Business Modeling Increases Profitability©

Introduction:

This is a good example of how individual corporate functions in trying to improve their effectiveness and profitability often sub-optimize the corporate bottom line.

It also shows how a well-designed New Product Introduction process helps functions cooperate for the common good and greatly improve profits and the bottom line.

Finally, it shows how good business models serving as decision support tools in the NPI process can improve cooperation and results.

Background:

The design for a new terminal aimed at global markets triggered intense debate among members of the cross functional team bringing it to market. While the firmware on the keyboard allowed for easy switching between any of the nine languages supported, Manufacturing and Logistics wanted just one keyboard to minimize their costs and maximize product profitability. To enable multilingual support, they suggested adding a set of additional keycaps to the manufacturing bill of materials. This would to allow the customer to tailor the keys as needed for local language support without increasing keyboard cost by much. They believed customers could easily change the keycaps as needed.

When Service modeled the key change process, they determined that changing keycaps, while easy for experienced engineering or manufacturing technicians, would not be easy for customer personnel with no specialized tools and normal dexterity – most untrained customers with not tools available would break the keyboards and call for help. This would result in dispatching a field engineer on site to customize the keycaps whenever a keyboard failed.

Engineering and Manufacturing could cite standard practice, supported by cost accounting, minimizing the number of parts specified as a means of reducing costs. While Service was unable to show hard numbers supporting its position, it was certain this situation was untenable. Neither side would back down. Matters slowly came to a stalemate with emotions running high on both sides. It appeared the terminal would miss the target release date and slip the schedule.

Action:

The first thing done was confirming the Service position. Extensive testing of the keycap changing process using normal data entry people, typists, and other non-technical personnel confirmed that most keycap replacement attempts ended with a broken keyboard and a request for a replacement.

Roy Sequeira then modeled the service needs for the terminal. The model established the incremental labour costs associated with keycap replacement at $4.9 Million over the projected terminal life of 5 years. This analysis, presented to Engineering and Manufacturing management, was also closely scrutinized by their finance and accounting people who concurred with the findings. Further investigation, done in collaboration with the Finance organization, determined the total costs of modifying the keyboard’s Bill of materials (BOM), specifying language-specific keyboards, and stocking nine keyboard variants were $200,000.

Roy then presented these facts to the new product team, including engineering and manufacturing representatives. The ROI on the $200,00 was easy to understand and the facts were irrefutable. As it was very hard to argue against improving corporate profitability by $4.7 M, they unanimously agreed to support language-specific keyboards.

Results and Benefits: Modeling helped the company by:

• Forcing an objective analysis of the entire cost structure over the product life cycle, not just those costs associated with bringing the product to market
• By emphasizing objectivity and hard numbers, it eliminated emotional discussions and restored harmony between the functions
• Enabling all corporate functions to rally round a common good – improved corporate profitability
• Created a template for future new product development and introduction

Final Analysis:

The resulting objective discussions helped optimize decisions resulting in an additional $4.7Million flowing to the bottom line.

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