Choosing the Right Development Projects to Work On.
Lean Accounting for NPD. Blog #2
There are several ways to establish a value stream for New Product Development. Sometimes NPD engineering is contained within an order fulfillment value stream to customize or configure products for the customers. The engineers largely work full-time on projects within their own value stream. The extreme of this is when the organization is a design company, and the “product” is itself the design.
It is more common though for the new product development process to be it’s own value stream serving the design needs of more than one order fulfillment value stream. The NPD value stream is self-contained, and all the people work full-time directly within the NPD value stream. Larger organizations can have several NPD value streams and these value streams may also have occasion to work together to create new products.
Once we have understood, recognized, and organized the NPD value stream(s), then we are ready to choose the projects the NPD value stream team should work on. As with all Lean Accounting we provide information and make decisions at the value stream level; we do not decide if an individual project is viable or beneficial. We recognize that the benefit to the company and customers comes from the combination of new product designs. We choose the mixture of design projects that will maximize the company’s long term profitability. To do this we need a Lifetime Box Score for the value stream. The Box Score will have similar characteristics to the familiar Lean Accounting box scores used widely in lean organizations. The box score shows the operational performance of the value stream, the use of the people’s time, and the financial outcomes of the decisions.
The first example shows the financial impact of adding a single new project into the value stream. The second example shows the financial impact of multiple projects. The third example shows the box score for multiple projects.
The current state of the value stream shows the lifetime cost and profitability of the projects the NPD value stream is currently working on. The “lifetime” is generally set at an arbitrary time period that is suitable for the business. Typical manufacturing companies will use a 5 year horizon. The products might well last longer than 5 years, but the ability to forecast even 5 years ahead is questionable, and longer than this is pure guesswork. Companies making such products as commercial aircraft may use a 25-40 years horizon and companies making short lifetime products like consumer electronics may only look out 2 years.
The financial information is incremental. If, for example, there is plenty of design capacity then the cost of the design will be zero because we already have the capacity we need and it is already planned to be paid for. As the engineers complete their current projects their time is freed up and used on the new project. There is no additional or incremental expense. The key issue here is that we are not assessing the individual project, we are addressing the portfolio of projects within the value stream and over the time horizon. This gives us real and correct numbers.
The future state is the lifetime costs and expected profitability of the value stream including the current state projects and the new project we are assessing.
This lifetime financial analysis includes multiple planned projects, and shows the expected lifetime sales and their associated revenues. It shows the lifetime production costs, both the people costs, the tooling costs, and the other costs. It also shows the incremental development costs. The first two projects will require adding more people to the value stream to support these design projects. The other two projects can be completed without any additional people. The four projects together provide a clear understanding of the financial impact of adding these design projects into the value stream. The right hand column entitled “Goal” shows the strategic goal required to meet the company’s longer term requirements from the introduction of new products.
Often, of course, there are more projects than capacity to complete them. Also the timing of the product launch may well be critical for the customer we are serving or the market we are addressing. When this is the case, we do a number of “what-ifs” and determine the best combination of products and timing to provide the maximum lifetime return and the best possible value to the customers. This more realistic assessment requires us to understand the capacity available within the NPD value stream and the impact of our decisions on the value stream operational performance. For this we need a lifetime box score.
The Lifetime Box Score gives more information about the projects. It shows the capacity usage of the design team. It shows the plans we have for achieving on-time delivery, customer value, target costs and development costs. These are the summary of the decisions the NPD team has made with regard to the development of these new projects. The Box Score shows a summary of the information required for the team to make these decisions.
The NPD team can do a number of “what-if” analyses to determine the best sequence and approach to completing the projects. It would, of course, be ideal for every project to be completed on-time and achieve the target costs and customer value, but at this early stage in the process the team has recognized that – with what they know now – they can not achieve all of these objectives. The Box Score provides great insight into the expected lifetime profitability and how the team has balanced the requirements for on-time delivery, development costs, target costs, and customer value.
The layout of the Box Score varies from one organization to another. It is common, for example, to show not just the summarized future state numbers, but also to show the summarized box score information separately for each of the 5 years included in the lifetime horizon. The capacity in the example given above is the cumulative capacity used within the value stream when this project is underway. It is often more helpful to show the amount of the 5 year capacity taken up by the individual project. This gives an indication of the relative amount of work required to complete the project.
Next time, in blog #3 we will take a look at the linkage chart addressing the four measurements shown in the upper section of the Box Score report.