Bringing products to market is a risk-reward proposition. A good organization spends significant time determining if there is an appropriate ROI for a product prior to risking the capital and time commitments needed to bring the product to market. This is known as the ‘Strategic Product Plan’ that guides an organizations actions in the short and mid-term time horizons. There are lots of potential speed bumps along that path, and some are more costly that they look at face value.
Mistakes, they happen. An important key is product design is when they happen. It’s well known that mistakes and failures during the design cycle are expected, and should be encouraged. If no mistakes are being made, it suggests that teams are too conservative and not innovating or pushing the envelope. This is a recipe for being overtaken by your competition. Mistakes after the design cycle, during manufacturing or product deployment are another story. The magnitude of these types of mistakes are often overlooked.
Let’s look at a theoretical example. You company is developing a product that is intended to be leased to businesses and generate revenue from end-customer use. Think Redbox terminals, ATM machines, Arcade games or even self-service cash registers. This products cost your firm a soft cost to develop plus a certain hard cost to manufacture. In return your firm is expecting a daily fee from the businesses, which will recoup the development and manufacturing cost, plus a profit. Simple, right? Well, oops, something went wrong during manufacturing when a main component, such as the processing board failed due to a design error. It’s just a mistake, right? Lets look at the numbers:
Set the stage:
- 500 unit production run.
- Hard cost per unit to manufacture: $1500 / unit (does not include development cost)
- Expected Revenue : $100 per day
- Rework cost due to design error: $250 / unit, scrap and rework cost.
- Time delay for deployment: 3 weeks (21 days) for rework and re-manufacture.
In this case, a 500 piece manufacturing run is expected to be placed on a certain date. During the manufacturing an issue is found with a critical component, stopping production. The issue requires the replacement of the critical component at a cost of $250 per unit. ‘Ouch’ the design team feels, that adds up to $125,000! That buys a lot of cheeseburgers. This rework expense is often the focal point for the failure, but in reality its just a small portion of the overall impact. Take a look at a timeline for product deployment:
The $125,000 rework expense jumps out as a big blip in the product expense, but the bigger issue is the delay to market caused by the rework. New parts need to be made, tested and installed, in this case it is a 3 week delay in the install date to customers. Doing some quick math: at $100 a day in expected revenue per unit, times 500 units, that’s $50k per day in lost revenue. Multiply that by 21 days and the hit to the organization is $1.05m in lost revenue. That brings the financial impact to $1.175m, this type of mistake hurts, far more than just rework costs. Another case of ‘Time is Money.’
There are further costs that are difficult to quantify, including lost opportunity costs to design teams, manufacturing teams and others. This financial pain is also felt upstream in the supply chain because the organization may not pay it’s suppliers until the product is produced, meaning suppliers now have to carry material costs for additional weeks.
So what is the message here, don’t make mistakes? No, that is a silly statement to make, in the CPI world any post-it note that says ‘do better’ is thrown in the trash. Mistakes occur from a variety of reasons; some preventable, some not, some caused by typhoons, some caused by time crunches. They happen. The message here is to be cognizant of the full impact of mistakes and production delays to help guide design activities and due diligence at release. One mistake and production delay can be costly, likewise preventing one can be financially impactful!
What are your thoughts? Ever contemplate the value of a good/bad decision you made?