Product Design & Process Selection

(Ch-4 Norman Gaither, Ch-2 Upendra Kachru)

Product Life Cycle

Product life cycle is the course of a products sales and profits over time. Product life cycle (PLC) deals with the life of a product in the market with respect to business or commercial costs and sales measures. The five stages of each product life cycle are product development, introduction, growth, maturity and decline.

Product Life Cycle

Sales and Profits Profits Time Decline Sales

Product Introduction Development

Growth

Maturity

Sales and Profits Over the Products Lifetime

Introduction Stage of the PLC

Summary of Characteristics, Objectives, & Strategies
Sales Costs Profits Marketing Objectives Low High cost per customer Negative Create product awareness and trial

Product
Price Distribution

Offer a basic product

Use cost-plus formula Build selective distribution Heavy to persue product trial

Promotion

Growth Stage of the PLC

Summary of Characteristics, Objectives, & Strategies
Sales Costs Profits Marketing Objectives Rapidly rising Average cost per customer Rising Maximize market share

Product
Price Distribution Promotion

Offer extension, service, warranty

Penetration strategy Build intensive distribution

Reduce to take advantage of demand

Maturity Stage of the PLC

Summary of Characteristics, Objectives, & Strategies
Sales Costs Profits Marketing Objectives Product Price Distribution Promotion Peak Low cost per customer High Maximize profits while defending market share Diversify brand and models Match or best competitors Build more intensive distribution Increase to encourage brand switching

Decline Stage of the PLC

Summary of Characteristics, Objectives, & Strategies
Sales Costs Profits Marketing Objectives Product Price Distribution Promotion Declining Low cost per customer Declining
Reduce expenditures and milk the brand

Phase out weak items Cut price

Selective: phase out unprofitable outlets Reduce to minimum level

Product Development
Product development means making changes in the size, design, color, shape, characteristics, packing etc. of the product. It may include addition of a new product line, addition of a new product item in a particular product line, elimination of existing product or product line & changes in the size, color, design, packing, characteristics, and prices of the product & discontinuation of the unprofitable item or product line. A new product is any product which is perceived by the customer as being new.

REASONS FOR NEW PRODUCTS

There are at least 3 reasons for which new products should be developed. 1st, new products become necessary for meeting the changes in consumer needs. 2nd, new products become necessary for earning more revenue & making more profits. 3rd, new products become necessary for combating environmental threats.

Factors to be considered at Product Planning and Design stage

Marketing Aspect Product Characteristics : Aesthetic Aspect Functional Aspect Operational Aspect Durability and Dependability

 Economic Analysis Effect of Standardization, Simplification and Specialization Break-Even Analysis Profitability and Competitiveness Production Aspect

Product Screening Tool Break-Even Analysis

Computes the quantity of goods company needs to sell to cover its costs QBE = FC/ (SP - VC)
QBE : Break even quantity FC : Fixed costs SP : selling price/unit VC : Variable cost/unit

Product Screening Tool Break-Even Analysis

Break-even analysis also includes calculating
Total cost which is sum of fixed and variable cost Total cost = FC + (VC)*Q Revenue The amount of money brought in from sales Revenue = (SP) * Q SP = Selling price per unit Q = number of units sold FC = Fixed Cost VC = Variable Cost

Break-Even Analysis: Graphical Approach

Compute quantity of goods that must be sold to breakeven Compute total revenue at an assumed selling price Compute fixed cost and variable cost for several quantities Plot the total revenue line and the total cost line Intersection is break-even

Cost Functions of Processing Alternatives

# Three production processes (A, B, and C) have the following cost structure:

Process A B C

Fixed Cost Per Year $120,000 90,000 80,000

Variable Cost Per Year $3.00 4.00 4.50

What is the most economical process for a volume of 8,000 units per year? Which process to be selected based on break even analysis if selling price is $6.95?

Cost Functions of Processing Alternatives

Solution : TC = FC + VC * (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.

Break-Even Analysis
Solution : Break-Even Points of Processes A, B, and C may be computed as below : Q = FC / (SP - VC)
A: Q = 120,000 / (6.95 - 3.00) = 30,380 units B: Q = 90,000 / (6.95 - 4.00) = 30,509 units C: Q = 80,000 / (6.95 - 4.50) = 32,654 units Since, Process A has the lowest break-even point, so Process-A is to be selected.

Designing for Quality

Crucial element of product design is its impact on quality Quality is determined by the customers perception of the degree of excellence of the products (or services) characteristics

Functional Design
Two performance characteristics are considered during Functional Design of a product. These are reliability and maintainability. Reliability is the probability that a given part or product will perform its intended function for a specified length of time under normal conditions of use. A product or system reliability is a function of the reliabilities of its component parts. Rs=(R1)(R2).(Rn) where Rn is the reliability of the nth component Example: If two components are required and they each have a reliability of 0.90 then the system reliability is 0.81 or 81%

If R1 : reliability of original component R2 : reliability of backup component System reliability Rs = 1- [(1-R1)(1-R2)]

Mean Time Before Failure (MTBF) : Reliability can also be expressed as the length of time a product or service will be in operation state before it fails. It is also known as Mean Time Before Failure(MTBF).It is a reciprocal of failure rate. Maintainability : It refers to the ease with which a product can be maintained. On quantitative measure, maintainability is the Mean Time to Repair (MTTR). System Availability (SA) = (MTBF) / (MTBF + MTTR)

Problem
A company is trying to choose a service provider for its companys e-commerce site. Other factors being equal, it will base its decision on server availability. Given the following server performance data, which provider it should choose: Provider MTBF(hrs) MTTR(hrs) A 60 4.0 B 36 2.0 C 24 1.0