INTODUCTION

This chapter briefly describes two important topics which are of

day to day concern to any engineering manager. Evidence from

the past indicates that growth of an engineering equipment
manufacturer largely depends on the developments of new
products. Despite this indications, in many organizations the
planning for the development of new products seems to be a
weak spot. These maybe the reason for an extremely high
percentage of new product failure in the market. Usually there
are two procedures practiced to establish corporate objectives in
regard to product planning. In the first approach, the product
planning objectives are established at the vice presidential level
or higher. However, in the second procedure the committee
concept is followed, especially in bigger companies.

Important Reasons for Developing

New Engineering Products
Excess Capacity
Utilization of By- Products
Competition
Seasonal Fluctuations
Phased-out Products
New Opportunities
Risk

Steps Involved in New Engineering

Product Development
Seach for
Product
Ideas

Produce
and sell

Screen
Ideas

Perform
Business
Analysis

Test to verify
business
judgements
made earlier

Convert Idea
into a
producible and
demonstrable
end

Task Useful in Effectively Managing the New

Engineering Product Development
Determine the strong and weak points of the company
Determine the goals of the company
Product planning function

Product Manager

Product
adverting
agencies

Purchasin
g officers

Marketing
research
team

Product
Manager
Interfaces

Marketing
Force
The
purchasin
g public

Product
distributor
s

Other
necessary
company
personel

Causes for Product Manager Failure to Develop

Effective Relationships with Interfaces
Product manager receives poor assistance from the organization
Product manager has poor training
Product manager has to deal with too many interfaces
Product managers job is poorly defined
Poor cooperation from the functional departments
Product manager is occupied with unimportant tasks
Product managers work time is poorly scheduled

Duties of a Product Manager

Profit and loss associated w/ the product

Forecasting product sales
Strategy concerning product
Product budget
Advertising
Preparation of reports concerning products
Purchasing associated with the products
New (related) product responsibility
Direct control over products technical development
Product quality control
Interpretation of reports associated with the products
Capital expenditure associated with the products
Product pricing strategy
Product related trouble shooting

Causes of Newly Developed

Product Failures in the Market
Poor quality
Poor timing
Wrong market
Poor design
Product price
Product marketing

Hints to Avoid Product Failure

Market test
Finance study
Feasibility study I
Market research study
Feasibility study II
Team effort

A List of Useful Information for

Product Development

Time and cost to develop new product

Manufacturing and development difficulties
Prospects and profit in the long term
Time required to breakeven
Time required to absorb product development costs
Problems associated with patent
Quantity of product units required
Capital requirement
Estimate of product selling price
Profit margin and return on investment cost
Foothold on new technology due to the development of product under
consideration
Materials related difficulties

Product Costing
Whatever product an engineering company
manufactures, it has to purchase some kind of raw
or other materials from outside, to employ
manpower to carry out the work, to pay for
overheads, to know what the capital requirements
are, etc. Therefore all these items require cost
estimations to make effective decisions.
Furthermore cost estimations play an important
role in the future planning of the company.
Without the proper cost estimations such plans
may not be effective.

Reasons for Product Costing

To ascertain in the manufacture of a product, the most profitable material ang

procedure.
To determine the product price for the use in various purposes.
To establish the profitability of the product under consideration with respect to
manufacture and market.
To establish the amount of money to be spent in equipment and other related items
to produce a product.
To determine if it is cheaper to fabricate the components or assemblies or procure
them from outside agencies.
To study whether or not it is economical to modify the existing production facilities
to manufacture a product.
To provide input to the longterm company financial plans.
To perform new products feasibility analysis.
To verify bids from outside agencies.
To measure the product manufacturing process efficiency.
To provide assistance in controlling the cost of product manufacturing.

System Cost Estimation Procedure

Problem
definition

Estimate
derivation

Data collection

Documentation

Estimate
presentation

Cost Estimation
Cost of tooling
Cost of overheads
Cost of bought equipments
Costs of raw and finished materials
Testing and direct labour charges costs
Cost of pattern
Cost of engineering

Estimation of new Project Capital

Investment Cost
Cost of fixed investment, type I
Cost of fixed investment, type II
Cost of amortized investment

Estimation of Operating Cost

Cost of general overheads
Cost of marketing
Cost of administrative activities

Operating costs, type I

Operating costs, type II

An Approach to Performing Cost

Effectiveness Analysis

Define the objectives of the system.

Outline the mission requirements pertinent to fulfilling system objectives.
To fulfill the missions, develop the concepts of alternative systems.
Develop a criterion to evaluate a system. This criterion must relate the
capabilities of the system to the requirements of the mission.
Choose either the fixed effectiveness or fixed cost procedure. In the fixed
effectiveness the criterion used is the cost or resources required to obtain
the specified effectiveness. Similarly, in the case of fixed cost, the criterion
used is the effectiveness obtained with the utilization of specified
resources.
Evaluate alternative systems capabilities.
Develop systems against criterion array.
Evaluate alternative systems advantages.
Conduct analysis of sensitivity.
Document the study.

Pricing of a New Product

Competitive environment
Cost
Behaviour of the market
Demand for the product

Pricing Model I
This model is concerned with the breakeven analysis. This analysis is very simple and
useful for investigating the effect on profits by changing the priceand volume of the
product sales units.
The term breakeven pinpoints that point where the total cost to produce the product
units is equal to the total revenue from the sales of those product units.

The equation for the breakeven analysis is as follows:

sp y = cf + cv * y
Where:
cf is the fixed cost
cv is the variable cost per unit
sp is the product selling price for one unit
y is the number of units to be sold for breakeven

Example 12.1
An engineering company has estimated the fixed cost of
$60,000 to develop an engineering product.
Furthermore, the estimated variable cost of the
product for one product unit is $4. Determine, the
quantity of units to be sold at the following prices to
breakeven:
a.) $5/unit
b.) $6/unit
c.) $4.5/unit
d.) $7/unit

Solution:
y*sp = 60000 + 4y
y=
60000
(sp 4)
y=
60000 = 60000 units
(5 4)
y=
60000 = 30000 units
(6 4)
y=
60000 = 120000 units
(4.5 4)
y=
60000 = 20000 units
(7 4)