Operations Management

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AQUILANO CHASE

chapter 3

New New Product Product and and Service Service Development, Development, and and Process Process Selection Selection

© The McGraw-Hill Companies, Inc., 2003

PowerPoint Presentation by Charlie Cook

Chapter Chapter Objectives Objectives • Illustrate the importance of the development of new products and services to a firm’s competitiveness. • Identify the various types of new products that are developed by companies. • Introduce the new product design process and the concept of a product’s life cycle. • Demonstrate the necessity of concurrent product and process design as a new product or service is developed. • Present a framework for understanding how new services are developed and introduced into the marketplace. Fundamentals of Operations Management 4e

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Managerial Managerial Issues Issues • Product life cycles becoming shorter. –The need to bring products to market more quickly and efficiently.

• Conducting product development on a continuous basis. –New products may represent a majority of sales and profits. –3M an innovative company, having strength to introduce new products in the market at a faster pace with a great success record.

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Why Why the the Emphasis Emphasis on on New New Goods Goods and and Services Services • Increased Competition Advances in worldwide telecommunications Lower trade barriers (import duties and tariffs) and the creation of trade organizations (NAFTA and European Union) Faster transportation of goods

• Advances in Technology Products become obsolete faster. Cell Phone sizes & features and PC’s speed and storage are good examples. Improved manufacturing processes (CAD and CAM and industrial robots) Fundamentals of Operations Management 4e

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The The Benefits Benefits of of Introducing Introducing New New Products Products Faster Faster • Greater Market Share Early entry captures large initial market share. Semi-conductor industry – first two entrants share majority of market

• Price Premiums Ability to initially charge more for new products. Products that are late to market have a –ve impact on profitability in terms of cost overruns.

• Quick Reaction to Competition Rapid response to competitor’s new products.

• Set Industry Standards Initial product sets market/industry standards (entry barriers).

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The The Impact Impact of of Speed Speed to to Market Market on on Sales Sales

Exhibit 3.1a Fundamentals of Operations Management 4e

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The The Impact Impact of of Speed Speed to to Market Market on on Profit Profit Margins Margins

Exhibit 3.1b Fundamentals of Operations Management 4e

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The The Impact Impact of of Speed Speed to to Market Market on on Profits Profits

Exhibit 3.1c Fundamentals of Operations Management 4e

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Categories Categories of of New New Products Products • Incremental or Derivative Products Cost-reduced versions of existing products or products with added functions & features. Are hybrids or enhancements of existing products. Require minimal changes in design or process, allowing for quick development. Require fewer resources to develop new features or functions. Help ensure near-term cash flows by maintaining current market share. Fundamentals of Operations Management 4e

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Categories Categories of of New New Products Products • Next Generation or Platform Products Represent new “system” solutions for customers. Require more resources to develop. Are key to continued product revenue growth.

Intel’s 286, 386, 486, PI, PII, PIII & PIV are examples Ford’s MUSTANG models Ensure company’s growth and lay the foundation for a series of evolutionary products in coming years. Fundamentals of Operations Management 4e

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Categories Categories of of New New Products Products • Breakthrough or Radical Products Create new product categories as core businesses. Require substantial design and process change. Render existing products obsolete in long-term. First PC, first Laptop, first Cellular phone are good example. CDs, Optic Fiber, Teflon are another class of examples. These products are necessary for long term success of the firm. Fundamentals of Operations Management 4e

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The The Trend Trend toward toward Shorter Shorter Product Product Development Development Times Times

Source: Data: Product Development & Management Association, Business Week, January 27, 1997, p. 6.

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The The New New Product Product Development Development (NPD) (NPD) Process Process • New Product Development Process The method by which new products evolve from conceptualization through engineering to manufacturing and marketing.

• Market Success Depends on NPD Continuously generate new product ideas. Convert ideas to reliable functional designs. Ensure that the designs are readily producible. Select the processes most compatible with customer needs. Fundamentals of Operations Management 4e

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Sequential Sequential Flow Flow of of Activities Activities in in Product Product Design Design and and Process Process Selection Selection

Source: Reprinted with the permission of the Free Press, an imprint of Simon & Schuster from Fast Cycle Times: How to Align Purpose, Strategy, and Structure for Speed by Christopher Meyer. Copyright © 1993 by Christopher Meyer. Fundamentals of Operations Management 4e

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The The New New Product Product Development Development (NPD) (NPD) Process Process • Concurrent Engineering The simultaneous and coordinated efforts of all functional areas which accelerates the time to market for new products.

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Concurrent Concurrent Engineering Engineering Approach Approach to to NPD NPD

Exhibit 3.4 Fundamentals of Operations Management 4e

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The The New New Product Product Development Development (NPD) (NPD) Process Process (cont’d) (cont’d) • Idea Generation Market pull: the “voice of the customer” in providing feedback to determine product specifications. Technology push: a product developed by the firm’s R&D is “pushed” into the market. Polaroid Cameras, PCs and 3M’s Post-it Notes are examples

• Concept Development Initial product design developed and tested. Analysis of the market and customer requirements. Businesses today recognize the need to involve their customers in all aspects of design, production and delivery of goods and services. Fundamentals of Operations Management 4e

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The The New New Product Product Development Development (NPD) (NPD) Process Process (cont’d) (cont’d) • Quality Function Deployment (QFD) The process for translating customer requirements into a product’s design.

• Voice of the Customer Customer feedback is used in QFD process to determine product specifications. Customer attributes: • Product needs • Product preferences Attributes are weighted based on their relative importance to customer. Consumer is asked to compare and rate the company’s products with those of its competitors. Fundamentals of Operations Management 4e

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The The New New Product Product Development Development (NPD) (NPD) Process Process (cont’d) (cont’d) • House of Quality The part of the QFD process that uses customer feedback for product design criteria. Use of QFD teams • Identify important customer attributes. • Design superior product. • Shorten product design time. • Facilitate inter-functional cooperation.

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Completed Completed House Houseof of Quality Quality Matrix Matrix for foraaCar Car Door Door

Exhibit 3.5 Fundamentals of Operations Management 4e

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QFD QFD Details Details 

Process used to ensure that the product meets customer specifications

Voice of the engineer

Voice of the customer

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Customer-based benchmarks

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QFD QFD –– House House of of Quality Quality 

Adding trade-offs, targets & developing product specifications Trade-offs

Targets

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Technical Benchmarks

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The The New New Product Product Development Development (NPD) (NPD) Process Process (cont’d) (cont’d) • New Product Planning 1. Build models of new product. 2. Test new elements and components. 3. Conduct detailed investment and financial analyses of product’s anticipated life cycle.

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The The New New Product Product Development Development (NPD) (NPD) Process Process (cont’d) (cont’d) • Design for Manufacturability (DFM) Choosing manufacturing methods and materials. Minimizing the number of individual parts: • Reduces assembly time. • Increases reliability.

 Setting product specifications. • Output from the design activity that states all criteria for building a product.

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Design Design Change Change to to Reduce Reduce the the Number Number of of Parts Parts in in aa Bracket Bracket

Exhibit 3.6 Fundamentals of Operations Management 4e

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Factors Factors contributing contributing to to Successful Successful Product Product Design Design

• Design from the outside in. Make the customer’s use of the product the focus of all product development.

• Partner Deeply. Involve all of the relevant functional areas (marketing, engineering, purchasing & manufacturing) early in the design process to assist in defining the new product (concurrent engineering).

• Partner Widely. Organizational boundaries

are becoming fused. Designers should involve all stakeholders – internal & external.

• Design the product upfront. Match the right product to the right market niche. Upfront design analysis will eliminate the faulty concepts early.

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Factors Factorscontributing contributingto toSuccessful SuccessfulProduct ProductDesign Design––contd. contd.

• Get physical fast. Use prototypes to visualize a concept and to obtain quick feedback from both users and managers.

• Design for manufacturability. Always design a product that will meet established quality, cost and delivery parameters. Manufacturing issues are as important to success as ergonomics, aesthetics and functionality.

• Surprise the user. Always build something extra into the product that will unexpectedly delight the customer. This creates customer loyalty and increases the chances of having a truly “hot” product.

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• WITH TODAY'S HUGE ARSENAL of drugs, doctors can control diabetes, glaucoma, hypertension, and dozens of other diseases. But they can't force people to take their medicine. Forgetful and reluctant patients rack up $25 billion in avoidable hospital bills each year, according to the National Pharmaceutical Council in Reston, Va., plus billions more in unnecessary nursing home admissions. One remedy may be for the medicine containers themselves to remind patients when it's time to take a pop. Aprex Corp. in Fremont, Calif., builds a "smart" bottle cap that's equipped with its own chip, alarm clock, and a tiny display. The cap keeps track of how often the bottle is opened and can nudge patients with electronic beeps. Now, Aprex has added a modem that reads the cap's memory and automatically relays to Aprex the number of times the cap was removed that day. If the count isn't right, the patient gets a reminder call in the morning. The service, called Dosing Partners, costs less than $2 a day--but isn't covered by insurance. Still, Aprex has drawn some big backers. Last fall, Pfizer invested $2 million to join Johnson & Johnson and New York Life as an equity partner. Fundamentals of Operations Management 4e

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Process Process Selection Selection in in Manufacturing Manufacturing • Types of Processes –Project process • Process that focuses on making one-of-a-kind products.

–Intermittent process • Process that produces products in small lot sizes (e.g., job and batch operations).

–Line-flow process • Continuous process that produces high volume, highly standardized products (e.g., assembly-line and continuous operations).

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Types Types of of Processes Processes

Exhibit 3.7 Fundamentals of Operations Management 4e

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Process Process Selection Selection in in Manufacturing Manufacturing • The Product-Process Matrix –High production volumes and narrow product lines make specialized equipment and standardized materials economically feasible. • Remaining in a process niche after the product cycle has advanced to its next stage dooms a firm to market failure.

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Matching Matching Major Major Stages Stages of of Product Product and and Process Process Life Life Cycles Cycles

Source: Adapted from Robert Hay and Steven Wheelwright, Restoring Competitive Edge: Competing through Manufacturing (New York: John Wiley & Sons, 1984).

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Product Product and and Process Process Life Life Cycles Cycles

Exhibit 3.9 Fundamentals of Operations Management 4e

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New New Service Service Development Development

Types Types of of Incremental Incremental and and New New Services Services

Exhibit 3.10 Fundamentals of Operations Management 4e

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Categories Categories of of New New Services Services • Incremental services – Service line extensions • New services that augment current services. – New items on restaurant menu, new airline routes.

– Service improvements • New services in which features have changed relative to existing services. – E-ticketing for airlines.

– Style changes • Modest forms of new services that change only the appearance of the service. • Aimed to impact the customer’s perceptions, emotions and attitudes. – Renovation of a restaurant, exterior painting of airplane with a new logo. Fundamentals of Operations Management 4e

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Categories Categories of of New New Services Services (cont’d) (cont’d) • Radical – New service offerings that were not previously available or new delivery system for existing service – Major innovations • New services in markets not fully defined. Often driven by computer and information technology. – Internet banking

– Start-up services • New services in established markets already served by existing services. – Development of SMART card for retail transactions, customer loyalty card by Lahore Chatkhara.

– New services for current markets • Added services to current customers. – PICIC Bank’s kiosk in PC Lahore. Fundamentals of Operations Management 4e

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AA Framework Framework for for Categorizing Categorizing New New Services Services

Exhibit 3.11 Fundamentals of Operations Management 4e

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Categories Categories of of New New Services Services Service Category

Content Change

“Window Dressing”

Not significantly different from other services Delivered in similar fashion

Breadth of Offering

Significant design change in content of service Delivered in similar fashion

Revolutionary

New in both content and delivery method

Channel Development

Delivery of same/existing service through a different/new channel

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Categories Categories of of New New Services Services –– Contd. Contd.

Service C

“Window D

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New New Service Service Development Development Process Process • NSD is very similar to NPD. • Designing of Product and Process is carried out simultaneously. • It is impossible to separate product from process. • The process starts with IDEA. • R & D in services occurs primarily in the operations process w.r.t. how the service is delivered. Fundamentals of Operations Management 4e

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New New Service Service Development Development (NSD) (NSD) Process Process –– Contd. Contd. Stage

Activity

Design

Formulating the objectives and strategy of the new service.

Analysis

Considering the financial implications of the new service. Examining supply chain issues for delivery of service.

Development

Testing the service design, training personnel, conducting pilot runs.

Full Launch

Releasing the service to the market place.

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NSD NSD Process Process -- Propositions Propositions • The NSD process is more likely to be nonlinear for the services that are less standardized or are delivered through more industrialized service channels. • Competence in the planning phase activities of NSD process drives successful radical innovations, whereas competence in execution phase activities of the NSD process drives successful incremental innovations. • Service failures and subsequent recovery efforts are often the result of using an ad hoc NSD process or the lack of NSD competence rather than from poor service execution. • Effective portfolio management of individual NSD efforts will decrease the total risk of a firm’s NSD program and increase the probability of high NSD returns (Similar to the portfolio management approvals that mutual funds use) • Portfolio-like management of NSD efforts will increase the fulfilment of heterogeneous customer needs. Fundamentals of Operations Management 4e

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The The Customer Customer Contact Contact Approach Approach to to Designing Designing Service Service Processes Processes • Service systems are generally classified along industry lines – Financial services, health services, transportation and etc. – Such classification does not mention much about process

• Customer Contact – The presence of the customer in the system.

• Extent of Contact – The percent of time the customer is involved relative to the time required to deliver the service.

• Creation of the Service – The work process involved in providing the service. Fundamentals of Operations Management 4e

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The The Customer Customer Contact Contact Approach Approach to to Designing Designing Service Service Processes Processes

High HighDegree Degree of ofCustomer Customer Contact Contact

High

Low LowDegree Degree of ofCustomer Customer Contact Contact

Percentage of customer contact (customer influence on the system) Difficulty in managing system

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Low

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Major Major Differences Differences between between HighHigh- and and Low-Contact Low-Contact Systems Systems in in aa Bank Bank

Exhibit 3.12 Fundamentals of Operations Management 4e

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The The Service Service Process Process Matrix Matrix

Source: Roger W. Schemenner, “How Can Service Businesses Survive and Prosper?” Sloan Management Review 27, no. 3 (Spring 1986), pp. 21–32, by permission of publisher. Copyright 1986 by Sloan Management Review Association, All rights reserved.

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Customer Customer Contact Contact Approach Approach –– Contd. Contd. • Degree of customer interaction and customization, closely parallels the degree of customer contact. • The degree of labour intensity to deliver service is also important • Service Factory – Low degree of labour intensity and low degree of customer interaction and customization

• Service Shop – Low degree of labour intensity but higher degree of customer interaction and customization

• Mass Service – High degree of labour intensity but has a relatively low degree of customer interaction and customization

• Professional Service – High degree of labour intensity as well as higher degree of customer interaction and customization

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Generic Generic Strategies Strategies for for Service Service Organizations Organizations • Low Degree of labour intensity Capital intensive with high fixed costs. Can’t easily adjust capacity to meet changes in demand Must attempt to smooth out demand during peak periods by shifting it to off-peak periods

• High Degree of labour intensity Workforce management is paramount. Emphasis should be on hiring training and scheduling

• Benchmarking of best-in-class companies could help Fundamentals of Operations Management 4e

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Designing Designing aa New New Service Service Organization Organization • “Service Vision” (Heskett) –Identification of the target market • Who is our customer?

–Defining the service concept • How do we differentiate our service in the market?

–Developing the service strategy • What is our service package and its operating focus?

–Creating the service delivery system • What processes, staff, and facilities are needed?

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Designing Designing aa New New Service Service Organization Organization –– Contd. Contd. • The process and the product must be developed simultaneously. • Service operation itself lacks the legal protection, commonly available to goods production. • Service package constitutes the major output of development process. • Many parts of the service package often are defined by training individuals receive before they become part of organization. – Professional service organizations, e.g. law firms, hospitals require certification prior to hiring

• Many service organizations can change their service offerings virtually overnight. – Barber shops, retail stores and restaurants

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Service-System Service-System Design Design Matrix Matrix

Exhibit 3.14 Fundamentals of Operations Management 4e

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Service-System Service-System Design Design Matrix Matrix –– Contd. Contd. • Buffered Core – physically separated from the customer. • Permeable System – customer can penetrate via phone or face-to-face contact • Reactive System – Penetrable and reactive to customer requirements • Greater the amount of customer contact, the greater the opportunity to generate additional sales. • Face-to-face loose specs – Fast food restaurants and Disneyland, neither customer nor server has much discretion on creating the service

• Face-to-face total customization – Where the specs. to be developed through some interaction b/w customer and server, e.g., legal and medical services Fundamentals of Operations Management 4e

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Strategic Strategic Uses Uses of of the the Service-System Service-System Design Design Matrix Matrix 1. 2.

Enabling systematic integration of operations and marketing strategy. Clarifying exactly which combination of service delivery the firm is actually providing. 

1.

Permitting comparison with other firms in the way specific services are delivered. 

1.

This helps to pinpoint a firm’s competitive advantage.

Indicating evolutionary or life cycle changes that might be in order as the firm grows. 

1.

As the company incorporates the delivery options (listed on diagonal) it is becoming diversified in production process.

The evolution of service delivery could move in either direction, unlike to that in manufacturing where from intermittent operation, movement is towards continuous operation.

Providing flexibility. 

One can go into depth, placing particular service products of a small firm or cover a large service organization at more aggregated level.

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Process Process Selection Selection in in Services Services • Types of Service Organizations – Service businesses • Facilities-based services that provide assistance to customers who come to the service facility. Banks, hospitals, law firms. • Field-based services that provide on-site services to customers. Cleaning and home repair services. – Customer support services • Provide product information and services to current external customers. Product repair and maintenance services. – Internal services • Provide services for other internal organizational units. Functions such as, maintenance, accounting. Fundamentals of Operations Management 4e

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Process Process Selection Selection in in Services Services (cont’d) (cont’d) • The Production Line Approach Orientation is toward the efficient production of results— precisely controlled execution of the “central function”. McDonald’s Big Mac Besides marketing and financial skills, the company carefully controls the execution of each outlet’s central function – the rapid delivery of a consistently uniform, high quality mix of prepared food in a clean environment, with cheerful courtesy. The systematic substitution of equipment for people, combined with carefully planned use and positioning of technology enables McDonald’s to attract customers in unprecedented manner.

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McDonald’s McDonald’s Production Production Line Line Approach Approach  The McDonald’s french fryer allows cooking of the optimum number of french fries at one time.  A wide-mouth scoop is used to pick up the precise amount of french fries for each order size. (The employee never touches the product)  Storage space is expressly designed for a predetermined mix of pre-packaged and pre-measured products.  Cleanliness is pursued by providing ample trash cans in and outside each facility. (larger outlets have motorized sweepers for parking areas)  Hambergers are wrapped in color coded paper.  Through painstaking attention to total design and facilities planning, everything is built integrally into the (McDonald’s) machine itself – into the technology of system. The only choice available to the attendant is to operate it exactly as the designer intended. Fundamentals of Operations Management 4e

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Process Process Selection Selection in in Services Services –– Contd. Contd. • The Customer Involvement Approach Having the customer take a greater participatory role in the production of the service. • ATMs, self-service gas stations, salad bars, inroom coffee-making equipment in hotel rooms.

This turns customer into partial employees, who must be trained in what to do and be compensated primarily through lower prices that are charged for service.

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Process Process Selection Selection in in Services Services –– Contd. Contd. • The Personal Attention Approach The central focus is complete customer attention and satisfaction at all times. It is the concept of mass-customization, applied to services. Each customer is treated as an individual, with the service firm often maintaining a database of each customer’s likes and dislikes. This information may be available within one particular facility or for all facilities of that organization. Ritz-Carlton does it for all of its guests. Fundamentals of Operations Management 4e

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Common Common Characteristics Characteristics of of Well-Designed Well-Designed Service Service Systems Systems 1. Each element of the service system is consistent with the operating focus of the firm. 2. It is user-friendly—customers can interact easily. 3. It is robust—capable of coping with variations in demand and resources availability 4. It is structured so that consistent performance by its people and systems is easily maintained. 

Supportive technologies are truly supportive and reliable.

1. It provides effective links between the back office and the front office so that nothing falls between the cracks. Fundamentals of Operations Management 4e

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Common Common Characteristics Characteristics of of Well-Designed Well-Designed Service Service Systems Systems (cont’d) (cont’d) 6. It manages the evidence of service quality in such a way that customers see the value of the service provided. 

This is particularly true where a service improvement is made. Unless customers are made aware of improvement through explicit communication about it, the improved performance is unlikely to gain maximum impact.

6. It is cost-effective—there is a minimum waste of time and resources in delivering the service.

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