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Module 6
Product and Process Selection
MODULE 6:
Product and Process Selection
1. Introducing New 5. Illustrative Examples
Products and Services 6. Self Evaluation Quiz
2. Economic Evaluation of 7. Problems for Practice
Products and Services
8. Further exploration
3. Product Mix Decisions
4. Product and Process
Selection
1. Introducing new
Products and Services
INTRODUCING NEW
PRODUCTS
For profit
To satisfy need
COONTRIBUTION TO NEW
PRODUCT IDEAS
Sales and Marketing (close touch with
customer)
Top management (Active listener to visitor
and customer feedback)
Production department (limited to production
ease and economics)
Research and Development (prompted by
new developments in materials & technology)
GENERATION OF NEW
PRODUCT IDEAS
Brain storming (preferably by
interdisciplinary team)
Team apprised of
Company objectives & long term goals
Current economic scenario
Preferred field of activity (expertise)
Approximate budget for new product
Each one generates ideas which are
recorded without criticism or evaluation
EVALUATION OF NEW
PRODUCT IDEAS
The evaluation of the new product ideas
could be done on a number of criteria
Likely demand and pattern of growth
Ease of raw material availability
Availability of Production technology
Competition and likely market share
Likely revenues and costs of operation
The product life cycle
An example to illustrate this process is taken
up next
AN EXAMPLE OF
SCREENING IDEAS
Idea/ Demand Comp Ease Cost of Likely Scor
factor etition of process profit
Raw ing e
Mtl
Computer 6 3 6 5 6 26
peripheral
s
Fast food 8 6 9 7 5 35
Fashion 4 5 7 4 4 24
clothing
Soaps and 9 2scale of71(least desirable)
6 410 (most desirable)
28
Each factor
detergents evaluated on a –
MORTALITY OF IDEAS
Screening
35-40 ? Economic
evaluation Development
Testing
Commercialization
Number
of ideas
3-24 months ?
Time
PRODUCT POLICY
Minimum price, whatever the quality
Maximum quality, whatever the cost
Safety/reliability
Precision and prestige
Satisfactory balance between quality &
price
Versatility
PRODUCT ANALYSIS
Marketing aspect
Product Characteristics
Functional aspect
Operational aspect
Durability and dependability aspect
Aesthetic aspect
Economic aspect
Production aspect
MARKETING ASPECT
Who is the
customer?
What are his needs?
Market
How Research
to reach him?
Forecasting
Advertising
PRODUCT
SPECIFICATIONS
Quality Function Deployment
Value Analysis
The Taguchi Method
Computer Aided Design
Design for manufacturability
Design for assembly
Prototyping
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module 6: Product and Process Selection
HOUSE OF QUALITY
VALUE ANALYSIS
Define the function of each component
provide support; permit rotation (verb, noun)
Primary and secondary functions
Identify poor value functions and eliminate
them
Come up with a design with higher value and
lower cost (Value = Quality/Cost)
TAGUCHI METHODS
Develop a robust design
Use a loss function with appropriate range
for aimed at target value
Identify the design parameters of interest
Design experiments to determine which
combination of parameters affect quality
most(Use of orthogonal arrays limits
search)
Develop a robust design
COMPUTER AIDED
DESIGN
Use of software permits
Development of drawings (Orthographic plus
Isometric views)
Rotation and viewing from different angles
Visualization of alternative designs
Compatibility of assemblies
Producing files and drawings for manufacture
Easy updation and transfer to needed locations
DESIGN FOR
MANUFACTURABILITY
Uses catalogs of information,
guidelines, checklists, charts, tables,
diagrams and graphs to
Develop a design plan
Decompose products into components and
assemblies
Evaluate the production costs of product
designs
Simplify and improve product design
PROTOTYPING
A prototype provides a feel for the final
product.
With increasing competition, it is imperative to
reduce cost & lead times
Rapid prototyping machines produce the 3-D
part by generating and joining slices
Stereolithography is a commonly used
technology for this purpose.
SUMMARY
The product life cycle
Idea generation and screening
Marketing aspect
Product Features
Function, Operation,Quality, Durability,
Dependability, Aesthetics, Production aspect
Tools for a Product Designer
QFD, Value Analysis, Taguchi, CAD, DMF, DFA,
Prototyping
2. Economic Evaluation
of
New Products and
Services
TYPES OF ECONOMIC
ANALYSIS
Gross Measures of Cash Flows
Return over the life span (NPV,IRR, Payback)
Loan disbursement cabability(DSCR)
Risk evaluation in probability terms
Annual Measures of Performance
Fixed and Variable Costs
Break even analysis
Profit Volume Charts
Changes in demand, profitability
Optimal strategy evaluation
GROSS PERFORMANCE
MEASURES
Net Present Value
Payback period
Financial Ratios
- Benefit /Cost Ratio
-Debt Service Coverage Ratio
RISK EVALUATION
Decision Tree
Optimistic
Scenario
Most likely
Scenario
Uncertain Cash flows
Pessimistic
Scenario
THE PROFIT
CONSIDERATIONS
A
Profit
Distribution
B
Storage Selling
Profit
Price
Total
Overhead Cost
Labour C
A Increase Selling Price
Materials B Increase Market
Set up Quantity
C Reduce total cost
COMPETITIVENESS OF
PRODUCT
Competitiveness =
Fraction of the market captured by the
product = p/P
p
P
Ratio of Value/Price determines the
Competitiveness of product
V1
Breakeven point Volume of Sales
(BEP)
MARGIN OF SAFETY
Revenue = bV
Cost = F+ aV
Margin of Safety=
F (V2- V1)/V1 =
(V2/V1) - 1
V1 V2
(BEP)
PROFIT-VOLUME CHART
Profit, Z =
Profit, Z Z = -F + pV Revenue - Cost =
bV - (F+aV)
-F + (b-a)V =
Volume -F + p V
V1
Slope = (b-a)
= profitability, p
-F
AN EXAMPLE
Fixed Unit Likely Selling
cost variable Sales Price
cost
Management
Product B Rs 10,000 Rs 80 2000 Rs 150
Choices
EXAMPLE(CONTD 1)
The Profit functions for the three products A B and C are:
3 lac
2 lac
1lac A
Profit
0
B 1 2 3 4 5 6
V in 000 s
-1 lac For maximum profit:
C
For Volume
0 < V< 4000 Product A
-2 lac V>= 4000 Product C
EXAMPLE (CONTD 2)
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module 6: Product and Process Selection
EXAMPLE(CONTD 3)
3 lac
Assuming Limited
Capacities of Products
2 lac
1lac A
Profit
0
B 1 2 3 4 5 6
V in 000 s
-1 lac Maximum profit is realized
C
for Volume ranges as follows
0 <= V<=1000 Product A
-2 lac 1000<= V<=2000 Product B
2000<=V< =5000 Product C
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module 6: Product and Process Selection
MODULAR DESIGN
Products are typically designed and
manufactured in modules. This results in
Low cost of production
Greater product variety at low cost
Greater satisfaction for assembly workers
A greater choice of subcontractors and vendors for
product manufacture
Control of product reliability and cost
AN EXAMPLE OF
MODULAR DESIGN
A B
EXAMPLE OF MODULAR
DESIGN
Subcomponen Reliability
t
.90 0.98
0.95
A Rs 50 Rs 90 Rs 140
B Rs 70 Rs 90 Rs110
Required reliability of the product = 0.90
SUMMARY
Financial Evaluation of Products is generally
carried out in two phases
Gross measures of evaluation eg. NPV,IRR,
Payback, Risk, Financial Ratios
Annual cost analysis eg Breakeven analysis, Profit
volume Charts, Profitability, Demand.
P-V charts could be used to determine the
optimal strategy when choices are available.
Modular Design helps to improve variety,
lower costs and greater job satisfaction to
workers.
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module 6: Product and Process Selection
3. Product Mix
Decisions
WHY INTRODUCE
VARIETY?
It may seem that choosing the most
profitable product in large quantities would
maximize profits. This need not be so due
to
Demand constraints
Commitment to produce multiple products
To absorb the risk of producing only one
product
To expand the customer base
Utilization of resources
LP FORMULATION FOR
PRODUCT MIX
3 Products A, B, and C are to be produced
Let X1 be quantity of A to be produced.
Let X2 be quantity of B to be produced.
Let X3 be quantity of C to be produced.
If the profits from the sales of one unit of
each of these products is
Rs 42, Rs 40 and Rs 36 respectively , then
to maximize Profit
Objective function
Max. Z = 42 X1 + 40 X2 + 36 X3
LP FORMULATION FOR
PRODUCT MIX
Constraints
0.14X1 + 0.10 X2 <= 160
0.6X1 + 0.4 X2 + 0.2 X3 <= 320
0.2X1 + 0.2X2 + 0.1X3 <= 160
0.04X1 + 0.04X2 + 0.04X3 <=80
0.10X1 + 0.10X2 + 0.12 X3 < = 80
X1 => 150
X1 <= 250
X2 =>200
X2 <= 400
X3 => 360
X3 <= 500
X1,X2,X3 all non-negative
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module 6: Product and Process Selection
SOLUTION TO LP
Z = Rs. 28016
X1 = 168
X2 = 200
X3 = 360
Only 3 constraints satisfied as equalities
.10x1 + .10x2 + .12x3 <= 80 (Shadow price = 420)
x2 >= 200 (Shadow price = -2)
x3 >= 360 (Shadow price = -14.4)
PROBLEM 2
• Goal Programming to deal with multiple
conflicting objectives
DEVIATIONAL
VARIABLES
The GP objective function
is: Overachievement
Variable d+
A function
Target
of only Underachievement
Variable d-
deviational variables
Minimization
Priority wise, hierarchical
GOAL PROGRAMMING
A Goal Programming Problem is an
extended version of an LP formulation
and the constraints include
Goal Constraints
One for each goal, linking the goal to deviational
Variables
System Constraints
These are the original constraints that appear in
the LP formulation
Goal constraints:
SYSTEM CONSTRAINTS
0.14X1 +.10 X2 + <= 160
0.6X1 + 0.4 X2 + 0.2 X3 <= 320
0.2X1 + 0.2X2 + 0.1X1 <= 160
0.04X1+ 0.04X2+0.04X3 <=80
0.10X1 + 0.10X2 + 0.12 X3 <= 80
X1 => 150
X1 <= 250
X2 =>200
X2 <= 400
X3 => 360
X3 <= 500
X1,X2,X3 all non-negative
SOLUTION TO THE
GOAL PROGRAM
X1= 168 d3+ = 0
X2 = 200 d3- = 47.2
X3 = 360 d4+ = 0
d1+ = 563 d4- = 40.4
d1- = 0 Profit = Rs 22976
d2+ = 0 Utilization of I =43.52
d2- = 116.48 Utilization of II =252.80
Utilization of III = 109.6
PROBLEM 3
Unconstrained Stochastic Product Mix
• n different items
Notation
Xi = initial stock level of item i
ci = unit procurement cost of item i
ri = unit selling price of item i if sold
during sale
ri = unit disposal value of item i if not
sold during the sale
Di = demand of item i during sale,
random variable having pdf fi(Di)
Z = Contribution to profit and overhead
from the sale
ANALYSIS
For given {Xi} and a given realization {Di}
Quantity sold = S (Xi, Di) = min (Xi, Di)
Quantity remaining = R (Xi, Di)
= max (Xi – Di, 0)
Payoff from the sale = Z =
Sum i=1,n [riS(Xi,Di) + ri’ R(Xi,Di)- ciXi]
ANALYSIS(2)
E(Z) = Sum (i=1,n) { [ri S(Xi, Di) +
ri’R(Xi,Di)] fi(Di)dDi – ciXi}
ANALYSIS (3)
E(Z) == Sum (i=1,n){(ri-ci)Xi +
(ri-ri’)[ Difi(Di)dDi –XiFi(Xi)]}
For the maximum E(Z) Xi
= (ri-ci) - (ri-ri’)[Fi(Xi)] = 0
STOCHASTIC PRODUCT
MIX
Product Cost Revenue Disposal Demand
from sale if not sold Min Max
(Rs) (Rs) (Rs) (units)
1 10 20 5 150 250
2 20 35 10 0 400
3 30 50 20 100 300
SOLUTION (1)
pdf
fi(xi) 1/(b-a)
ai xi bi
cdf
Fi(xi)
ai xi bi
Xi = ai +(bi-ai)Fi(xi)
SUMMARY
The motivation and considerations behind
product mix considered
Some commonly used formulations of
Product Mix illustrated with examples
Linear Programming Formulation
Goal Programming Formulation for
accommodating multiple goals
Stochastic product mix for perishable items and
short term sale
4. Product and
Process Selection
Functional Design
PRODUCT
DESIGN Production Design
PROCESS
PLANNING Make - Buy decision
Sales
Volume
I II III IV Stages
Start Rapid Maturity Decline
up growth Commodity
MANUFACTURING
PROCESS TECHNOLOGY
EQUIPMENT,
PEOPLE AND
SYSTEMS
USED TO PRODUCE A FIRM’S
PRODUCTS AND SERVICES.
KEY DECISIONS
Organizing Process Flows
Project / Job shop/ Batch/ Assembly line/
Continuous flow
Choosing appropriate product/ process mix
Adapting process to meet strategic
requirements.
Evaluating Automation & high technology
processes.
Continuous Sugar,
IV Flow Void
Refinery
Products
As Change
Market requirements
Competition
Equipment
So Procedures
Must Human
Resources
Product - Process Matrix helps to understand WHY &
HOW companies change their production operations.
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module 6: Product and Process Selection
Amount of Intensiveness
Customer of Labour vs
Contact Capital
MATRIX OF SERVICE
PROCESSES
Low Customer High Customer
Contact Contact
AUTOMATION
Automated banking
Electronic grocery scanners
Office automation
CHOICE OF PROCESS
Cost
Volume
VARIOUS PROCESS
FEATURES
Project
From objective, identify tasks, plan and
execute, one time activity
Job Shop
On general purpose equipment produce a
variety of jobs. Each job chooses its route
J2
J1
VARIOUS PROCESS
FEATURES
Batch Production
A batch of similar parts produced by
following a sequence of machines. Savings
from common setups.
Assembly Line
One product produced in large numbers by
processing on sequential work stations
VARIOUS PROCESS
FEATURES
Continuous Production
Chemical Plants, Refineries
Here the product flows continuously with
characteristics governed by environmental
and control conditions such as
temperature, humidity, chemical
composition, catalyst etc.
SUMMARY
The Product undergoes varying requirements
during its lifecycle
Different processes serve different needs
Product- Process Matrix captures the
relationship
Process life cycle gives how processes
mature
Service matrix for categories of service
SUMMARY (CONTD)
Features of different processing modes
Projects
Job Production
Batch Production
Assembly Lines
Continuous Production