Chapter 3

Product & Process Design

Part 1: Product Design
Product/Service Design Process
A process that defines the
Appearance and features,
Quality characteristics,
Spec limits and target levels
Inputs (labor, capital, materials)
Transformation process
Supply chain suppliers, channels of
distribution
of a product/service that a company is
planning to produce.


Steps in Product Design
Process
Idea Development
Product Screening
Preliminary Design and Testing
Final Design

Idea Development
Someone thinks of a unsatisfied need
Then someone thinks of a
product/service to satisfy it
e.g. customers, marketing, engineering,
reverse engineering


Idea Development
2006 Industrial Design Excellent
Awards (IDEAs) Winners - (BW,
7/10/06, p. 77)
Bumpbrella Concept Umbrella
Company: RKS Design
An inflatable umbrella that uses a
bicycle pump in the center for the arm.
A totally new design looking for a
company to make it.

Idea Development
2-Second Tent
Designer: Decathlon, France
Spring hoops allow you to throw this 2-
person tent into the air, and it opens
before hitting the ground.
Two second to open, 15 seconds to
close.

Idea Development
Idea Development
How Failure Breeds Success (BW,
7/10/06, p. 48)
Everyone fears failure. But breakthroughs
depend on it.
Innovation requires risk-taking.
Many companies have found success in
the ashes of the memorable misses.


Idea Development
McDonalds Hula Burger (1962)
Cheese-topped grilled pineapple on a bun
for Chicagoans who avoided eating meat
on Fridays.
Big flop!
McDonalds decided to try something less
extreme:
Came up with tastier hamburger-fee
alternative: the Filet-O-Fish, now a McDonalds
classic.
Idea Development
Fords biggest mistake 1958 Edsellead to its
greatest success.
Edsel was called the Titanic of the auto
industry.
Came in two sizes big and bigger
Overhyped, oversized, overpriced.







Idea Development
Idea Development
Designed based on a hunch about what
consumers want.
Abandoned in 1960, just after 2,800 cars
produced.
Ford substituted research for hunches.
Found out that consumers wanted style and
affordability
Result?
1964 Mustang

Idea Development
How do companies get employees to come
up with creative and innovative ideas?
By shifting from risk-adverse culture to a
risk-taking culture.
In risk-taking culture, employees are
encouraged to
Explore,
Experiment,
Foul-up, sometimes
Then repeat.
Idea Development
Shift not easy
Fear of blame for mistakes makes
employees want to play it safe and not
take risks.
Companies must design performance-
management systems that reward risk-
taking.
Coca-Cola, Intuit, GE


Idea Development
Cokes Head of Marketing, Strategy,
and Innovation, Mary Minnick idea
development strategy
Stop thinking in terms of existing drink
categories
Start thinking broadly abut why people
consume beverages in the first place.
Then come up with products that satisfy
those needs before the competition.
Step 2 - Product Screening
Screen ideas
Some screening criteria are
fit with existing facilities and labor skills,
size of potential market,
expected market share,
share of potential market
expected profit,
break-even point

Step 3 Preliminary
Design and Testing
Suppliers involved,
Transformation process is designed,
Prototype built,
Tricycle developed system for digitally modeling
carpets and textiles so manufactures can make
prototypes of new designs without making
samples for architects and interior designers.
Cuts development costs. (BW, 7/10/06, p.81)
Prototype tested for
Functionality
Acceptance by potential customers

Design and Testing
Corning
Developed new chip in 1998 that would
help in DNA research
Killed in 2001
Customers had not been brought in early
enough to help assess its marketability.
Market potential was too small to break-
even in a reasonable amount of time.

Step 4 Final Design
Prototype design is modified based on
test results
Final design approved
Production begins

Product Design Process vs.
Demings PDCA Cycle?
PDCA
P = plan
D = do
C = check (or study)
A = act

Product Design
Idea development
Product screening
Preliminary design
and testing
Final design

How is Product Design Process
Related to Demings PDCA
Cycle?
Plan
Idea Development
Product screening
Do
Preliminary Design and Testing
Check, Act
Final Design


Good Product Design
Process Should:
Design products/services that match
the needs and preferences of the
targeted customer group
Design products that are as easy as
possible to make (product
manufacturability).
Use concurrent engineering

Product Manufacturability
Achieve it by
Simplification
Minimize number of parts
Standardization
Design parts for multiply products
Modular (prefabricated) design

Product Manufacturability
Matsushita, Electronic Giant in Japan
One division has 7 factories that make 35
million phone, fax machines, printers and
other products annually.
1,500 shape and color variations in phones
alone
Engineers had to rearrange as many as 77
circuit-board parts for each new model.
Product Manufacturability
Setting up production for every type of
board was too time consuming.
Company designed a new circuit board
that would need only slight changes for
each model.
Reduced cycle time and lowered defect
rate to under 1%.

Product Manufacturability
Bo Andersson, GMs head of purchasing,
wants GM cars to share more parts, the
way Japanese automakers do.
Shared parts results in fewer parts
Fewer parts saves millions.
Also want to ax many of GMs 3,200
suppliers by weeding out weak
suppliers.

Product Manufacturability
Andersson is asking:
Why do we have two dozen different seat
frames when Toyota has only two?
Answer?
Why do we have 12 V6 engines when
Toyota has just a few?
Progress has been made:
GM once had 20 fuel pumps, now it has 5.
Wants to use savings to make better
interiors.

Product Manufacturability
Goal is twofold:
to make one part for many models
To reduce number of components in each
part.
Product Manufacturability
GM discovered that door hinges on big
SUVs and trucks could be made out of 3
components instead of 5.
This would save $21 a truck, or about
$100 million over several years.
Designing a new hinge requires months
of testing, which is costly.
Must weight costs and benefits.


Over-thewall vs. Concurrent
Engineering Design Process
Old over-the-wall sequential design
process should not be used
Each function did its work and passed it to the next
function
Replace with a Concurrent Engineering,
where cross functional design teams
work together to
involve customers early, develop specifications,
solve potential problems, reduce costs, &
shorten time to market

Concurrent Engineering
Concurrent Engineering
GMs North American operations had
completely separate engineering groups
for cars and trucks.
Within each group, there were separate
teams for almost every type of vehicle.
Each team worked independently


Concurrent Engineering
Engineers and designers had no idea
how much money was being wasted
making different version of the same
things.
Andersson is pushing a company wide
effort to break down silos and get
divisions talking to one another about
how to share parts and save money.
Global Trends in Design
China, Twain, Korea, Hong Kong
companies are committing huge
resources to product design in order to
build global brands. (BW, 7/10/06, p.
77)
Theyre competing less and less on
price and more on differentiation and
value to consumer.
Cokes Design Process
Anticipate the customer
Cokes marketers are encouraged to think
more creatively about consumers needs
Retool tired brands
Cost of launching new brands is expensive
Reposition existing brands
Coke used its Tab brand to create a new
energy drink for women
Using Sprite name for a new energy drink in
France.
Cokes Design Process
Engage partners
Coke brings bottlers into the decision-
making process to get their input and
brings them on board from the outset.
Dont fear failure

Product Screening Tool
Break-Even Analysis
Is expected sales large enough to
exceed the break-even point?
Break-even point (BE) is the number
of units of a product/service that a
company must sell to cover its total
cost.
Break-even point is where total
revenue equals total cost, or profit
equals zero.


Break-Even Analysis
Total Revenue = Total cost

or

Profit = Total Revenue Total Cost = 0


Notation
Q = expected sales in number of units
sold
SP = selling price per unit
F = Total fixed costs
VC = Variable cost per unit


Notation
Total Revenue = (SP)*Q
Total Cost = Total Fixed Cost + Total
Variable Cost
Total fixed costs = F
Total Variable Cost = (VC)*Q
Total Cost = F + (VC)*Q



Finding the Break-Even
Point
Total Revenue = Total cost
(SP)*Q = F + (VC)*Q
(SP)*Q - (VC)*Q = F
Q(SP - VC) = F
Q = Q
BE
= F/(SP - VC)



Break-Even Decision Rule
If Q > Q
BE
, Total Rev. > Total Cost and
Profit > 0
If Q < Q
BE
, Total Rev. < Total Cost and
Profit < 0

Break-Even Analysis
Example 1
A company is planning to introduce a new
product.
The expect to sell 875 units of the new
product.
The sales price is set at $25 per unit.
The fixed cost of producing the product is
$10,000.
The variable cost per units is $15.
Should the company develop the new
product?


Solution to Example 1
Q = expected sales
SP = selling price per unit =$25
F = Total fixed costs = $10,000
VC = Variable cost per unit = $15

Solution to Example 1
units 000 , 1
15 $ 25 $
000 , 10 $

VC SP
F
Q
BE
Solution to Example 1
If the company sells 1,000 units of the new
product, it will breakeven.
If the company expects to sell more than
1,000, it will make a profit.
If the company sells less than 1,000 units, it
will incur a loss.
Since the company expects to sell 875 units,
which is less than the BE quantity, the
company should not develop the new
product.

Example 2
A company is planning to establish a chain of
movie theaters. It estimates that each new
theater will cost approximately $1 Million. The
theaters will hold 500 people and will have 4
showings each day with average ticket prices
at $8. They estimate that concession sales
will average $2 per patron. The variable costs
in labor and material are estimated to be $6
per patron. They will be open 300 days each
year.
Example 2
1. What must average occupancy be to
break-even?
2. What is the annual capacity utilization
rate?
3. What is the chains profit if they sell
300,000 ticket next year?

Solution 1. What must average
occupancy be to break-even?
Q = ticket sales per year
Total cost = $1,000,000
Ticket SP = $8
Concession sales/patron= $2
Sales revenue/patron = $8 + $2 =
$10
VC = $6

year per ticket 000 , 250
6 $ 10 $
000 , 000 , 1 $

VC SP
F
Q
BE
Solution 1. What must average
occupancy be to break-even?
Solution 2. What is the capacity
utilization rate?
Annual Capacity (AC) = 4 shows per
day x 300 days per year x 500 people
= 600,000 patrons
Capacity utilization rate (CUR) = (Q
BE
/AC) x
100%

CUR = (250,000/600,000) x 100% = 41.7%
Solution 3. What is the chains
profit if they sell 300,000 ticket
next year?
Total Revenue = 10Q
Total Cost = 1,000,000 + 6Q
Profit = Total Revenue Total Costs
Profit = $10Q (1,000,000 + $6Q)
= -1,000,000 + 4Q
Solution 3. What is the chains
profit if they sell 300,000 ticket
next year?
Q = 300,000
P = -1,000,000 + 4(300,000)
= $200,000
Product life cycle
Due to changing product demand over
time
Stages of product life cycle stages
Introduction
Growth
Maturity
Decline
Is it long enough to justify launching
new product?

Product life cycle
Product life cycle
Where is break-even point on product
life cycle?
The earlier it is on the product life
cycle, the ???