Module-3 (Chapter 4) Module-3 (Chapter 4)

Product

Module-3 : Syllabus
Product Life Cycle qProduct Design qProduct Development
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Overview
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Product Life Cycle Designing and Developing Products Process Planning and Design Major Factors Affecting Process Design Decisions Types of Process Designs Interrelationships Among Product Design, Process Design, and Inventory Policy Process Design in Services Deciding Among Processing Alternatives 3 Wrap-Up: What World-Class Companies Do

Stages in a Products Life Cycle

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Introduction- Sales begin, production and marketing are developing, profits are negative. Growth - Sales grow dramatically, marketing efforts intensify, capacity is expanded, profits begin. Maturity - Production focuses on high-volume, efficiency, low costs; marketing focuses on competitive sales promotion; profits are at peak. Decline - Declining sales and profit; product might be dropped or replaced.
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Stages of a Products Life Cycle

Dot-Matrix Fax Machine Printer Cell Phone Video Recorder Internet Radio Color Copier CD Player B&W TV Automobile

Introduction

Growth

Maturity

Decline
DECLINE

ANNUAL SALES GROW

Evolution of Positioning Strategies

Life Stage Product Volume Focus Batch Size Intro. Custom Very Low Process Very Small Early Growth Slightly Standard Low Process Late Maturity Growth Highly Standard Standard Very High High Product Product Very Large
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Fin.Gds. To-Order To-Order To-Stock To-Stock Small Large

CONCEPT OF PRODUCTION PROCESS LIFE CYCLE

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Production Systems tend to evolve as products move through their product life cycles, Product life cycle and production process life cycle are interdependent; each affects the other.

PRODUCTION PROCESSES

PRODUCTION COST, QUALITY, & PRODUCTION CAPACITY

VOLUME OF PRODUCTS THAT CAN BE SOLD

VOLUME OF PRODUCTS THAT ARE SOLD

TYPE OF PRODUCTION PROCESSES THAT CAN BE JUSTIFIED

PRODUCT, PROCESS AND SERVICE DESIGN

DESIGNING AND DEVELOPING PRODUCTS AND SERVICES

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Product / Service Design

When a product /service is designed: q The detailed characteristics of the product/service are established. q The characteristics of the product / service directly affects how the product / service can be produced / delivered. q How the product/service is produced / delivered determines the design of the production / delivery system.
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Product / Service Design

Product / service design directly affects :
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Product / service quality Production / delivery cost Customer satisfaction

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Product / Service Design and Development

FOLLOWING ARE RELEVANT :
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Sources of product innovation Developing new products / services Getting them to market faster Improving current products / services Designing for ease of production Designing for quality Designing and developing new services

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Sources of Product / Service Innovation

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Customers Managers Marketing Operations Engineering Research and Development (R&D) Basic research Applied research
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Steps in Developing New Products

1. 2. 3. 4. Technical and economic feasibility studies Prototype design Performance testing of prototype Market sensing / evaluation and economic evaluation of the prototype 5. Design of production model 6. Market / performance / process testing and economic evaluation of production model 7. Continuous modification of production model
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Steps in Developing New Products

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Technical and Economic Feasibility Studies : Determine the advisability of establishing a project for developing the product If initial feasibility studies are favorable, engineers prepare an initial prototype design
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Steps in Developing New Products

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Prototype Design : This design should exhibit the basic form, fit, and function of the final product It will not necessarily be identical to the production model
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Steps in Developing New Products

3.

Performance Testing of Prototype Performance testing and redesign of the prototype continues until this design-testredesign process produces a satisfactorily performing prototype
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Steps in Developing New Products

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Market Sensing / Evaluation and Economic Evaluation of the Prototype :

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Accomplished by demonstrations to potential customers, market test, or market surveys If the response to the prototype is favorable, economic evaluation of the prototype is performed to estimate production volume, costs, and profits If the economic evaluation is favorable, the project enters the production design phase.

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Steps in Developing New Products

5. Design of Production Model The initial design of the production model will not be the final design; the model will evolve.
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Steps in Developing New Products

6. Market / Performance / Process Testing and

Economic Evaluation of Production Model q The production model should exhibit: low cost reliable quality superior performance the ability to be produced in the desired quantities on the intended equipment
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Steps in Developing New Products

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Continuous Modification of Production Model :

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Production designs are continuously modified to: Adapt to changing market conditions Adapt to changing production technology Allow for manufacturing improvements
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Managing Product Development Projects

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About 5% of all new-product ideas survive to production, and only about 10% of these are successful. It is best to cancel unpromising newproduct/service development projects early! Employees often become emotionally caught up in these projects and are overly optimistic An impartial management review board is needed for periodic reviews of the progress of these projects.
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Getting New Products to Market Faster

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Speed creates competitive advantages Speed saves money Tools to improve speed: Autonomous design and development teams Computer-aided design/computer-aided manufacturing (CAD/CAM) Simultaneous (concurrent) engineering
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Tools to Improve Speed to Market

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Autonomous Design and Development Teams Teams are given decision-making responsibility and more freedom to design and introduce new products/services Time-to-market has been slashed dramatically Enormous sums of money have been saved Teams do not have to deal with the bureaucratic red tape ordinarily required to obtain approvals
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Tools to Improve Speed to Market

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Computer-Aided Design/Computer-Aided Manufacturing (CAD/CAM) :

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Engineers, using CAD/CAM, can generate many views of parts, rotate images, magnify views, and check for interference between parts Part designs can be stored in a data base for use on other products When it is time for manufacturing, the product design is retrieved, translated into a language that production machinery understands, and then the production system can be automatically set up.
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Tools to Improve Speed to Market

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Simultaneous (Concurrent) Engineering

Product/ Service Ideas Economic and Technical Feasibility Studies Continuous Interaction

Product/Service Design

Production Process Design

Produce and Market New Product/Service

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Improving the Design of Existing Products/Services Focus is on improving performance, quality, and cost Objective is maintaining or improving market share of maturing products/services Little changes can be significant Small, steady (continuous) improvements can add up to huge long-term improvements Value analysis is practiced, meaning design features are examined in terms of their cost / benefit (value).

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Designing for Ease of Production

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Ease of Production (Manufacturability)

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Specifications - Precise information about the characteristics of the product Tolerances - Minimum & maximum limits on a dimension that allows the item to function as designed Standardization - Reduce variety among a group of products or parts Simplification - Reduce or eliminate the complexity of a part or product
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Designing for Quality

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Crucial element of product design is its impact on quality Quality is determined by the customers perception of the degree of excellence of the product/services characteristics Chapter 7 covers the principles of designing products / services for quality
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Designing and Developing New Services

Three general dimensions of service design are: q Degree of Standardization of the Service Custom-fashioned for particular customers or basically the same for all customers? q Degree of Customer Contact in Delivering the Service High level of contact (dress boutique) or low level (fast-food restaurant)? q Mix of Physical Goods and Intangible Services Mix dominated by physical goods (tailors shop) or by intangible services (university)?
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Designing and Developing New Services

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Differences Between New Service and New Product Development : Unless services are dominated by physical goods, their development usually does not require engineering, testing, and prototype building. Because many service businesses involve intangible services, market sensing tends to be more by surveys rather than by market tests and demonstrations.
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Process Planning and Design

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Process Planning and Design System

Inputs: Product/Service Information Production System Information Operations Strategy Process Planning & Design: Process-Type Selection Vertical Integration Studies Process/Product Studies Equipment Studies Production Procedures Studies Facilities Studies

Outputs: Process Technology Facilities Personnel Estimates

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PRODUCT, PROCESS AND SERVICE DESIGN

MAJOR FACTORS AFFECTING PROCESS DESIGN DECISIONS

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Major Factors Affecting Process Designs

Nature of product/service demand q Degree of vertical integration q Production flexibility q Degree of automation q Product/Service quality
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Nature of Product/Service Demand

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Production processes must have adequate capacity to produce the volume of the products/services that customers need. Provisions must be made for expanding or contracting capacity to keep pace with demand patterns. Some types of processes are more easily expanded and contracted than others. Product/service price affects demand, so pricing decisions and the choice of processes must be synchronized.
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Degree of Vertical Integration

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Vertical integration is the amount of the production and distribution chain that is brought under the ownership of a company. This determines how many production processes need to be planned and designed. Decision of integration is based on cost, availability of capital, quality, technological capability, and more. Strategic outsourcing (lower degree of integration) is the outsourcing of processes in order to react quicker to changes in customer needs, competitor actions, and technology.
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Production Flexibility
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Product flexibility -- ability of the production (or delivery) system to quickly change from producing (delivering) one product (or service) to another. Volume flexibility -- ability to quickly increase or reduce the volume of product( or service) produced (or delivered).

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Degree of Automation
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Advantages of automation Improves product quality Improves product flexibility Reduces labor and related costs Disadvantages of automation Equipment can be very expensive Integration into existing operations can be difficult
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Product/Service Quality
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Old viewpoint high-quality products must be made in small quantities by expert craftsmen New viewpoint high-quality products can be massproduced using automated machinery Automated machinery can produce products of incredible uniformity The choice of design of production processes is affected by the need for superior quality.

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PRODUCT, PROCESS AND SERVICE DESIGN

TYPES OF PROCESS DESIGNS

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Types of Process Designs Product-Focused q Process-Focused q Group Technology / Cellular Manufacturing

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Product-Focused
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Processes (conversions) are arranged based on the sequence of operations required to produce a product or provide a service Also called Production Line or Assembly Line Two general forms Discrete unit automobiles, dishwashers Process (Continuous) petrochemicals, paper
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Product-Focused
Raw Material
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Components
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Su ba ss em .
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Assemblies
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Fin. Goods

1 Product/Material Flow

Purchased
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Production Operation

Components, Subassemblies

As se m b li es

Raw Material

Components

Subassem.

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Product-Focused
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Advantages Lower labor-skill requirements Reduced worker training Reduced supervision Ease of planning and controlling production Disadvantages Higher initial investment level Relatively low product flexibility
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Process-Focused
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Processes (conversions) are arranged based on the type of process, i.e., similar processes are grouped together Products/services (jobs) move from department (process group) to department based on that particular jobs processing requirements Also called Job Shop or Intermittent Production Examples Auto body repair Custom woodworking shop
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Process-Focused
Custom Woodworking Shop
Cutting Planing Shaping Assembly Sanding Finishing
1 Job A Job B 1 2 2 3 3 4 4 2 2 3 3 4 4 5 5 6 6 5 5 6 6 7

Drilling Turning

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Process-Focused
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Advantages High product flexibility Lower initial investment level Disadvantages Higher labor-skill requirements More worker training More supervision More complex production planning and controlling
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Group Technology/Cellular Manufacturing

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Group Technology Each part produced receives a multi-digit code that describes the physical characteristics of the part. Parts with similar characteristics are grouped into part families Parts in a part family are typically made on the same machines with similar tooling
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Group Technology/Cellular Manufacturing

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Cellular Manufacturing Some part families (those requiring significant batch sizes) can be assigned to manufacturing cells. The organization of the shop floor into cells is referred to as cellular manufacturing. Flow of parts within cells tend to be more like product-focused systems
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Group Technology/Cellular Manufacturing

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Advantages (relative to a job shop) Process changeovers simplified Variability of tasks reduced (less training needed) More direct routes through the system Quality control is improved Production planning and control simpler Automation simpler
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Group Technology/Cellular Manufacturing

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Disadvantages Duplication of equipment Under-utilization of facilities Processing of items that do not fit into a family may be inefficient
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Group Technology/Cellular Manufacturing

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Candidates for GT/CM are job shops having: A degree of parts standardization Moderate batch sizes
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Product/Process Design & Inventory Policy

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Standard Products and Produce to Stock Sales forecasts drive production schedule Maintain pre-determined finished-goods levels MRP forecast drives material ordering Custom Products and Produce to Order Orders set production schedule and drive material deliveries Design time (preproduction planning) may be required before production can be scheduled
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PRODUCT, PROCESS AND SERVICE DESIGN

PROCESS DESIGN IN SERVICES

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Process Design in Services

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Some of the factors important in process design for products are also important in services: Nature (level and pattern) of customer demand Degree of vertical integration Production flexibility Degree of automation Service quality
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Process Design in Services

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Three schemes for producing and delivering services Quasi-Manufacturing Customer-as-Participant Customer-as-Product
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Process Design in Services

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Quasi-Manufacturing Physical goods are dominant over intangible service Production of goods takes place along a production line Operations can be highly automated Almost no customer interaction Little regard for customer relations Example banks checking encoding operation
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Process Design in Services

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Customer-as-Participant Physical goods may be a significant part of the service Services may be either standardized or custom High degree of customer involvement in the process Examples: ATM, self-service gas station
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Process Design in Services

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Customer-as-Product Service is provided through personal attention to the customer Customized service on the customer High degree of customer contact There is a perception of high quality Customer becomes the central focus of the process design Examples: medical clinic, hair salon
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Process Reengineering
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The concept of drastically changing an existing process design Not merely making marginal improvements to athe process A correctly reengineered process should be more efficient A smaller labor force is often the result

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PRODUCT, PROCESS AND SERVICE DESIGN

DECIDING AMONG PROCESSING ALTERNATIVES

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Deciding Among Processing Alternatives

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Batch Size and Product/Service Variety Capital Requirements Economic Analysis Cost Functions of Alternative Processes Break-Even Analysis Financial Analysis
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Process Design Depends on Product Diversity and Batch Size

Product Focused, Dedicated Systems Product Focused, Batch System Cellular Manufacturing Process-Focused, Job Shop Few

Small

Batch Size

Large

Number of Product Designs

Many

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Capital Requirements
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The amount of capital required tends to differ for each type of production process Generally, the capital required is greatest for productfocused, dedicated systems Generally, the capital required is lowest for processfocused, job shops The amount of capital available and the cost of capital are important considerations

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Economic Analysis
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Cost Functions of Processing Alternatives Fixed Costs Annual cost when production volume is zero Initial cost of buildings, equipment, and other fixed assets Variable Costs Costs that vary with production volumes Labor, material, and variable overhead
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Cost Functions of Processing Alternatives

Annual Cost of Production ($000)
p ho S ob J
ine sembly L s Au t o m . A

nu f . a ar M l ellu C

2,000 1,500 1,000 500

Job Shop Preferred 100,000

Cellular Manufacturing Preferred

Automated Assembly Line Preferred Units Produced Per Year 250,000 66

Cost Functions of Processing Alternatives

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Example Three production processes (A, B, and C) have the following cost structure: Fixed Cost Variable Cost Process Per Year Per Year A $120,000 $3.00 B 90,000 4.00 C 80,000 4.50 What is the most economical process for a volume of 8,000 units per year?
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Cost Functions of Processing Alternatives

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Example TC = FC + v(Q) A: TC = 120,000 + 3.00(8,000) = $144,000 per year B: TC = 90,000 + 4.00(8,000) = $122,000 per year C: TC = 80,000 + 4.50(8,000) = $116,000 per year The most economical process at 8,000 units is Process C, with the lowest annual cost.

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Economic Analysis
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Break-Even Analysis Widely used to analyze and compare decision alternatives Can be displayed either algebraically or graphically Disadvantages: Cannot incorporate uncertainty Costs assumed over entire range of values Does not take into account time value of money
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Break-Even Analysis
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Example Break-Even Points of Processes A, B, and C, assuming a $6.95 selling price per unit Q = FC / (p-v) A: B: C: Q = 120,000 / (6.95 - 3.00) = 30,380 units Q = 90,000 / (6.95 - 4.00) = 30,509 units Q = 80,000 / (6.95 - 4.50) = 32,654 units

Process A has the lowest break-even point.

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Economic Analysis
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Financial Analysis A great amount of money is invested in production processes and these assets are expected to last a long time The time value of money is an important consideration Payback period net present value internal rate of return Profitability index
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METHODS OF FINANCIAL ANALYSIS

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Payback period Net present value (NPV) Internal rate of return (IRR) Profitability index
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Payback Period
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Payback is the number of years required to recover the original cash outlay invested in a project. If the project generates constant annual cash inflows, the payback period can be computed by dividing cash outlay by the annual cash inflow. That is:
Payback = C Initial Investment = 0 Annual Cash Inflow C

Assume that a project requires an outlay of Rs 50,000 and yields annual cash inflow of Rs 12,500 for 7 years. The payback period for the project is:
Rs 50,000 PB = = 4 years Rs 12,000
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Unequal cash flows In case of unequal cash inflows, the payback period can be found out by adding up the cash inflows until the total is equal to the initial cash outlay. Suppose that a project requires a cash outlay of Rs 20,000, and generates cash inflows of Rs 8,000; Rs 7,000; Rs 4,000; and Rs 3,000 during the next 4 years. What is the projects payback? 3 years + 12 (1,000/3,000) months 3 years + 4 months
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Acceptance Rule
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The project would be accepted if its payback period is less than the maximum or standard payback period set by management. As a ranking method, it gives highest ranking to the project, which has the shortest payback period and lowest ranking to the project with highest payback period.

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Net Present Value Method

Net present value should be found out by subtracting present value of cash outflows from present value of cash inflows. The formula for the net present value can be written as follows:
C1 C3 Cn C2 NPV = + + +L + C0 2 3 n (1 + k ) (1 + k ) (1 + k ) (1 + k ) n Ct NPV = C0 t t =1 (1 + k )

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Calculating Net Present Value

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Assume that Project X costs Rs 2,500 now and is expected to generate year-end cash inflows of Rs 900, Rs 800, Rs 700, Rs 600 and Rs 500 in years 1 through 5. The opportunity cost of the capital may be assumed to be 10 per cent.

Rs 900 Rs 800 Rs 700 Rs 600 Rs 500 NPV = + + + + Rs 2,500 2 3 4 5 (1+0.10) (1+0.10) (1+0.10) (1+0.10) (1+0.10) NPV = [Rs 900(PVF1, 0.10 ) + Rs 800(PVF2, 0.10 ) + Rs 700(PVF3, 0.10 ) + Rs 600(PVF4, 0.10 ) + Rs 500(PVF5, 0.10 )] Rs 2,500 NPV = [Rs 900 0.909 + Rs 800 0.826 + Rs 700 0.751 + Rs 600 0.683 + Rs 500 0.620] Rs 2,500 NPV = Rs 2,725 Rs 2,500 = + Rs 225 77

Acceptance Rule

Accept the project when NPV is positive NPV > 0 Reject the project when NPV is negative NPV < 0 May accept the project when NPV is zero NPV = 0 The NPV method can be used to select between mutually exclusive projects; the one with the higher NPV should be selected.
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Internal Rate of Return Method

The internal rate of return (IRR) is the rate that equates the investment outlay with the present value of cash inflow received after one period. This also implies that the rate of return is the discount rate which makes NPV = 0.
C0 = C3 Cn C1 C2 + + +L + (1 + r ) (1 + r ) 2 (1 + r )3 (1 + r ) n
n t =1 n

C0 =

Ct (1 + r )t Ct C0 = 0 t (1 + r )

t =1

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Calculation of IRR

Uneven Cash Flows: Calculating IRR by Trial and Error

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The approach is to select any discount rate to compute the present value of cash inflows. If the calculated present value of the expected cash inflow is lower than the present value of cash outflows, a lower rate should be tried. On the other hand, a higher value should be tried if the present value of inflows is higher than the present value of outflows. This process will be repeated unless the net present value becomes zero.

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Level Cash Flows

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Let us assume that an investment would cost Rs 20,000 and provide annual cash inflow of Rs 5,430 for 6 years. The IRR of the investment can be found out as follows:

NPV = Rs 20,000 + Rs 5,430(PVAF6,r ) = 0 Rs 20,000 = Rs 5,430(PVAF6, r ) PVAF6, r = Rs 20,000 = 3.683 Rs 5,430

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Acceptance Rule

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Accept the project when r > k. Reject the project when r < k. May accept the project when r = k.

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Profitability Index

Profitability index is the ratio of the present value of cash inflows, at the required rate of return, to the initial cash outflow of the investment.

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Profitability Index
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The initial cash outlay of a project is Rs 100,000 and it can generate cash inflow of Rs 40,000, Rs 30,000, Rs 50,000 and Rs 20,000 in year 1 through 4. Assume a 10 per cent rate of discount. The PV of cash inflows at 10 per cent discount rate is:

PV = Rs 40,000(PVF1, 0.10 ) + Rs 30,000(PVF2, 0.10 ) + Rs 50,000(PVF3, 0.10 ) + Rs 20,000(PVF4, 0.10 ) = Rs 40,000 0.909 + Rs 30,000 0.826 + Rs 50,000 0.751 + Rs 20,000 0.68 NPV = Rs 112,350 Rs 100,000 = Rs 12,350 Rs 1,12,350 PI = = 1.1235. Rs 1,00,000

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Acceptance Rule
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The following are the PI acceptance rules:

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Accept the project when PI is greater than one. PI > 1 Reject the project when PI is less than one. PI < 1 May accept the project when PI is equal to one. PI = 1

The project with positive NPV will have PI greater than one. PI less than means that the projects NPV is negative.

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Deciding Among Processing Alternatives

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Assembly Charts (Gozinto Charts) Macro-view of how materials are united Starting point to understand factory layout needs, equipment needs, training needs Ideal for getting birds-eye view of process Process Charts Details of how to build product at each process Includes materials needed, types of processes product flows through, time it takes to process product through each step of flow Useful for comparing operations
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Wrap-Up: World Class Practice

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Fast new product introduction Design products for ease of production Refine forecasting Focus on core competencies ... less vertical integration Lean production Flexible automation Job shops move toward cellular manufacturing Manage information flow ..... automate and simplify!
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End of Module-3 (Chapter 4) End of Module-3 (Chapter 4)

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