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Supply Chain Management:

From Vision to Implementation

Chapter 4: New Product Development Process:

Managing the Idea Infrastructure
Chapter 4: Learning Objectives
1. Describe the new product development
process and how it affects company and SC

2. List the risks involved in the new product

process. Explain how to mitigate these risks.

Chapter 4: Learning Objectives
3. Describe the marketing process and discuss
its role in the new product process.

4. Define target costing and explain its role in

developing new products and services.

Chapter 4: Learning Objectives
5. Describe the finance process and discuss its
role in the new product process.

6. Discuss EVA, profitability, and cash flow as

key financial metrics for organizations.

New Product Development
 New product development is risky and
 More than 9 out of 10 products fail.
 New product development is cross-functional:
 Marketing identifies unfilled customer needs
 R&D conceptualizes and develops the product
 Finance verifies that it is economically viable
 SC leaders rely on teaming which includes
suppliers and customers.
Customer Satisfaction Cycle

Mitigating Risk
Companies are faced with increasing levels of risk in
today’s 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

Intel’s 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
Intel’s 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 is regularly reported to top management
 High risk aspects are highlighted not glossed over
 Results: Nearly eliminated surprises during
Intel’s Risk Scorecard

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.

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
 Suppliers may be aware of trends in technology
or demand

“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

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

Marketing and the Customer
 Marketing’s job is to “get into the head” of the
 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
The Marketing Process
 The marketing process begins with understanding
the company’s goals, strategy, image, and
completive position.
 Entails SWOT analysis
Strengths and Weaknesses Opportunities and Threats
Core Competencies Competitors
Cash Flow Position New Markets
Research and Development Technology Trends
Customer Relationships Government Regulations
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
 Sequential is the traditional “over the wall” approach to
 Sequential is time consuming and inefficient
 Sequential results in lost opportunities to leverage
supplier competencies in the design process.

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, R&D, engineering, production,
 Many companies include customers, suppliers
and service providers in NPD teams.
 Use of target pricing and target costing

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  Packaging

 Cost of Materials  Equipment
 Labor  Utilities
 Logistics  Sales and Marketing Expense

Sequential Product Development

Determinants of Target Price
Estimated Cost Structure Historic Cost
of Product/Service Structure

Competitive Market Research

Pricing Data


Market Conditions Price Elasticity

Perceived Value
Versus Competition 21
Target Costing and Target Pricing

Competitive Target Costing - Example