OM 1 3 9 486 490 Organizations that have well designed products or services are more likely to realize their goals than those with poorly designed products or services The introduction of new products or services or changes to product or services designs can have impacts throughout the organization as well as the entire supply chain What Does Product and Service Design Do o Translate customer wants and needs into product and service requirements marketing operations o Refine existing products and services marketing o Develop new products and or services marketing operations o Formulate quality goals marketing operations o Formulate cost targets accounting finance operations o Construct and test prototypes operations marketing engineering o Document specifications o Translate product and service specifications into process specifications engineering operations Reasons for Product and Service Design Redesign o Market opportunities or threats Economic changes low demand Social and demographic changes population shifts Political liability or legal changes government changes new regulations Competitive changes new advertising promotions Cost or availability changes labor raw materials Technological changes processes Can indirectly affect product and service design o Advances in processing technology may require altering an existing design to make it compatible with the new processing technology The Key Questions o From a buyer s standpoint most purchasing decisions entail 2 fundamental considerations 1 is cost and the other is quality performance o From the organization s standpoint the key questions are Is there demand for it Potential market size Can we do it Products manufacturability services serviceability Manufacturability capability of an organization to produce an item at an acceptable profit Serviceability capability of an organization to provide a service at an acceptable cost or profit What level of quality is appropriate What do customers expect Does it make sense from an economic standpoint Potential liability sustainability issues costs profits Legal and Ethical Considerations o Product liability responsibility of a manufacturer for any injuries or damages caused by a faulty product Can be a strong incentive for design improvements o Uniform Commercial Code products carry an implication of merchantability and fitness Product must be usable for its intended purposes o Organizations generally want designers to adhere to guidelines such as the following Produce designs that are consistent with the goals of the organization high quality don t cut corners Give customers the value they expect Make health and safety a primary concern for employees and customers OM 2 491 495 496 526 Target Costing for Start Up Companies Main theme in the entire target costing practice is What should the new product cost It is not What does it cost Successful products are born when the customer comes first in the design process and when designers are challenged to meet their demands Determinants of product cost should come from a clear strategic vision of o Target markets in which the organization needs to compete o Wants and needs of the target customer in terms of quality and price o Target profit and returns required by investors o Market price required profit margin other costs target cost o Customer requirements for quality cost and time must be incorporated o Value to customer must be greater than the cost of providing those Target Costing Principles Price led costing Focus on customers features Focus on design o Engineering changes must occur before production begins Cross functional involvement o Cross functional product process teams are responsible for the entire product from initial concept through final production Value chain involvement o All members of the value chain suppliers distributors service providers and customers are included in the target costing process Life cycle orientation customer o Total life cycle costs are minimized for both the producer and the Life cycle costs include purchase price operating costs Target Costing for Start Up Companies maintenance and distribution costs Start ups don t have experience or existing company financial statements to help them to estimate costs for things like marketing general and administrative expenses Most entrepreneurial ventures must make loose initial estimates SWAGS of expected profits selling prices and costs other than operations costs as well as likely channel costs in order to use the target costing method o Must do Estimate retail price Teams can estimate a range of likely selling prices by examining the selling prices of competitive and substitute products Estimate channel margin for channel of distribution Using middlemen on average 50 channel margin Estimate gross margin required for product to be profitable Assume a gross margin of 50 sales marketing 20 general admin 20 profit 10 Compute target cost Subtract channel margin and gross margin from the retail price This is the maximum we can spend to make each product and still achieve desired margins Identify COGS material labor and overhead costs Design challenge Compare actual costs with the target cost Conduct research on markets customers competition and channels of distribution OM 3 15 28 Other Considerations in Product and Service Design Designers must also take into account product or service life cycles how much standardization to incorporate product or service reliability and the range of operating conditions under which a product or service must function Strategies for Product or Service Life Stages o When a product or service is introduced many potential buyers may suspect that all the bugs haven t been worked out and that the price may drop after the introductory period Companies must carefully weigh the trade offs in getting all the bugs out versus getting a leap on the competition as well as getting to the market at an advantageous time o Over time design improvements and increasing demand yield higher reliability and lower costs leading the growth in demand o In the next phase the product or service reaches maturity and demand levels off Few if any design changes are needed Costs and productivity o In the decline phase decisions must be made on whether to discontinue a product or service and replace it with new ones or abandon the market or to attempt to find new uses or new users for the existing product or service Degree of Standardization o