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1/384-B HYDROCARBON PROCESSING / F EB RUARY 200 0

J. B. Ayers, CGR Mana gement Consult an ts, Playadel Rey, Californ ia

Int roducing n ew products is becoming less a techni-cal process left to the product R&D department.Curr ently, ther e is an in creasing focus on m ar keting,

finance and operations. Also, many technical employ-ees lack business skills; this usu ally leads to comm u-nication barriers between technology and businessar enas. The aut hor presents useful business tools thatcan help br idge this gap. Value is t hu s added a s com-pany distr ibution, production and m ark eting costs a remore accur at ely plann ed.

Product development. The new products ar ena is asmu ch about ma rket ing, finance and opera tions as it is

about d eveloping a new t echn ology or upgra ding anexisting plat form . Of course, if someone is inven tingthe breakthrough mousetrap, the world will beat apat h t o his or h er door. But if not, success ma y dependon how ear ly and how well tha t individual ta ckles busi-ness issues.

There is much ma terial writt en about the impact ofdesign on t he su bsequent costs of production. The com-mon th eme is th at much of the cost of a product or ser-vice is bui l t in when th a t product or s ervice is

designed. After introduction to the market, the orga-nizat ion loses mu ch of its contr ol over t he cost. Un for-tu na tely, man y of th ese same organizat ions fail toaddr ess costs adequa tely in the ea rly sta ges of productdevelopmen t. Often, t he focus is on solving t he t echni-cal pr oblems associated with t he pr oduct. This is n otnecessarily bad, except wh en n eglect of business n eedsjeopardizes t he long-t er m ret urns fr om the p roject .

The consequence is th at t he product is lau nched andthen ru ns into profitability problems. Perha ps at leastpar t of this could have been avoided with better plan-ning. The advent of competition on the supply chainlevel makes plan ning even more importan t. Pr oductdevelopment litera tu re describes man y ways to redu cecosts at t he point where t hey are t he most cont rol-lablethat is, at the design stage. Typical examplesinclude t he following:

Increa sed cooperat ion bet ween design ers an d pro-ducers. In m anu facturing companies , this takes th eform of concur ren t engineer ing or joint pr oduct devel-opment t eam s . Here , th e t eams work toge the r t o

shorten product development lead-time and cut costs.The teams are n ot just engineering groups an y morebut also include marketing, procurement, manufac-tur ing and distribution.

Des ign for m an ufacturing analys is . In compa niesmak ing discreet par t products, design team s use ana-lytical tools to reduce the nu mber of parts in th e prod-uct an d ma ke assembly processes fast er an d cheaper.Similar opportu nities, no doubt , exist in pr ocess an dother industries.

Business tools fortechnology transfer

PROCESS TECHNOLOGY

Apply these guidelines for best

communication between technology

and business fields

Fig. 1. Schematic for business tools for technology transfer.

Reprinted with permission of Gulf Publishing, 3301 Allen Parkway, Houston TX 77252. All rights reserved

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Ear ly su pp lier involvem ent. Designers brin g theirsuppliers aboard early to ensure an adequate supplyof high-qua lity, often custom-designed component s.

Measure n ew product ca sh flow. Man y major com-pan ies measur e how long it ta kes for n ew products t obreak even. The focus on a financial retu rn increasesth e visibility and focuses developers at ten tion on th eimporta nce of meeting cost and revenue bu siness goals.1

These appr oaches have great value for both t he indi-vidual company and supply chain application. Therear e two tools th at will find part icular value for pr od-

uct developers wh o focus on t he issues su rr oundingsupply chain management ; so we have selected t hese formore in-depth description h ere.

Discovery-driven planning. This tool sets up a set ofeconomic assumptions concurr ent ly with the introductionof a n ew product. The t ool is described in an ar ticle int he H arv ard B usi ness R ev iew.2 It gains i ts name byvirt ue of th e process involved, and it is especially app li-cable in cases where t here a re n o existing supply chainsfor pr oducts. It can a lso work t o establish initial a ssump-tions rega rdin g technology and its expected application.If the product is t o be int roduced into an existing, mature

supply chain, t here is little need for t he appr oach. But ifth is is not th e case, th en discovery-driven plann ingshould play a r ole in intr oducing the pr oduct.

In essence, planners est ablish assum ptions a boutth e costs, revenues an d profits of a n ew vent ur e. In thisprocess, they mu st ma ke forecasts about th e stru ctu rean d perform an ce of th e supply chain, including ele-ment s within an d externa l to th e company. They th enset m ilestones for the implementat ion process. At th esemilestones, they measure actual results against theassu mpt ions. The outcome is ant icipated in plan ningan d t hen discovered th rough t his pr ocess. Cont in-gency plans should be at t he rea dy to react t o the real-ities as t hey un fold.

Discovery-driven plan ning can also apply to the t ech-nical aspects of th e projectin addit ion to th e businessaspects. The process requir es four docum ent s: a reverseincome st at ement ; pro form a opera tions specificat ions;a checklist of key assum ptions; an d a plan ning char ttha t shows significant milestones. It is in t he prepar at ionof opera tions specificat ions t ha t t he technique h as par -ticular application to supply cha in man agement . Here,planners must elucidate their assumptions regardingdistribution, production and marketing costs. The fol-lowing st eps briefly describe th e process.

S tep 1: Prepare a reverse incom e statem ent. Thisis a finan cial plan for th e product. It s reverse becau seone sta rt s with th e desired profit from th e product orproduct line under development. Based on this goal,the planner works in reverse to complete the incomestat ement. The income stat ement esta blishes whatlevel of sales and costs a re n eeded to ensure t he pr od-ucts viability. It st ar ts wit h requ ired pr ofits. Thisforces planner s to work backward, to th e required costsan d revenues, to meet t he profit objective. In doing th is,they ar rive at n eeded costs for m anu factur e, materi-als and distribut ion.

An import ant assum ption in th is process will be

whether the product is functional or innovative. Thereverse income st at ement should reflect th is beliefabout t he new product. If th e product is innovative, th eplanning approach should also estimat e the mar ketmediation costs. These ar e th e costs tha t a rise frommismatches between supply and demand. For exam-ple, shortages cause loss of contribution from salesone type of ma rk et m ediation cost. Overst ocking canlead to product m ar kdownsan other cost. S tep 2: Lay out pro forma fun ctional activity speci-

ficat ions. With t he financial statement , one ha s to deter-mine t he operat iona l perform an ce needed to fulfi llfinancial goals. This requir es defining th e supply chainactivities needed to run the ventu re or intr oduce the

HYDROCARBON PROCESSING / F EB RUARY 200 0 84-C

Table 1. A generic stage/gate model

Stage or gate Supply chain deliverables

Ideation: developingproduct concepts

Gate 1. Initial screen Determine what technologies need to be employed to successfully produce the product. List neededsupply chain changes. Assess whether the existing supply chain is appropriate for the product orprocess.

Stage 1: Preliminaryinvestigation

Gate 2. Second screen Find sources for required technologies; estimate the resources needed for their development. Fore-cast product margins. Decide whether innovative or functional product. List requirements for a newsupply chain if its needed. Identify supply chain partners to be involved in development process.

Stage 2: Detailed investigation(business case)

Gate 3. Decision on business Assess technology risks. Perform conceptual design of new supply chain (if applicable). Prepare firstcase cut, discovery-driven planning model.

Stage 3: Development

Gate 4. Post-development Prepare detailed work plan for implementing supply review chain requirements.review

Stage 4: Testing and validation

Gate 5. Precommercialization Test early discovery-driven planning assumptions.business analysis

Stage 5: Full production andlaunch

Post-implementation review Measure performance against assumptions.

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A gate, according to the source stat ed, has inpu ts,decision criter ia and out put s. The deliverables ar e devel-oped in t he pr evious st age. This appr oach can comple-ment oth er t ools like discovery-driven plan ning. Onesuch deliverable could be upda ted a ssumpt ions u singth at techniqu e. The gate design should specify deliver-ables for each gate along the product developmen t pat h.The gat e design sh ould also include criter ia for deci-sions regarding whether the project will proceed, becanceled, or be held ba ck unt il resources are a vailable.

In t his instan ce, the gate decision ha s two parts. Thefirst pa rt decides wheth er th e project is sound or not.This is performed as if th e project is th e only one u nderconsideration. Soundness encompasses the producttechnology, the process technology and the businesscase. Assum ing th e project is soun d, the second pa rtdecides the pr ojects priorit y. This requ ires a n evalu a-tion of resour ces an d priorities to determ ine if th e pro-ject sh ould proceed.

A generic stage/gat e model with five stages and gatesis offered. This model is shown in Table 1 to illustr at eth e app l i ca t ion . T he shaded r ows a re s t ages ; th eun sha ded rows are gat es. For each gate, there is a briefdescription of supply chain delivera bles tha t might be

appropriate at th at gate.The recommended process described in the table

calls for ear ly considerat ion of needed su pply chainchanges, as well as r equired t echn ology. The initia lassessment at Gate 1 is whether a supply chain changeis needed at all. At Ga te 2, developers sh ould knowwhat type of product it is in th e case of a new pr oductsitua tion. At this point, candida te par tn ers should beident ified. The busin ess case at Gat e 3 should producea discovery-driven plan that requires documentationof supply cha in assu mpt ions.

LITERATURE CITED

1 The Retu rn Map: Tracking Product Teams,Ha rvard Bu sin ess R eview , Ja n.Feb., 1991.2 Discovery-driven Planning,Ha rvard Bu sin ess Rev iew, JulyAug., 1995.3 Cooper, Robert G., Winning at New Products, 2nd E dition, Addison-Wesley Pu blishing Co.,

Reading, Massachusetts, 1993.

ACKNOWLEDGMENTS

Based on a pap er originally present ed at AIChEs 1999 Annu alMeetin g, Dallas, Texas, Oct. 31Nov. 5, 1999.

James B. Ayers is a principal with CGRManagement Consultants, Los Angeles, Cal-ifornia, e-mail: jimayers@cgrmc.com. He has

consulted in strategy and operationsimprovement for 28 years, including proj-ects addressing processes for product andprocess development. He has authorednumerous articles and has presented work-shops on product and process development.He is finishing a book titled Handbook of

Supply Chain Management to be published mid-year 2000 bySt. Lucie Press. Jim holds a BS, with distinction, from the U.S.Naval Academy, and MBA and MS Industrial Engineering fromStanford University. He held partner-level positions withTheodore Barry & Associates, Coopers & Lybrand and IngersollEngineer. As a Naval officer, he served on nuclear submarines.Jim is a member of the Society of Manufacturing Engineers andCouncil of Logistics Management. He is a certified managementconsultant (CMC) by the Institute of Management Consultants.