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producing the exact product design features, the quality of the product will
suffer. Therefore, for a product to succeed in the marketplace it must have a good
design and a good production process.
DESIGN OF SERVICES
Product design in the service industry has an added complication as the product
is intangible and there is a high degree of customer interaction. Service design
requires the design of the entire service concept. As with a tangible product, the
service concept is based on satisfying customer needs. However, there are aes-
thetic and psychological benefits which the service provides that must be
considered. Services are ‘‘experienced’’ by the customer, and details that enhance
this experience are all part of the service concept. Recall that in Chapter 4 we
discussed the use of scents to enhance the service experience, such as
Abercrombie & Fitch use of their signature fragrance as part of the retail
ambience, or Omni hotels scenting their coffee shop with the smell of sugar
cookies. These are all attempts at enhancing the ‘‘service experience,’’ to improve
customer satisfaction, and promote sales.
The service concept has three elements, each of which must be designed. The
first is the physical element of the service. This may be a haircut at the barber
shop, an investment made by the financial planner, or the filling your dentist just
put on your tooth. The second are the psychological benefits of the service, which
are elements such as promptness and friendliness. Finally, there are sensual
elements of the service, which are part of the experience, such as ambiance, image,
and ‘‘feel good’’ elements of the service. Part of the service design is to specify all
the elements of the service concept and to make sure that they work together.
Consider the differences in service design between Hyatt Hotels, which provide
upscale accommodations for travelers, and Hyatt Place, which provide lower-
priced accommodations but ample amenities for the business traveler.
THE PRODUCT DESIGN PROCESS
A significant challenge for today’s companies is the need to regularly bring out
new product designs. Some industries have a predictable cycle of new product
development, such as new car models every year or new retail fashions every
season. Some products come out seasonally, such as Starbuck’s specialty drinks
during the holiday season, or Bath and Body Works floral scented soaps available
in the spring.
The product design process follows a predictable set of steps:
1. Idea development. Product ideas can come from many sources, such as
marketing, which tries to determined what customers want, a company’s
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FIGURE 5.5 Functional concerns at the product screening stage
Function Product screening concerns
Marketing What is the potential size of the market for the proposed product?
How long will it take to capture the market?
What is the long-term product potential?
Operations What are the production process needs of the proposed product?
Do we have the facilities, equipment, and labor skills needed?
How easy would it be to acquire the needed production skills?
Is there enough capacity to produce the new product?
Sourcing What is the availability of sources of supply?
What is the cost of materials for production?
How easy is it to obtain available materials?
Finance What are the financial requirements of the new product?
What are the cost and the expected return on investment (ROI)?
R&D, engineering, or suppliers. Often suppliers participate in a program
called early supplier involvement (ESI) and get involved in the early stages
of product design. Ideas can also come from competitors, by observing their
products and success rate. Companies can also buy a competitor’s product
then analyze its parts and features. This is a process called reverse engineer-
ing, and was used by Ford in the design of its Ford Taurus.
2. Product Screening. All product ideas go through a screening stage where they are
evaluated to determine their likelihood of success. Product screening considers
the viability of the product based on the needs of each of the business functions.
Each function has its own concerns which are shown in Figure 5.5. Deciding
which ideas should pass the screening stage involves managerial skill and
experience. Roughly 80% of ideas not making it past the screening stage due to
the concerns illustrated in Figure 5.5. One decision making tool that can be
especially helpful at this stage is break-even analysis, and we will look at its use
later in this chapter.
3. Preliminary Design and Testing. Following the screening stage a product idea
moves into preliminary design and testing. This is the stage where design
engineers translate vague and general performance specifications (e.g., ‘‘pretty
blue color’’ or ‘‘strong material’’) into specific technical specifications. Proto-
types are built and tested, and changes are made. In service organizations this
stage may entail pre-testing the product on small groups of customers and
then refining the service concept accordingly.
4. Final Design. Product testing results in the specification of the final product
design. At this stage specifications are translated into specific instructions used to
manufacture the product, such as materials, equipment, and quality standards.
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GLOBAL INSIGHTS BOX
Smartcup
The product design of plastic lids for paper cups has become a lucrative business. One example is
Xpress Lid, made by Smartcup, which was designed to transform a paper cup into a pot of French
press coffee. There has been a surprising demand for these lids, including from deployed soldiers. ‘‘A
lot of deployed servicemen were e-mailing me, ‘We’re trying to get a good cup of coffee off the hood
of a Humvee,’’’ says Forrest Graves, a coffee roaster. In response, Graves sent them the Xpress Lid,
which incorporates a plastic strainer and plunger that transforms an ordinary paper cup into a
disposable single-use plunger pot. SmartCup sells to specialty shops and java enthusiasts for about 40
cents each. The lids are already making inroads in the Middle East. ‘‘We started shipping it to
troops,’’ Graves says.
As far as product designs go, coffee lid design is a hot item. The first lid design was the Solo
Cup’s Traveler model, introduced in l986. Starbucks was the first to use them and other retailers
followed. The original product design slowly changed, such as adding a sliding closure. Designers
continue to come up with ever more elaborate versions. There is a lid that harnesses steam to
warm chicken and biscuits placed on top of it. A Syracuse student has developed a ‘‘caddy’’ lid
with slots for creamers and sugar. An Australian company has even designed a lid that changes
color when coffee cools. In fact, the coffee lid business was recently estimated at $180 million by a
Chicago research firm. Last year 14 billion lids were sold in the United States alone. Who knew
that coffee lid designs could be so lucrative?
Adapted from: ‘‘The Big Top Circus.’’ Bloomberg Businessweek, August 2–8, 2010.
BREAK-EVEN ANALYSIS
Break-even analysis is a tool that can be used to evaluate the success of a new
product at the product screening stage. It is used to compute the product
quantity that needs to be sold for a company to cover their costs, called the
‘‘break-even point.’’ Products with a high break-even point may be a risky choice
as the company must sell a large quantity before it can cover costs.
At the break-even point, total cost equals revenue, which is money made
from sales. Total cost of producing a product or service is the sum of its fixed and
variable costs. Fixed costs are those that do not vary with the quantity produced.
They include overhead, taxes, and insurance, and are incurred regardless of how
much is produced. Variable costs, on the other hand, are costs that vary directly
with the amount produced, and include items such as direct materials and labor.
Together, fixed and variable costs add up to total cost:
Total Cost ¼ F þ V C Q
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Cost Revenue (Sp Q)
Profit Total cost (F + Vc Q)
Break-even quantity
FIGURE 5.6
Graphical
representation of the Fixed cost
(F)
break-even quantity.
Loss
QBE Quantity
where
F ¼ fixed cost
V C ¼ variable cost per unit
Q ¼ number of units sold
Figure 5.6 shows a graphical representation of these costs and the break-
even quantity. When Q ¼ 0, total cost and fixed cost are equal. However, as Q
increases, so do variable cost and total cost. Revenue from sales is computed as:
Revenue ¼ SP Q; where
SP ¼ selling price per unit
When Q ¼ 0, revenue is zero, as there are no sales. As sales increase so does
revenue, until the break-even point is reached when all costs are covered. Sales
beyond the break-even point result in a profit for the company. At the break-
even point total cost is equal to revenue:
Total Cost ¼ Revenue
F þ VC Q ¼ SP Q
Solving for Q at the break-even point—QBE—we get the following
equation:
F
Q BE ¼
SP V C
QBE computes the break-even quantity, or the quantity needed to be sold
for the company to breakeven. We could also find the break-even point by
graphing total cost and revenue.
Break-even analysis can also be useful for conducting a sensitivity analysis
to evaluate how changes in product price affect the break-even quantity. In
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addition, it can be used to make other product and process decisions, such as
evaluating cost and benefits of different processes or deciding whether the
company should make or buy a product.
Example 1 Computing the Break-Even Quantity
Shu Chen plans to produce a new line of children’s scarves and is considering the scarves’
processing needs and market potential. She estimates that the variable cost for each
product is $25 and the fixed cost per year is $15,000. If Shu offers each scarf at a selling
price of $30, how many scarves must she sell to break even? If Shu sells 4,000 scarves at
the $30 price, what will be the contribution to profit?
Solution: To compute the break-even quantity:
F
Q BE ¼
SP V C
$15; 000
Q BE ¼ ¼ 3; 000 scarves
$30 $25
This means Shu needs to sell 3,000 scarves to cover her costs. To compute the
contribution to profit with sales of 4,000 scarves, we look at the relationship between
cost and revenue:
Profit ¼ Total Revenue Total Cost
¼ ðSP ÞQ ½F þ ðVC ÞQ
Profit ¼ $30 ð4; 000Þ ½$15; 000 þ $25 ð4; 000Þ
Profit ¼ $5; 000
The contribution to profit is $5,000 if Shu can sell 4,000 scarves from her
new line. &
FACTORS IMPACTING PRODUCT DESIGN DECISIONS
There are some additional factors that need to be considered during the product
design process:
1. Design for manufacture (DFM). DFM is a series of guidelines that should be
followed to produce a product easily and profitably. Consider that product
design processes are typically driven by the desire to create the exact product
the customer wants. However, it is also important to consider how easy it is to
manufacture. Otherwise, a product that is either difficult or too costly to
manufacture may be created. DFM guidelines focus on two issues: design
simplification and design standardization. Design simplification means
reducing the number of parts and features of the product whenever possible.
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A simpler product is easier to make, less mistakes are made, and less costly to
produce. Design standardization, on the other hand, refers to the use of
common and interchangeable parts. By using interchangeable parts, a greater
variety of products can be made with less inventory, significantly lower cost,
and greater flexibility. DFM includes rules such as minimize parts, design
common parts for different products, use modular design, avoid tools, and
simplify operations.
2. Product Life Cycle. Another factor to consider is the stage of the product life cycle.
Most products go through a series of stages of changing product demand called
the product life cycle. There are typically four stages: introduction, growth,
maturity and decline. In the introductory stage, neither the product nor the
market are well-defined, and all the ‘‘bugs’’ have not been worked out. In the
growth stage the product is more established, although both product and market
continue to be refined. In the maturity stage, the product and market become
fairly stable and predictable. Finally, in the decline stage the product experiences
declining demand due to competing product designs or market saturation. In the
first two stages of the product life cycle—called the early stages–the product and
market are still being refined. Here product design involves product improve-
ment and refinement based on market response. In the last two stages—called
the later stages—the product and market are stable. The product, however, is
approaching the end of the life cycle and product design may involve major
changes or reinventions to either revitalize an old product or create a new one for
the market.
3. Concurrent Engineering. Historically, product design was made sequentially,
where an idea was developed and then passed on to each function for evalu-
ation. This was a time-consuming and inefficient process. Today, companies
engage in concurrent engineering that requires all the functions to work
together simultaneously to design and evaluate the product.
4. Remanufacturing. Remanufacturing uses components of old products in the
production of new ones. It has enormous environmental and cost benefits, as
the remanufactured products can be a fraction of the price of their new
counterparts. Remanufacturing is especially popular in the electronics indus-
try, such as the production of computers and televisions.
PROCESS DESIGN
WHAT IS PROCESS DESIGN?
Process design involves developing a production process that can create the exact
product that has been designed. Look at different products around you and
consider the processes used to create them—from a box of chocolates to the
