Making Operational Decisions for Lean NPD Projects
Lean Acct for NPD Blog#4
In the previous blog (#3) we looked at the Linkage Chart that relates our objective of maximizing the lifetime profitability of the value stream (or an individual project) with the key measurements driving the lifetime profitability.
- Size of the queue of design tasks.
- Actual value outcomes vs customer value needs.
- Actual expected product cost vs the Target Costs.
- The cost and capacity of the design and development
If we are to make these decisions frequently and at the lowest possible level, we must have simple and valid information available for each of these four factors. We also need some clear cut standard work for when these decisions should be made, and who should make them based on simple parameters. It is common for the design engineers to be authorized to make decisions up to a certain amount of money, or number of days. Above that, a supervisor or value stream manager is pulled into the process.
The traditional methods of stage-gate design processes and large design reviews mitigate against this kind of frequent and low level decision making and are not favored by lean organizations. Having said that, I recognize that moving into Lean NPD is difficult and the stage-gate approach may be useful step in the maturity path towards leaner methods.
Here’s an example of decision-making. The design team have discovered a new feature that can be implemented with an additional 20 days design time requiring one additional engineer. The cost of delay is $665 per day of delay, the new feature adds $10 to the product cost, and a 10% increase in sales is expected.
If the information related to each of the four factors is readily available, then these decisions can be made quickly, easily, and effectively.
1. The Cost of Delay can be calculated in advance. If the product id being design for a specific customer’s needs then the cost of delay will relate to the impact on the customer. If the product is a new product our company is introducing, then the cost of delay will be based on the cost of us launching the product late. This can be related to customers’ needs, competitive issues because generally the first to market achieves the best benefits, or marketing issues related to the right time to launch the product.
One company was designing a product used in domestic US oil fields in areas having harsh winters. It was essential to have the product available prior to October so that it could be proven through the winter. A delay of even 4 weeks would have resulted in 1 year of lost sales because without the product being proven for the climate, no one would have bought any.
2. Understanding the impact of design changes on the Product Value we create for the customer and the product price requires a deep understanding of the customers’ needs and use of the product. This information comes from the voice-of-the-customer (VOC) process used prior to the beginning the design of the product. This information is captured in the QFD (quality function deployment) and the value-based pricing analysis. When a significant change in the product’s features is contemplated, it is often necessary to update the VOC and the QFD based on the new product features. Smaller changes can be addressed by changing the current VOC and QFD information using the teams knowledge of the customers’ needs and requirements.
3. Lean accounting methods do not usually require the calculation of a Product Cost. The use of standard costing, activity-based costing, and other full absorption costing methods are very misleading and harmful to design and production organizations. We also recognize that the traditional methods of calculating costs based on the so-called direct labor time or machine time are also flawed and erroneous. The conversion costs of a product are primarily related to the rate of flow through the value stream and are not driven by the amount of touch labor.
There are three issues that impact the product cost; material cost, the rate of flow through the value stream, and capital tooling costs. When making a decision that impacts product costs we must have a good understanding of the material costs and other variable cost like outside process. Similarly we must have an good understanding of how the changes we are deciding on affect the cost of the tooling.
The best way to understand the conversion costs of the product will be to review the capacity within the production plant and determine if additional people or machines are required. If these changes are required then we can use the associated costs when making the decision. If this information is not valid, then we can estimate the conversion costs based upon the rate of the flow of the product through the value stream. This is usually assessed from the cycle time of the product through the value stream bottleneck (or constraint) operation step.
4. Additional Development Costs are usually the extra time required for the design process. If this additional time comes from currently available people, then there is no additional development costs. If new people need to be hired or outside consultants or contractors are needed, then these costs would be included in the additional development costs.
If the additional time comes from people already employed in the company, then it may be that using these people will impact another project. When this occurs the Value Stream manager will use the Lifetime Box Score to decide the balance between these projects. See Blog #2 in this series.
Next time – Lean Accounting for New Product Development Blog #5 – we will look at a short-hand way to approach these decisions.