:i1:idrno;i ;)JOJ ·z J;JJnPUJUUUlU )JUJ)UOJ '! mux3 a;>!lJU.ld OJ S.l