Operations
Management
Chapter 5 –
Design of Goods
and Services
PowerPoint presentation to accompany
Heizer/Render
Principles of Operations Management, 7e
Operations Management, 9e
© 2008 Prentice Hall, Inc.
5–1
Outline
 Global Company Profile: Regal
Marine
 Goods and Services Selection
 Product Strategy Options Support
Competitive Advantage
 Product Life Cycles
 Life Cycle and Strategy
 Product-by-Value Analysis
© 2008 Prentice Hall, Inc.
5–2
Outline - Continued
 Generating New Products
 New Product Opportunities
 Importance of New Products
 Product Development
 Product Development System
 Quality Function Deployment (QFD)
 Organizing for Product Development
 Manufacturability and Value
Engineering
© 2008 Prentice Hall, Inc.
5–3
Outline - Continued
 Issues for Product Design
 Robust Design
 Modular Design
 Computer-Aided Design (CAD)
 Computer-Aided Manufacturing (CAM)
 Virtual Reality Technology
 Value Analysis
 Ethics and Environmentally Friendly
Design
© 2008 Prentice Hall, Inc.
5–4
Outline - Continued
 Time-Based Competition
 Purchasing Technology by Acquiring
a Firm
 Joint Ventures
 Alliances
 Defining a Product
 Make-or-Buy Decisions
 Group Technology
© 2008 Prentice Hall, Inc.
5–5
Outline - Continued
 Documents For Production
 Product Life-Cycle Management (PLM)
 Service Design
 Documents for Services
 Application of Decision Trees to
Product Design
 Transition to Production
© 2008 Prentice Hall, Inc.
5–6
Learning Objectives
When you complete this chapter you should
be able to :
1. Define product life cycle
2. Describe a product development system
3. Build a house of quality
4. Describe how time-based competition is
implemented
© 2008 Prentice Hall, Inc.
5–7
Learning Objectives
When you complete this chapter you should
be able to :
5. Describe how products and services
are defined
6. Prepare the documents needed for
production
7. Describe customer participation in the
design and production of services
8. Apply decision trees to product
issues
© 2008 Prentice Hall, Inc.
5–8
Regal Marine
 Global market
 3-dimensional CAD system
 Reduced product development time
 Reduced problems with tooling
 Reduced problems in production
 Assembly line production
 JIT
© 2008 Prentice Hall, Inc.
5–9
Product Decision
 The good or service the organization
provides society
 Top organizations typically focus on
core products
 Customers buy satisfaction, not just
a physical good or particular service
 Fundamental to an organization's
strategy with implications
throughout the operations function
© 2008 Prentice Hall, Inc.
5 – 10
Product Strategy Options
 Differentiation
 Shouldice Hospital
 Low cost
 Taco Bell
 Rapid response
 Toyota
© 2008 Prentice Hall, Inc.
5 – 11
Product Life Cycles
 May be any length from a few
hours to decades
 The operations function must
be able to introduce new
products successfully
© 2008 Prentice Hall, Inc.
5 – 12
Sales, cost, and cash flow
Product Life Cycles
Cost of development and production
Sales revenue
Net revenue (profit)
Cash
flow
Negative
cash flow
Introduction
Loss
Growth
Maturity
Decline
Figure 5.1
© 2008 Prentice Hall, Inc.
5 – 13
Product Life Cycle
Introduction
 Fine tuning may warrant
unusual expenses for
 Research
 Product development
 Process modification and
enhancement
 Supplier development
© 2008 Prentice Hall, Inc.
5 – 14
Product Life Cycle
Growth
 Product design begins to
stabilize
 Effective forecasting of
capacity becomes necessary
 Adding or enhancing capacity
may be necessary
© 2008 Prentice Hall, Inc.
5 – 15
Product Life Cycle
Maturity
 Competitors now established
 High volume, innovative
production may be needed
 Improved cost control,
reduction in options, paring
down of product line
© 2008 Prentice Hall, Inc.
5 – 16
Product Life Cycle
Decline
 Unless product makes a
special contribution to the
organization, must plan to
terminate offering
© 2008 Prentice Hall, Inc.
5 – 17
Product Life Cycle Costs
100 –
Costs committed
Percent of total cost
80 –
60 –
Costs incurred
40 –
20 –
Ease of change
0–
Concept
design
© 2008 Prentice Hall, Inc.
Detailed Manufacturing
design
prototype
Distribution,
service,
and disposal
5 – 18
Product-by-Value Analysis
 Lists products in descending
order of their individual dollar
contribution to the firm
 Lists the total annual dollar
contribution of the product
 Helps management evaluate
alternative strategies
© 2008 Prentice Hall, Inc.
5 – 19
Product-by-Value Analysis
Sam’s Furniture Factory
Individual
Contribution ($)
Total Annual
Contribution ($)
Love Seat
$102
$36,720
Arm Chair
$87
$51,765
Foot Stool
$12
$6,240
Recliner
$136
$51,000
© 2008 Prentice Hall, Inc.
5 – 20
New Product Opportunities
1. Understanding the
customer
2. Economic change
3. Sociological and
demographic change
4. Technological change
5. Political/legal change
6. Market practice, professional
standards, suppliers, distributors
© 2008 Prentice Hall, Inc.
5 – 21
Importance of New Products
Percentage of Sales from New Products
50%
40%
30%
20%
10%
Industry
leader
Top
third
Middle
third
Bottom
third
Position of Firm in Its Industry
© 2008 Prentice Hall, Inc.
Figure 5.2
5 – 22
New Products at Disney
Millions of visitors
50 –
Figure 5.2
Magic Kingdom
Combined data only prior to 1993
Epcot
Disney-MGM Studios
Animal Kingdom
40 –
30 –
20 –
10 –
0–
84
© 2008 Prentice Hall, Inc.
86
88
90
92
94
96
98
00
02
04
5 – 23
Product Development
System
Ideas
Figure 5.3
Ability
Customer Requirements
Functional Specifications
Scope of
product
development
team
Product Specifications Scope for
design and
Design Review
engineering
teams
Test Market
Introduction
Evaluation
© 2008 Prentice Hall, Inc.
5 – 24
Quality Function
Deployment
 Identify customer wants
 Identify how the good/service will satisfy
customer wants
 Relate customer wants to product hows
 Identify relationships between the firm’s hows
 Develop importance ratings
 Evaluate competing products
 Compare performance to desirable technical
attributes
© 2008 Prentice Hall, Inc.
5 – 25
QFD House of Quality
What the
customer
wants
Target values
Interrelationships
How to satisfy
customer wants
Relationship
matrix
Competitive
assessment
Customer
importance
ratings
Weighted
rating
Technical
evaluation
© 2008 Prentice Hall, Inc.
5 – 26
House of Quality Example
Your team has been charged with
designing a new camera for Great
Cameras, Inc.
The first action is
to construct a
House of Quality
© 2008 Prentice Hall, Inc.
5 – 27
Interrelationships
House of Quality Example
What the
Customer
Wants
Technical
Attributes and
Evaluation
What the
customer
wants
Lightweight
Easy to use
Reliable
Easy to hold steady
Color correction
© 2008 Prentice Hall, Inc.
Relationship
Matrix
Analysis of
Competitors
How to Satisfy
Customer Wants
Customer
importance
rating
(5 = highest)
3
4
5
2
1
5 – 28
Interrelationships
House of Quality Example
© 2008 Prentice Hall, Inc.
Relationship
Matrix
Ergonomic design
Paint pallet
Auto exposure
Auto focus
Technical
Attributes and
Evaluation
Aluminum components
Low electricity requirements
What the
Customer
Wants
Analysis of
Competitors
How to Satisfy
Customer Wants
How to Satisfy
Customer Wants
5 – 29
Interrelationships
House of Quality Example
What the
Customer
Wants
High relationship
Medium relationship
Low relationship
Lightweight
Easy to use
Reliable
Easy to hold steady
Color corrections
Relationship
Matrix
Analysis of
Competitors
How to Satisfy
Customer Wants
Technical
Attributes and
Evaluation
3
4
5
2
1
Relationship matrix
© 2008 Prentice Hall, Inc.
5 – 30
Interrelationships
House of Quality Example
What the
Customer
Wants
Relationship
Matrix
Analysis of
Competitors
How to Satisfy
Customer Wants
© 2008 Prentice Hall, Inc.
Ergonomic design
Paint pallet
Auto exposure
Auto focus
Aluminum components
Relationships
between the
things we can do
Low electricity requirements
Technical
Attributes and
Evaluation
5 – 31
Interrelationships
House of Quality Example
What the
Customer
Wants
Relationship
Matrix
Analysis of
Competitors
How to Satisfy
Customer Wants
Technical
Attributes and
Evaluation
Lightweight
Easy to use
Reliable
Easy to hold steady
Color corrections
Our importance ratings
3
4
5
2
1
22
9
27 27
32
25
Weighted
rating
© 2008 Prentice Hall, Inc.
5 – 32
Interrelationships
How to Satisfy
Customer Wants
Technical
Attributes and
Evaluation
How well do
competing products
meet customer wants
Lightweight
Easy to use
Reliable
Easy to hold steady
Color corrections
Our importance ratings
© 2008 Prentice Hall, Inc.
3
4
5
2
1
22
Company B
Relationship
Matrix
Company A
What the
Customer
Wants
Analysis of
Competitors
House of Quality Example
G
G
F
G
P
P
P
G
P
P
5
5 – 33
Interrelationships
How to Satisfy
Customer Wants
2 circuits
2’ to ∞
75%
Target
values
(Technical
attributes)
0.5 A
Technical
Attributes and
Evaluation
Panel ranking
Relationship
Matrix
Failure 1 per 10,000
What the
Customer
Wants
Analysis of
Competitors
House of Quality Example
Company A 0.7 60% yes 1
ok G
Technical
evaluation Company B 0.6 50% yes 2
Us
0.5 75% yes 2
ok F
© 2008 Prentice Hall, Inc.
ok G
5 – 34
Company B
Company A
Ergonomic design
Paint pallet
Auto exposure
Auto focus
Aluminum components
Completed
House of
Quality
Low electricity requirements
House of Quality Example
Lightweight
3
G P
Easy to use
4
G P
Reliable
5
F G
Easy to hold steady 2
G P
Color correction
P
1
P
Panel ranking
Failure 1 per 10,000
2’ to ∞
Company A
0.7 60% yes
1
ok
G
Technical
Company B
evaluation
0.6 50% yes
2
ok
F
0.5 75% yes
2
ok
G
Us
© 2008 Prentice Hall, Inc.
75%
0.5 A
Target values
(Technical
attributes)
2 circuits
Our importance ratings 22 9 27 27 32 25
5 – 35
House of Quality Sequence
Deploying resources through the
organization in response to
customer requirements
Quality
plan
Customer
requirements
House
1
House
2
House
3
Production
process
Design
characteristics
Design
characteristics
Specific
components
Specific
components
Production
process
House
4
Figure 5.4
© 2008 Prentice Hall, Inc.
5 – 36
Organizing for Product
Development
 Historically – distinct departments
 Duties and responsibilities are defined
 Difficult to foster forward thinking
 A Champion
 Product manager drives the product
through the product development
system and related organizations
© 2008 Prentice Hall, Inc.
5 – 37
Organizing for Product
Development
 Team approach
 Cross functional – representatives
from all disciplines or functions
 Product development teams, design
for manufacturability teams, value
engineering teams
 Japanese “whole organization”
approach
 No organizational divisions
© 2008 Prentice Hall, Inc.
5 – 38
Manufacturability and
Value Engineering
 Benefits:
1. Reduced complexity of products
2. Additional standardization of products
3. Improved functional aspects of product
4. Improved job design and job safety
5. Improved maintainability (serviceability)
of the product
6. Robust design
© 2008 Prentice Hall, Inc.
5 – 39
Cost Reduction of a Bracket
via Value Engineering
Figure 5.5
© 2008 Prentice Hall, Inc.
5 – 40
Issues for Product
Development
 Robust design
 Modular design
 Computer-aided design (CAD)
 Computer-aided manufacturing (CAM)
 Virtual reality technology
 Value analysis
 Environmentally friendly design
© 2008 Prentice Hall, Inc.
5 – 41
Robust Design
 Product is designed so that small
variations in production or
assembly do not adversely affect
the product
 Typically results in lower cost and
higher quality
© 2008 Prentice Hall, Inc.
5 – 42
Modular Design
 Products designed in easily
segmented components
 Adds flexibility to both production
and marketing
 Improved ability to satisfy customer
requirements
© 2008 Prentice Hall, Inc.
5 – 43
Computer Aided Design
(CAD)
 Using computers to
design products and
prepare engineering
documentation
 Shorter development
cycles, improved
accuracy, lower cost
 Information and
designs can be
deployed worldwide
© 2008 Prentice Hall, Inc.
5 – 44
Extensions of CAD
 Design for Manufacturing and Assembly
(DFMA)
 Solve manufacturing problems during the
design stage
 3-D Object Modeling
 Small prototype
development
 CAD through the
internet
 International data
exchange through STEP
© 2008 Prentice Hall, Inc.
5 – 45
Computer-Aided
Manufacturing (CAM)
 Utilizing specialized computers
and program to control
manufacturing equipment
 Often driven by the CAD system
(CAD/CAM)
© 2008 Prentice Hall, Inc.
5 – 46
Benefits of CAD/CAM
1. Product quality
2. Shorter design time
3. Production cost reductions
4. Database availability
5. New range of capabilities
© 2008 Prentice Hall, Inc.
5 – 47
Virtual Reality Technology
 Computer technology used to
develop an interactive, 3-D model of
a product from the basic CAD data
 Allows people to ‘see’ the finished
design before a physical model is
built
 Very effective in large-scale designs
such as plant layout
© 2008 Prentice Hall, Inc.
5 – 48
Value Analysis
 Focuses on design improvement
during production
 Seeks improvements leading either
to a better product or a product
which can be produced more
economically
© 2008 Prentice Hall, Inc.
5 – 49
Ethics and Environmentally
Friendly Designs
It is possible to enhance productivity,
drive down costs, and preserve
resources
Effective at any stage of the product life cycle
 Design
 Production
 Destruction
© 2008 Prentice Hall, Inc.
5 – 50
The Ethical Approach
View product design from a
systems perspective
 Inputs, processes, outputs
 Costs to the firm/costs to
society
Consider the entire life cycle of
the product
© 2008 Prentice Hall, Inc.
5 – 51
Goals for Ethical and
Environmentally Friendly
Designs
1. Develop safe and more environmentally
sound products
2. Minimize waste of raw materials and energy
3. Reduce environmental liabilities
4. Increase cost-effectiveness of complying
with environmental regulations
5. Be recognized as a good corporate citizen
© 2008 Prentice Hall, Inc.
5 – 52
Guidelines for Environmentally
Friendly Designs
1. Make products recyclable
2. Use recycled materials
3. Use less harmful ingredients
4. Use lighter components
5. Use less energy
6. Use less material
© 2008 Prentice Hall, Inc.
5 – 53
Legal and Industry
Standards
For Design …
 Federal Drug Administration
 Consumer Products Safety Commission
 National Highway Safety Administration
 Children’s Product Safety Act
© 2008 Prentice Hall, Inc.
5 – 54
Legal and Industry
Standards
For Manufacture/Assembly …
 Occupational Safety and Health
Administration
 Environmental Protection Agency
 Professional ergonomic standards
 State and local laws dealing with
employment standards, discrimination, etc.
© 2008 Prentice Hall, Inc.
5 – 55
Legal and Industry
Standards
For Disassembly/Disposal …
 Vehicle Recycling Partnership
 Increasingly rigid laws worldwide
© 2008 Prentice Hall, Inc.
5 – 56
Time-Based Competition
 Product life cycles are becoming
shorter and the rate of
technological change is
increasing
 Developing new products faster
can result in a competitive
advantage
© 2008 Prentice Hall, Inc.
5 – 57
Product Development
Continuum
External Development Strategies
Alliances
Figure 5.6
Joint ventures
Purchase technology or expertise
by acquiring the developer
Internal Development Strategies
Migrations of existing products
Enhancements to existing products
New internally developed products
Internal
Lengthy
High
© 2008 Prentice Hall, Inc.
Cost of product development
Speed of product development
Risk of product development
Shared
Rapid and/
or Existing
Shared
5 – 58
Acquiring Technology
 By Purchasing a Firm
 Speeds development
 Issues concern the fit between the acquired
organization and product and the host
 Through Joint Ventures
 Both organizations learn
 Risks are shared
 Through Alliances
 Cooperative agreements between
independent organizations
© 2008 Prentice Hall, Inc.
5 – 59
Defining The Product
 First definition is in terms of
functions
 Rigorous specifications are
developed during the design phase
 Manufactured products will have an
engineering drawing
 Bill of material (BOM) lists the
components of a product
© 2008 Prentice Hall, Inc.
5 – 60
Product Documents
 Engineering drawing
 Shows dimensions, tolerances, and
materials
 Shows codes for Group Technology
 Bill of Material
 Lists components, quantities and
where used
 Shows product structure
© 2008 Prentice Hall, Inc.
5 – 61
Monterey Jack Cheese
(a) U.S. grade AA. Monterey cheese shall conform to the
following requirements:
(1) Flavor. Is fine and highly pleasing, free from undesirable
flavors and odors. May possess a very slight acid or feed
flavor.
(2) Body and texture. A plug drawn from the cheese shall be
reasonably firm. It shall have numerous small mechanical
openings evenly distributed throughout the plug. It shall not
possess sweet holes, yeast holes, or other gas holes.
(3) Color. Shall have a natural, uniform, bright and attractive
appearance.
(4) Finish and appearance - bandaged and paraffin-dipped.
The rind shall be sound, firm, and smooth providing a good
protection to the cheese.
Code of Federal Regulation, Parts 53 to 109,
General Service Administration
© 2008 Prentice Hall, Inc.
5 – 62
Engineering Drawings
Figure 5.8
© 2008 Prentice Hall, Inc.
5 – 63
Bills of Material
BOM for Panel Weldment
© 2008 Prentice Hall, Inc.
NUMBER
DESCRIPTION
QTY
A 60-71
PANEL WELDM’T
1
A 60-7
R 60-17
R 60-428
P 60-2
LOWER ROLLER ASSM.
ROLLER
PIN
LOCKNUT
1
1
1
1
A 60-72
R 60-57-1
A 60-4
02-50-1150
GUIDE ASSM. REAR
SUPPORT ANGLE
ROLLER ASSM.
BOLT
1
1
1
1
A 60-73
A 60-74
R 60-99
02-50-1150
GUIDE ASSM. FRONT
SUPPORT WELDM’T
WEAR PLATE
BOLT
1
1
1
1
Figure 5.9 (a)
5 – 64
Bills of Material
Hard Rock
Cafe’s Hickory
BBQ Bacon
Cheeseburger
DESCRIPTION
QTY
Bun
Hamburger patty
Cheddar cheese
Bacon
BBQ onions
Hickory BBQ sauce
Burger set
Lettuce
Tomato
Red onion
Pickle
French fries
Seasoned salt
11-inch plate
HRC flag
1
8 oz.
2 slices
2 strips
1/2 cup
1 oz.
1 leaf
1 slice
4 rings
1 slice
5 oz.
1 tsp.
1
1
Figure 5.9 (b)
© 2008 Prentice Hall, Inc.
5 – 65
Group Technology
 Parts grouped into families with
similar characteristics
 Coding system describes
processing and physical
characteristics
 Part families can be produced
in dedicated manufacturing cells
© 2008 Prentice Hall, Inc.
5 – 66
Group Technology Scheme
(b) Grouped Cylindrical Parts (families of parts)
(a) Ungrouped Parts
Grooved
Slotted
Threaded
Drilled
Machined
Figure 5.10
© 2008 Prentice Hall, Inc.
5 – 67
Group Technology Benefits
1. Improved design
2. Reduced raw material and purchases
3. Simplified production planning and
control
4. Improved layout, routing, and
machine loading
5. Reduced tooling setup time, work-inprocess, and production time
© 2008 Prentice Hall, Inc.
5 – 68
Documents for Production
 Assembly drawing
 Assembly chart
 Route sheet
 Work order
 Engineering change notices (ECNs)
© 2008 Prentice Hall, Inc.
5 – 69
Assembly Drawing
 Shows exploded
view of product
 Details relative
locations to
show how to
assemble the
product
Figure 5.11 (a)
© 2008 Prentice Hall, Inc.
5 – 70
Assembly Chart
1
2
3
4
5
6
7
8
9
R 209 Angle
R 207 Angle
Bolts w/nuts (2)
Left
bracket
SA
A1
1 assembly
R 209 Angle
R 207 Angle
Bolts w/nuts (2)
Right
bracket
SA
A2
2 assembly
Bolt w/nut
R 404 Roller
A3
Lock washer
Part number tag
10
Identifies the point
of production where
components flow
into subassemblies
and ultimately into
the final product
Poka-yoke
inspection
A4
Box w/packing material
11
© 2008 Prentice Hall, Inc.
A5
Figure 5.11 (b)
5 – 71
Route Sheet
Lists the operations and times required
to produce a component
Process
Machine
Operations
1
Auto Insert 2
2
3
Manual
Insert 1
Wave Solder
4
Test 4
Insert Component
Set 56
Insert Component
Set 12C
Solder all
components
to board
Circuit integrity
test 4GY
© 2008 Prentice Hall, Inc.
Setup
Time
Operation
Time/Unit
1.5
.4
.5
2.3
1.5
4.1
.25
.5
5 – 72
Work Order
Instructions to produce a given quantity
of a particular item, usually to a schedule
Work Order
© 2008 Prentice Hall, Inc.
Item
Quantity
Start Date
Due Date
157C
125
5/2/08
5/4/08
Production
Dept
Delivery
Location
F32
Dept K11
5 – 73
Engineering Change Notice
(ECN)
 A correction or modification to a
product’s definition or
documentation
 Engineering drawings
 Bill of material
Quite common with long product life
cycles, long manufacturing lead times, or
rapidly changing technologies
© 2008 Prentice Hall, Inc.
5 – 74
Configuration Management
 The need to manage ECNs has led
to the development of configuration
management systems
 A product’s planned and changing
components are accurately
identified and control and
accountability for change are
identified and maintained
© 2008 Prentice Hall, Inc.
5 – 75
Product Life-Cycle
Management (PLM)
 Integrated software that brings
together most, if not all, elements of
product design and manufacture
 Product design
 CAD/CAM, DFMA
 Product routing
 Materials
 Assembly
 Environmental
© 2008 Prentice Hall, Inc.
5 – 76
Service Design
 Service typically includes direct
interaction with the customer
 Increased opportunity for customization
 Reduced productivity
 Cost and quality are still determined at
the design stage
 Delay customization
 Modularization
 Reduce customer interaction, often
through automation
© 2008 Prentice Hall, Inc.
5 – 77
Service Design
(a) Customer participation in design
such as pre-arranged funeral services
or cosmetic surgery
 Service typically includes direct
interaction with the customer
 Increased opportunity for customization
 Reduced productivity
(b) Customer participation in
delivery such as stress test for
cardiac exam or delivery of a
baby
 Cost and quality are still determined at
the design stage
 Delay customization
(c) Customer participation in design and
 Modularization
delivery such as counseling, college
education, financial management of
personal affairs, or interior decorating
 Reduce customer interaction, often
through automation
Figure 5.12
© 2008 Prentice Hall, Inc.
5 – 78
Moments of Truth
 Concept created by Jan Carlzon of
Scandinavian Airways
 Critical moments between the
customer and the organization that
determine customer satisfaction
 There may be many of these moments
 These are opportunities to gain or lose
business
© 2008 Prentice Hall, Inc.
5 – 79
Moments-of-Truth
Computer Company Hotline
Experience Enhancers
Standard Expectations
Experience Detractors
I had to call more than
once to get through
A recording spoke to me
rather than a person
While on hold, I get
silence,and wonder if I am
disconnected
The technician sounded
like he was reading a form
of routine questions
The technician sounded
uninterested
I felt the technician rushed
me
© 2008 Prentice Hall, Inc.
Only one local number
needs to be dialed
I never get a busy signal
I get a human being to
answer my call quickly and
he or she is pleasant and
responsive to my problem
A timely resolution to my
problem is offered
The technician is able to
explain to me what I can
expect to happen next
The technician was
sincerely concerned and
apologetic about my
problem
He asked intelligent
questions that allowed me
to feel confident in his
abilities
The technician offered
various times to have work
done to suit my schedule
Ways to avoid future
problems were suggested
Figure 5.13
5 – 80
Documents for Services
 High levels of customer
interaction necessitates different
documentation
 Often explicit job instructions for
moments-of-truth
 Scripts and storyboards are
other techniques
© 2008 Prentice Hall, Inc.
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Application of Decision
Trees to Product Design
 Particularly useful when there are a
series of decisions and outcomes
which lead to other decisions and
outcomes
© 2008 Prentice Hall, Inc.
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Application of Decision
Trees to Product Design
Procedures
 Include all possible alternatives and
states of nature - including “doing
nothing”
 Enter payoffs at end of branch
 Determine the expected value of each
branch and “prune” the tree to find
the alternative with the best expected
value
© 2008 Prentice Hall, Inc.
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Decision Tree Example
(.4)
Purchase CAD
High sales
(.6) Low sales
Hire and train engineers
(.4)
High sales
(.6)
Low sales
Do nothing
Figure 5.14
© 2008 Prentice Hall, Inc.
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Decision Tree Example
(.4)
Purchase CAD
High sales
(.6) Low sales
Hire and train engineers
$2,500,000
- 1,000,000
- 500,000
$1,000,000
$800,000
- 320,000
- 500,000
- $20,000
Revenue
Mfg cost ($40 x 25,000)
CAD cost
Net
Revenue
Mfg cost ($40 x 8,000)
CAD cost
Net loss
(.4)
High sales
EMV (purchase CAD system)
= (.4)($1,000,000) + (.6)(- $20,000)
(.6)
Low sales
Do nothing
Figure 5.14
© 2008 Prentice Hall, Inc.
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Decision Tree Example
(.4)
Purchase CAD
$388,000
High sales
(.6) Low sales
Hire and train engineers
$2,500,000
- 1,000,000
- 500,000
$1,000,000
$800,000
- 320,000
- 500,000
- $20,000
Revenue
Mfg cost ($40 x 25,000)
CAD cost
Net
Revenue
Mfg cost ($40 x 8,000)
CAD cost
Net loss
(.4)
High sales
EMV (purchase CAD system)
= (.4)($1,000,000) + (.6)(- $20,000)
= $388,000
(.6)
Low sales
Do nothing
Figure 5.14
© 2008 Prentice Hall, Inc.
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Decision Tree Example
(.4)
Purchase CAD
$388,000
High sales
(.6) Low sales
Hire and train engineers
$365,000
(.4)
High sales
(.6)
Low sales
Do nothing $0
$2,500,000
- 1,000,000
- 500,000
$1,000,000
$800,000
- 320,000
- 500,000
- $20,000
$2,500,000
- 1,250,000
- 375,000
$875,000
$800,000
- 400,000
- 375,000
$25,000
$0 Net
© 2008 Prentice Hall, Inc.
Revenue
Mfg cost ($40 x 25,000)
CAD cost
Net
Revenue
Mfg cost ($40 x 8,000)
CAD cost
Net loss
Revenue
Mfg cost ($50 x 25,000)
Hire and train cost
Net
Revenue
Mfg cost ($50 x 8,000)
Hire and train cost
Net
Figure 5.14
5 – 87
Transition to Production
 Know when to move to production
 Product development can be viewed as
evolutionary and never complete
 Product must move from design to
production in a timely manner
 Most products have a trial production
period to insure producibility
 Develop tooling, quality control, training
 Ensures successful production
© 2008 Prentice Hall, Inc.
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Transition to Production
 Responsibility must also transition as the
product moves through its life cycle
 Line management takes over from design
 Three common approaches to managing
transition
 Project managers
 Product development teams
 Integrate product development and
manufacturing organizations
© 2008 Prentice Hall, Inc.
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