Supply Chain Management: From Vision to Implementation

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Supply Chain Management From Vision to
Implementation

• Chapter 4 New Product Development Process
  Managing the Idea Infrastructure

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Chapter 4 Learning Objectives

1. Describe the new product development process and
   how it affects company and SC success.
2. List the risks involved in the new product
   process. Explain how to mitigate these risks.

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Chapter 4 Learning Objectives

1. Describe the marketing process and discuss its
   role in the new product process.
2. Define target costing and explain its role in
   developing new products and services.

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Chapter 4 Learning Objectives

1. Describe the finance process and discuss its role
   in the new product process.
2. Discuss EVA, profitability, and cash flow as key
   financial metrics for organizations.

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New Product Development

• New product development is risky and expensive.
• More than 9 out of 10 products fail.
• New product development is cross-functional
• Marketing identifies unfilled customer needs
• RD conceptualizes and develops the product
• Finance verifies that it is economically viable
• SC leaders rely on teaming which includes
  suppliers and customers.

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Customer Satisfaction Cycle
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Mitigating Risk

• Companies are faced with increasing levels of
  risk in todays market.
• Time Compression product life cycles are being
  reduced, this increases risk because
• New products must continually be in development
• Less time to capture development costs
• Cost new product development is expensive with
  costs regularly exceeding 100 million
• 40 of all quality problems stem from poor design
• 60-80 of a product's cost is determined during
  design

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Intels Plan to Mitigate Risk

• Intel regularly faces product life cycles that
  are less than 6 months.
• Integrated circuit development cost can exceed
  30 million, requires 1 billion market to
  justify expense.
• To mitigate risk, Intel analyzes 8 risk factors

Design Manufacturability
Cost Quality
Legal Issues Supply Base
Supply Availability Environmental, Health, and Safety Impacts
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Intels Plan to Mitigate Risk

• Intel uses a scorecard to add visibility to
  risk in new product development.
• Additional actions taken
• Clear owner for each risk reduction plan
• Cross-functional teams
• Specific timetables are established for risk
  reduction progress
• Progress is regularly reported to top management
• High risk aspects are highlighted not glossed
  over
• Results Nearly eliminated surprises during
  development

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Intels Risk Scorecard
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Early Supplier Involvement (ESI)

• ESI is a key element of innovation strategies.
• ESI accounts for one-third of the reduction in
  labor-hours and 4-5 months of the shorter
  development cycle in the auto industry.
• Products introduced on-time but 50 over budget,
  realized only a 4 reduction in profit.
• Products introduced on budget but six months late
  experience a 33 decrease in profits.

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Early Supplier Involvement (ESI)

• ESI reduces risk when used in conjunction with
  New Product Development Teams
• Reduces costly misunderstandings
• Uses supplier competencies during design
• Suppliers may have access to pertinent customer
  feedback
• Suppliers may be aware of trends in technology or
  demand

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Design for Considerations

• New Product Development could consider
• Design for Manufacturability ease of production
• Design for Purchasing support the product from
  the existing supply base
• Design for Logistics ease of distribution
• Design for Environment minimize environment
  impact
• Design for Disassembly disassemble, recycle,
  and reuse
• Design for Reuse new design using existing parts

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Modular Design

• Modular products can be manufacturer in pieces
  and parts from a variety of manufacturers.
• Modularity is facilitated by standardization
• Reduces the risk of supplier dependency
• Increases customer choice in terms of options
• Creates opportunity for niche competitors

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Marketing and the Customer

• Marketings job is to get into the head of the
  customer.
• Customer information is used in planning
• Product - design of goods and services including
  both tangible and intangible elements
• Price - determine the value of the need which is
  satisfied by the product
• Place - having the product where it is needed,
  when it is needed, and in the correct quantities
• Promotion - effective advertisement and sales
  techniques
• Product Positioning relies on promotion and
  design to create niche appeal in a market segment

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The Marketing Process

• The marketing process begins with understanding
  the companys goals, strategy, image, and
  completive position.
• Entails SWOT analysis

Strengths and Weaknesses Core Competencies Cash Flow Position Research and Development Customer Relationships
Opportunities and Threats Competitors New Markets Technology Trends Government Regulations
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New Product Development (NPD)

• New product development begins with the
  recognition of some unmet customer need and a
  potential market large enough to justify
  exploration.
• NPD can proceed either in a sequential or
  concurrent fashion.
• Sequential is the traditional over the wall
  approach to NPD.
• Sequential is time consuming and inefficient
• Sequential results in lost opportunities to
  leverage supplier competencies in the design
  process.

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Concurrent NPD

• Advocated by most supply chain leaders
• Uses cross-functional teams to develop new
  products with targeted cost and features.
• Typical teams will include managers from
  marketing, RD, engineering, production,
  purchasing.
• Many companies include customers, suppliers and
  service providers in NPD teams.
• Use of target pricing and target costing

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Pricing to Meet Customer Demand

• Customers determine the value of the need that is
  satisfied, this is the Target Price for new
  products.
• Target Cost is the Target Price minus profit
  margin
• Target Cost must include

Cost of Development Cost of Materials Labor Logistics
Packaging Equipment Utilities Sales and Marketing Expense
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Sequential Product Development
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Determinants of Target Price
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Target Costing and Target Pricing
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Competitive Target Costing - Example
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Target Cost Breakdown

• Once the target cost has been determined,
  component level costs may be calculated.
• Cross-functional teams again are employed
• Operations - knowledge of processes employed
• Purchasing - supplier and parts knowledge
• NPD Team - new design knowledge
• Finance - knowledge of cost accounting
• Also may include members from Packaging,
  Engineering, Logistics, Suppliers, and Customers

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Importance of Design on Total Cost

• While the total cost of design might only be 5
  of the total product cost, 70 of total product
  costs are committed to during the design phase.
• It is therefore important to get it right the
  first time

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Strategic Tracking Reporting Areas

• Target - Has a target cost been determined that
  acknowledges both the margin requirements and the
  competitiveness of the products?
• Team - Are cross-functional cost advisory teams
  chartered to identify relevant issues and
  competitors and to drive cost of goods to meet or
  beat the targets?
• Activity Coordination - Are all the sub-teams
  meeting the timetables, and merging results as
  necessary?
• Value and Features - Are we retaining the key
  features identified as critical to the customers
  as we refine the design and cost?
• Progress - How are we progressing in our plan to
  get to best-in-class and target COGS?

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Strategic Tracking Reporting Areas

• Manufacturing Roadmap - Is there a manufacturing
  roadmap for the product?
• Suppliers - Have our key suppliers been
  identified?
• Risks - Have key risks in cost, supply, timing,
  pricing, and so on been identified and a plan
  developed for mitigating these risks?
• Launch - For new products, will the product/offer
  be at best-in-class COGS when launched?
• Communication - Have we communicated key news to
  top management, so that we continue to have their
  support to proceed, and dont have any surprises?

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The Role of Finance

• Finance and Accounting are organizations
  scorekeepers
• Communicate performance results throughout the
  organization and the outside world
• Finance and Accounting may be imbedded into other
  areas of the organization but generally maintain
  a direct reporting relationship to corporate
  finance
• Maintain objectivity and loyalty to the overall
  organization rather than a particular business or
  function

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Reporting Relationships
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Measures of Profit

• Operating profit represents how much money,
  before tax, a company makes from its ongoing
  business of selling goods and services.
• Profit before tax represents the sum of operating
  profits plus or minus gains and losses from other
  activities.
• Includes investments, interest expense, and other
  financing activities

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Profit and Loss Statement

• Cost Category
• Sales
• Cost of Goods
• Gross Profit
• G A
• Operating Profit
• Non-operating cost (interest expense)
• Profit before tax
• Taxes
• Profit after tax

• (000s)
• 20,000
• (1,250)
• 7,500
• (2,500)
• 5,000
• (1,250)
• 3,750
• (1,250)
• 2,500

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Cash Flow

• Cash flows in to a company when it collects on
  receivables, borrows money, or sells stock.
• Cash flows out from a company when it acquires
  plant and equipment, purchases raw material,
  produces goods, markets goods, repays investors,
  or repays debt.
• Of interest is not only the aggregate amount of
  these flows but their timing.

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Cash Flow Cycle
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Income Statement and Cash Flows

• While the income statement shows a pretax profit
  of 160,000, the statement of cash flows shows
  that we would not have enough cash to finance
  operations.
• Managing cash flows and profit are critical for
  long term survival.

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Economic Value-Added (EVA)

• EVA considers how much money the company makes
  from operations after taxes, less the cost of
  capital for the money tied up to make the
  product.
• Gives a longer-term perspective on whether a
  project is generating or destroying value.
• Goes beyond Net Present Value by considering
  timing of cash flows and the cost of capital tied
  up in accounts receivable, inventory, and related
  assets.
• EVA Operating Profit Taxes (Total Capital
  
• Employed X Companys Cost of Capital)

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A Return to the Opening Story

• Based on what you have now read and discussed
• If you were in Charlenes situation, what
  questions would you ask marketing, finance, and
  new product development?
• What do you think the organization structure,
  reporting relationships, and reward systems at
  Frozen Delight look like? Are this issues
  relevant to what is happening here?
• What are some of the mechanisms within the
  organization that can be used to help these
  functions, and others within the company, work
  more closely towards common goals?

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Supply Chain Management From Vision to
Implementation

• Supplement D Evaluating the Return on a New
  Product

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Net Present Value

• Time-Value-of-Money Concept
• 1 today is worth more than 1 in the future
• Discounts future cash flows in terms of present
  value to determine the net value added to the
  company by a project.
• Considers
• Forecasts of revenues and costs
• Expected life cycle or products and technology
• Industry Trends

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Present Value

• An organization will receive 500 two years from
  now. At an interest rate of 10 percent, what is
  the present value of this future payment?

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Future Value

• An organization invests 500 for 5 years at an
  interest rate of 15 percent. What is the future
  value of this original 500?

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Net Present Value

• The value of future cash flows minus the present
  value of the cost of the investment.
• The greater the NPV, the better the investment
• Negative NPVs represent projects that do not
  breakeven