How to Support New Product Introductions
The emphasis today is shifting from managing core business processes to managing the intersections between those processes. And one of the most critical of all intersections is the convergence of new product introduction and supply chain management. How effectively you design and execute your supply chain to support new product introduction will go a long way in determining your overall business success.
By Stephen Todd -- Supply Chain Management Review, 7/1/2001
Over the last 10 years, companies that have focused on redesigning their core business processes have achieved considerable improvements in performance. To cite one notable example, the focus on integrated supply chain management, both internally and across the extended enterprise, has kept the individual objectives of the various supply chain functions from impeding overall supply chain performance. This accomplishment alone has led to significant reductions in delivery leadtimes and supply chain costs.1 In the area of product development, companies that have adopted best-in-class practices have significantly reduced time to market for new products and increased their research and development (R&D) productivity.2 Some companies have gone further still, redesigning their organizations around their core processes to create true process enterprises. In so doing, they have fundamentally changed the way that they manage their businesses.3
In the fast-paced world in which technology-based companies compete, the emphasis is now shifting from the management of core business processes to the management of the intersections between them. Companies that understand how to manage the critical interactions between these processes are able to progress toward the next level of business performance. The intersection of a company's product development and supply chain management processes is one such point of critical interaction.
Some insight into the size of the opportunity can be gained by looking at the product development performance gaps between best-in-class (BIC) and average companies by phase. Although there are other factors involved, we believe that the ability to manage the product development/supply chain management interface has a significant impact on performance during the later stages of development. A benchmarking analysis of product development performance in the computer, telecommunications equipment, and electronic equipment industries, conducted by The Performance Measurement Group (a subsidiary of PRTM), provides some telling examples.
During the detailed product design and development phase, the timely supply of prototype units for proving the design at both the unit and the system levels is crucial. For high-complexity projects, analysis found that average-performing companies took 43 percent longer than best-in-class companies did to complete this phase, adding an average of 10 weeks to their overall development time. For medium-complexity projects, this performance gap widens to 70 percent. During the launch and ramp-up phase, average-performing companies took nearly three times as long as BIC performers to meet their ramp-up objectives and achieve stable production for high-complexity projects. Overall, the top-performing companies have decreased time to market across projects of various complexity by 10 to 30 percent, as shown in Exhibit 1 on the following page.
The business case for effectively integrating product development and supply chain management is indeed a compelling one. Consider the following example. As part of a project for a major international telecommunications equipment provider, PRTM worked with the company's European operations to improve the company's supply chain performance. Long prototype leadtimes were seriously affecting product development projects and delaying product launches. Over a five-month period, we helped the company reduce prototype leadtimes by 50 percent. The bottom-line value of these improvements was more than $30 million a year.
Achieving these kinds of benefits is not easy. New product introduction (NPI) places particular demands on the supply chain. In the race to be first to market with a new product, each week of delay can mean millions of dollars of lost revenue and profit. Not surprisingly, then, product divisions are demanding ever-shorter leadtimes for prototypes. As the complexity of new products increases, so does the volume of prototypes that are needed by product development teams. When the number of prototypes required was small, companies could get away with viewing their production as an exception to the normal supply chain operations associated with the volume production of finished products. Today, many companies have two parallel supply chains. The first is a transient NPI supply chain, which delivers relatively low volumes of prototypes to internal engineering customers. The second is an ongoing volume supply chain, which delivers high-volume finished products to external customers. Supply chain managers need to understand the different characteristics of these two supply chains and know how to manage both effectively.
The increasing complexity of technology-based products means that development projects now commonly involve teams spread across multiple sites and multiple countries. The NPI supply chains needed to support projects with such characteristics present particular challenges. Two other factors further increase the complexity of the NPI supply chain challenge: (1) the use of leading-edge components from start-up suppliers and (2) the move toward outsourcing the manufacturing of subassemblies to contract engineering manufacturer (CEM) partners.4
This article presents a comprehensive framework that explains how the supply chain can effectively support new product development. Though the discussion draws on examples from PRTM's work in the telecommunications and electronic equipment industries, the framework's underlying principles can be applied across a range of industries where excellence in new product introduction is critical to survival and success.
Our framework consists of three keys to effectiveness in introducing new products:
- Key 1: Manage your NPI supply chain as a differentiated supply chain.
- Key 2: Understand all of the interfaces between your product development process and your supply chain management process, and implement integrated service level agreements at each interface. (These agreements are explained later in the article.)
- Key 3: Explicitly design your NPI and volume supply chains as part of the product development process.
The specific practices and organizations required to address the NPI supply chain challenge will vary by industry, but we believe that these three keys have wide applicability.
Key 1: Manage your NPI supply chain as a differentiated supply chain.
Leading companies recognize that they need to manage their new product introduction supply chain as a differentiated supply chain. The reason: The NPI supply chain serves different customers from the company's volume supply chain and has different requirements and characteristics.
The NPI supply chain's customers are the project teams in the divisions responsible for product development. Short leadtimes for prototypes are a priority for these teams. They require prototypes in different volumes and with different levels of testing at each stage of their product development projects. Overall, the NPI supply chain has the characteristics of an engineer-to-order supply chain, which may differ markedly from a company's make-to-order or make-to-stock volume supply chains.
Industry leaders have responded in a number of ways to the challenge of defining and configuring their supply chains to support new product introductions. We have distilled our observations and experiences down to four distinct best practices. Implementing these practices entails significant challenges because each practice may be at odds with prevailing behaviors. The four best practices are:
- Creation of distinct NPI supply chain processes.
- Definition of dedicated NPI roles.
- Use of dedicated NPI groups in key areas.
- Implementation of multilevel NPI demand-supply planning.
Create distinct NPI supply chain processes that will support rapid prototype leadtimes. In many organizations, supply chain departments use the same processes to support NPI that they use for volume production. Forcing NPI activities to conform to processes designed for a supply chain intended to support volume production for external customers can lead to unnecessary delays in delivering prototypes to internal engineering customers. Leading companies are implementing distinct NPI supply chain processes that can meet the performance levels required by those internal customers in their product divisions.
One area that can have a major impact on NPI performance is procurement. In the majority of companies we have worked with, a major cause of delay in prototype production is material unavailability. For technology-based companies working in rapidly growing markets such as optical networking, the competition for components is becoming intense. Leadtimes are increasingly unpredictable, as components that were formerly commodity items suddenly become difficult to source. Amid these uncertainties, any delay in starting the NPI procurement activities can put the prototype delivery date at risk.
Some specific procurement practices that can improve NPI performance include:
- Controlled release of BOMs (bills of material) from engineering. The product development process should provide for the staged release of early BOMs for prototypes. Their release needs to be coordinated to ensure that the other information that procurement needs to purchase any long-leadtime items also is available. This process should incorporate clear guidelines and policies that allow procurement to buy these "at risk" items.
- Early critical-part identification. This practice allows engineers to communicate their upcoming needs for critical components to the procurement function as early as possible, before the first BOM is made available. This early-identification process needs to be combined with an ongoing program that educates the engineering groups about the current state of the component market. An education program ensures that everyone involved in NPI understands the impact of changing component leadtimes. Close support from advanced component engineers can help identify problem components early.
- Procurement against full prototype demand. As product development time scales get shorter and as component leadtimes get longer, the time between delivery of different versions of a prototype (alpha-build, beta-build, first-time-off) may not be sufficient to allow procurement to order parts for these batches separately. In these circumstances, it may be necessary to order critical components for all of the builds before the first prototype build.
NPI procurement processes must balance several competing factors. On the one hand, engineering wants to retain the flexibility to make changes to designs as late as possible, while holding the original delivery date for the prototypes. On the other hand, supply chain managers need to have sufficient time to procure new components and to ensure that there are not excessive levels of unused NPI inventory. When companies outsource the manufacturing of subassemblies to CEMs, the contracts and service-level agreements need to be carefully designed to balance these factors.
Critical to the success of NPI procurement is the ability to make business-level trade-offs between the potential cost of buying "at risk" prototype components and the cost of possible delays to the product development program. Those responsible for NPI procurement will continue to sacrifice time to market to avoid the risk of unused inventory as long as they are measured and rewarded on the criteria traditionally applied to volume supply chain performance. Companies need a new set of criteria that recognize the realities of the NPI supply chain.
Organize your supply chain with clear responsibility and accountability for NPI. Leading companies ensure effective support for new product introductions by using project-focused supply chain teams. These teams are led by an NPI project manager who has clear end-to-end responsibility and accountability for all of the project's NPI supply chain activities. The supply chain teams are responsible for supporting new products from concept and initial planning through successful handoff to the volume supply chain. The NPI project manager is typically responsible for:
- Fulfilling all of the supply chain deliverables for the product development project.
- Building and developing a high-performing cross-functional supply chain team.
- Developing the supply chain capability to deliver forecast volume requirements in accordance with cost, leadtime, and quality targets.
- Ensuring that business processes are in place to integrate customer forecasts and orders into the supply chain.
- Supporting the development of best-in-class NPI processes.
(For a more detailed list of the NPI project manager's responsibilities, see the sidebar on this page.)
Among the NPI project manager's responsibilities are many activities traditionally performed by the manufacturing engineering or industrial engineering departments. The key here is not the creation of a separate "organization" for NPI but an increased focus on the effective management of the NPI supply chain processes. These include all of the associated "Plan, Source, Make, and Deliver" activities incorporated in the Supply Chain Operations Reference (SCOR) model.5
Beyond the project-focused teams, it is important that everyone across the supply chain organization understands that NPI is part of his or her job. Everyone also needs to understand the cost to the business of delays to product development projects.
To ensure the proper emphasis on NPI, some leading companies have created a dedicated senior management position within their global supply chain organization. The focus of this role is on "supply chain product life cycle engineering." Its scope typically includes new product introduction, prototype supply, engineering change management, and product retirement activities. The person in this role ensures that the supply chain has processes that balance fast cycle times for introducing engineering-based changes into the chain, the costs of doing so (excess and obsolete inventory, cost of quality, etc.), and margin optimization. Ideally, the individual charged with leading this set of practices comes from product engineering or product marketing. He or she must make it a priority to provide the best value for customers and shareholders alike. Much of the work entails making informed decisions within the engineering community and ensuring that the supply chain managers (including third-party partners) are given early visibility into life cycle forecasts and other key product development data.
Use dedicated NPI groups to guarantee NPI performance. To achieve fast and predictable NPI performance, a company may need to assign dedicated NPI groups to some areas of supply chain execution, such as purchasing. Unless necessary resources are firmly set aside, it can be difficult to prevent NPI from being squeezed out by the demands of volume production, particularly at quarter and fiscal year ends. At one of our client companies, rapid growth in volume production had squeezed out NPI to such an extent that it was taking 20 to 30 working days to place purchase orders for components required for prototypes. This bottleneck went unnoticed because volume and NPI purchase orders were not differentiated and were handled by the same group of buyers. No one was accountable for the purchasing group's contribution to NPI supply chain performance, and no one measured this key metric. After reorganizing the purchasing group and designating dedicated NPI buyers, the company was able to clear its backlog of unplaced NPI purchase orders and achieve stable performance.
The volume of work that the NPI supply chain must support may have significant peaks and troughs, depending on the volume of new products that it needs to handle. It may be necessary to move people between the dedicated NPI group and the group handling volume production as these peaks and troughs dictate.
Use multilevel supply-demand planning techniques to manage the NPI supply chain. NPI supply chain planning needs to take place at three levels: (1) managing prototype demand at the project level; (2) managing cross-project demand and resolving conflicts between projects, either for manufacturing slots or for the allocation of components; and (3) managing NPI supply chain capacity, including the linking of product development roadmaps to NPI supply chain planning.
Key 2: Understand all of the interfaces between your product development process and your supply chain process, and implement integrated service-level agreements for each interface.
NPI project managers must maintain a dual focus on the following:
- The delivery of prototypes to product development projects in support of the business objective of fast time to market.
- An involvement in product development activities to ensure that other business objectives are met, such as volume ramp-up of new products and year-to-year cost-reduction targets.
Achieving the two objectives embodied in that focus requires an understanding of how a range of interfaces between the supply chain management and product development processes work. Each interface needs to be explicitly managed as part of a coherent operating model for the business. The supply chain organization must make service-level agreements (SLAs) with the product divisions it supports for all of these products/services—not just the supply of prototypes. These SLAs need to cover both the performance required from the NPI supply chain and the actions the product division must perform so that short prototype leadtimes can be met. SLAs for individual groups within the NPI supply chain must be created, and they must be consistent with the overall service-level agreement.
The broad supply chain/product development interfaces are depicted in Exhibit 2. The key supply chain activities of the SCOR model are presented in parallel to the best-in-class product development practices, as reflected in the Product and Cycle-time Excellence (PACE) model.6 The PACE model, initially developed by PRTM in 1986, has in many ways become the de facto standard process reference model for product development. PACE provides a common framework, standard terminology, industrywide process benchmarks, a way of updating best practices, and a process for continuous improvement in product development. PRTM has worked directly with more than 500 companies in technology-based industries to help them implement the key elements of PACE. It has been estimated that companies using PACE accounted for more than $15 billion—or 15 percent—of the $100 billion American companies invested in R&D in 1995.
Examples of specific interfaces for which SLAs are needed include:
- Designing the NPI and volume supply chains, including the joint definition of supply chain requirements and the means of managing any changes.
- Supplying prototype units to the multi-site product development teams. These include units required for customer trials and units required by other product development teams that are developing complementary products.
- Status reporting, both between the different partners in the extended NPI supply chain and between the supply chain organization and the product development project core team.
- Managing the distribution of engineering data between engineering and the supply chain, and playing the key gatekeeper role to ensure a controlled flow of information throughout the extended NPI supply chain.
- Managing engineering changes at both the product level and the BOM level to ensure that customer orders and forecasts reflect the current product structure and that the NPI and volume supply chains are primed.
- Advanced component engineering, including component selection advice and approval as well as obsolescence management.
- Supply chain support to engineering for product design approaches such as design for manufacturing, design for test, and design for cost. At leading companies, this extends to advanced supply chain practices such as design for order fulfillment and design for postponed customization.
- Reducing cost, which involves support for both product-division–driven cost-reduction projects and initiatives driven by ongoing supply chain cost-reduction targets.
- Managing new product ramp-ups. This includes achieving early volume and yield targets and handling the transfer of the new product to the volume supply chain.
The service-level agreements for each element must reflect the need to achieve time-to-market and time-to-profit objectives simultaneously. Ultimately, meeting the NPI supply chain challenge is not just about rapid development and fast prototype leadtimes. It also includes the parallel development and priming of the volume supply chain.
Key 3: Explicitly design the NPI and volume supply chains as part of the product development process.
From the perspective of product divisions, it seems that supply chains often are designed late or seem to come together by chance. And when supply chain decisions get made, they are not always stable. Industry leaders avoid this confusion by explicitly designing both their NPI and volume supply chains. We have identified three core practices that are essential to implementing a company's plans:
- Link supply chain design to the product development process.
- Explicitly responding to NPI uncertainty in the course of supply chain design.
- Creating local NPI support centers.
Link supply chain design decisions to product development phase reviews. Effective new product decision making is implemented through a phase review process that requires decisions at specifically defined points during the development cycle. The deliverables for each of these phase reviews must define key elements of the supply chain design so that the right questions can be answered at each stage.
Supply chain designs for new products need to be based on clear requirements, including the order fulfillment leadtimes required for the product and the expected volume in each region. Getting product development teams—product marketing teams, in particular—to understand what information is needed at each stage of development is an important first step. The criteria for designing the NPI and volume supply chains include proximity to engineering groups and proximity to lead customers and markets. A key principle is to match the design of the NPI supply chain as closely as possible to the design of the volume supply chain. However, in designing the NPI and volume supply chains for a new product, experienced supply chain managers need to balance this principle with the need to achieve fast leadtimes for prototypes.
Use options-based thinking to explicitly handle uncertainty in supply chain design.With many new products, a key problem is predicting the volume that will be sold in the critical manufacturing ramp-up period after launch. If you build a supply chain based on your marketing department's optimistic forecast, you could risk increased supply chain costs and loss of margin on the product. If you build a supply chain based on the marketing department's pessimistic forecast, you risk becoming the bottleneck for your company's hot new product.
The costs of failing to build a supply chain with the right capability can be serious. Sony's failure to produce sufficient quantities of its new Playstation 2 in the crucial early months is a good example. This failure put at risk Sony's attempt to dominate the market for game consoles and its effort to repeat the success of the original Playstation, which accounted for more than 40 percent of the company's profits in 1999. Some industry analysts are speculating that as a result, Sony may lose its dominant position to Microsoft's XBox or Nintendo's next-generation GameCube console and may miss out on the huge stream of royalties from future software sales.
Faced with this type of uncertainty, many organizations merely put off key decisions about the supply chain design, hoping that the range of estimates from marketing will improve. Instead of indulging in such vain hopes, supply chain managers need to recognize the source and nature of the uncertainty, and to design the new product supply chain to cope with this uncertainty.7
One way to manage this uncertainty is for supply chain managers to think about the investments required to establish the supply chain in terms of "buying options." For example, to meet the volume ramp-up for a new product's optimistic scenario, it may be necessary to incur some costs early on (for example, buying tooling, ordering scarce high-value components that have a penalty charge for order cancellation) that cannot be fully recovered if this scenario does not occur. However, if this decision isn't made now, we may not be able to ramp up production to this level later on. And if the product is a success, we will not be able to meet the demand. Making the investment now buys us the "option" of being able to meet the optimistic scenario if it occurs. Simple option-valuation techniques can help supply chain managers make the right business decision in these circumstances based on the likelihood of the different scenarios.
Options need to be bought for the entire supply chain, not just for internal manufacturing capability. For many technology-based products faced with unplanned upside demand, the key supply chain bottleneck is often the supply of advanced components. The small start-up companies that may be the only source of supply for these components often find it very hard to ramp up supply rapidly and without support.
Use NPI support centers to provide local delivery of key supply chain services.Technology-based companies often have product development groups spread across multiple locations in multiple countries. Such geographical fragmentation is sometimes the legacy of acquisitions or of a strategic decision to locate a design group close to sources of skilled engineers, key partners, or technology.
Experience has shown that conducting final assembly and testing of complex products remote from the engineering group can result in significant delays in resolving problems encountered at that stage. As an alternative, leading companies set up small supply chain facilities co-located with their main engineering sites. These local support centers are able to work closely with the design engineers during the testing of prototypes. They also provide close support for other key supply chain services, such as guidance on component selection.
The Next Wave of PerformanceThe pressure on supply chain managers to support the introduction of new products will only intensify as product development cycle times continue to shorten. Though we believe that significant business improvements can be achieved by adopting the practices described above, we are already exploring the next wave of innovation through which technology-based companies will ascend to the next level of performance: development chain excellence.8 At the heart of this next wave of thinking are two key elements: effective deep collaboration and IT-enabled new product development.
The fabric of development chain excellence is deep collaboration. Deep collaboration is enabled by Internet technology that allows companies to accelerate previously serial information flows and interactions. Key elements of the IT systems required to support new product introduction in this model include shared workspace for all contributors, comprehensive access to data and documents, the building of processes into systems, and role-based visibility of information. Truly effective collaboration practices are in their infancy, but development chain excellence builds on solid organizations and processes, such as those described in this article.
Further advances in this area will be driven by radical innovations in the operating model for NPI.9 These include the systematic deconstruction and reconstruction of the intersection between product development and supply chain management, and a radical rethinking of the way in which prototypes are used in product development.
We have identified and described three keys to improving the supply chain "supports" behind new product introductions. Although these keys are based on our experiences in helping technology-based companies achieve breakthrough improvements, the underlying principles have widespread applicability to any business sector where excellence in NPI needs to be a core competency. But insights into valuable principles do not translate, in and of themselves, into a healthier bottom line. Implementation is what ultimately separates good intentions from sustained success.
The companies that succeed in mastering these critical new practices at the intersection between supply chain management and product development will be solidly positioned to take full advantage of the Internet revolution. Those that cannot succeed will abdicate the future to their competitors.
| Author Information |
| Stephen Todd is a principal in PRTM, a high-tech management consulting firm. He is based in PRTM's Oxford, England, office. |
| Footnotes |
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