New product development costingDeveloping a product costing model andperformance measuring system for a new productCarles DebartProduct Costing and Financial ManagementDM944, University of Strathclyde, Glasgow, UKMSc Global Innovation Management
1Content1. Introduction ...........................................................................................................................21.1 Background ......................................................................................................................21.2 New product description .................................................................................................21.3 Discussion of the appropriate costing model..................................................................32. Product costing model...........................................................................................................42.1 Bill of Materials................................................................................................................42.2 Lifecycle costs ..................................................................................................................62.3 Building the model...........................................................................................................72.4 Sales scenarios .................................................................................................................92.5 Driving improvements through target costing principles..............................................113. Performance management systems....................................................................................153.1 Introduction to performance measurement systems ...................................................153.2 New product development performance......................................................................153.3. Role of supply chain performance in new product development................................163.4 Performance management models for NPD within supply chain .................................164. References ...........................................................................................................................18
21. IntroductionThe purpose of this report is to build a product costing model for a new product development in thecontext of a large multinational company. The key points to be addressed are to model the costelements of the product family, develop a costing model for various sales volume scenarios andidentify room of improvement using the model. Moreover, in order to manage the new productdevelopment, a performance management system needs to be implemented and discussion aboutexisting methods and their suitability for the supply chain is sought.In order to build the case study, all the references to Ikea have been taken to establish a startingpoint and for educational purposes only.1.1 BackgroundIkea is a Dutch multinational company with origin in Sweden, famous worldwide because of hisapproach of ready-to-assemble furniture, appliances and home accessories. Ikea is known forfocusing on cost control, operational excellence and continuous product development. Thisapproach has allowed them to continuously reduce their prices (between 2 or 3% per year) andexpanding successfully all over the world.Ikea has been criticized for being the third-largest consumer of wood in the world, after The HomeDepot and Lowe’s. To clean their image, the commandment has decided to launch anunprecedented family of eco-friendly products that will reinforce their alignment with the vision ofbeing a more of environmental friendly company.1.2 New product descriptionIkea’s marketing department has identified three possible options for this unprecedented productfamily: bicycles, greenhouses, windmills. After some market research and a carefully selectioncriteria (see figure 1), bicycles were chosen as the best way to accomplish the above mentionedgoal. However, although this product will be used as marketing strategy and lies away from corecompetencies of the business (furniture), it needs to be designed and development in such a waythat won’t damage Ikea’s finances. This is of a great importance especially when we take intoaccount how competitive is the bicycle industry. For this reason, a new product costing model needsto be deployed to guarantee that the entire project will be profitable.The project will have a lifetime of 3 years, and after that time it will be reviewed for possibleextension. The new product will be a hybrid unisex bicycle (suitable for city and off-road) calledBikea, with special focus on design, usability and low maintenance. Ikea will make use of their teamof talented designers to create a model that will make an impact on the market, while maintaining alow cost. The biggest technological challenge is to build the frame, activity that will be externalisedto a manufacturer in Taiwan in order to limit the initial investment and possible risk. The rest of thecomponents will be taken from several different suppliers located in China. The assembly, quality
3control, packaging and delivering will be done in a refurbished warehouse near Ikea’s headquartersin Netherlands.Figure 1: Evaluation criteria for the new product development1.3 Discussion of the appropriate costing modelDespite being the traditional costing the most used costing model in the past, especially in themanufacturing industry whose activities consists of a series of common or repetitive tasks, over thelast 20 years has gained a lot of detractors. Their main argument relies on the fact that it is notsufficiently accurate for new manufacturing environment. The high adoption of automation, thelower workforce required and the market globalisation puts standard costing into a tight spot. It isagreed by researchers that standard costing is a model suitable for cost control but not for costreduction, which is a key point in the current manufacturing environment.New methodologies appeared to improve the accuracy of traditional costing methods. Activity-Based Costing (ABC) is one of the most widely adopted costing methods for manufacturing industrynowadays. The aim of ABC is to calculate costs and performance of each activity involved tomanufacture a product. According to Turney (1996), a cost for each activity is set according to theuse of the companies’ resources and then, each product is allocated a cost regarding those activitiesinvolved in its manufacture. However, ABC shows some pitfalls. ABC method can be resourceconsuming method to deploy, and as it is argued by Gunasekaran (1999), it requires a deepEvaluation Criteria Weighting Windmill Bicycle Greenhouse NotesRate between 1 - 10 5% 3 10 10Rate between 1 - 10 10% 7 8 9Rate between 1 - 10 15% 8 6 5Rate between 1 - 10 10% 4 10 4Rate between 1 - 10 15% 8 7 7Rate between 1 - 10 5% 3 8 7Rate between 1 - 10 5% 8 8 8Rate between 1 - 10 5% 4 5 6Rate between 1 - 10 20% 6 10 7Rate between 1 - 10 5% 9 9 10Rate between 1 - 10 5% 8 6 10Totals 100% 6,45 8,05 7,05Competitive Evaluation - Is the product similar to other products on the market? If so, have we identified our products competitive advantage?Value - Can the product deliver value to the end user? Are customers willing to pay for the product?Strategic Alignment - Does the product fall in line with our strategic objectives? Can we use existing infrastructure to produce the new product?Demand - Is there a need for the product on the market? Does it follow market or industry trends?Financial Feasibility - Can we afford the cost of development? , is the likelihood of a positive financial return high?Launch - Will the product be easy to launch? Are the financial resources in place to allow for a successful product launch?Usability - Is the product user friendly? Can it be widely used?Implications - will the launch of the new product have any positive implications on existing product lines?Innovation - Is the product new to the market? Is there anything else on the market that is similar?Market Growth - Is there growth in the market? Is there room in the market for this product?Barriers to Entry - Have barriers been considered (legal or otherwise)?
4knowledge of organization’s processes and activities and it implies a high level of critical decisionmaking when activities and costs need to be mapped into the model.Moreover, ABC needs to be deployed very carefully in order to select each cost driver that will leadinto correct cost estimations (Baykasoglu and Kaplanoglu, 2008). However, when it is appliedcorrectly, gives clear ideas on how activities and departments perform across the entireorganization, delivers better control tools for overheads costs and facilitates the identification ofcost reduction initiatives.However, both traditional costing and ABC methodologies (and other similar approaches) have tomain flaws. The first one is that the product price will be based on its cost, which is a problembecause we cannot guarantee that the costumer will be willing to pay for that. It can happen thatour product includes functionalities that are irrelevant to the customer’s point of view and that willraise the price with no reason. This problem is addresses by target costing methodologies. Thesecond flaw is that costs are allocated as current costs, but there are certainly other costs in newproduct development without which is not possible to launch a new product to the market (like R&Dcosts). Moreover, other costs incurred in the product’s life must be taken into account, like thoserelated to after-sales services or disposal costs. This is particularly addressed in lifecycle costing.Ikea value proposition is to give good quality products at unbeatable prices, thus target costing iscertainly the best costing model for this purpose. However, as the bicycle project is not strategicallyaligned with the current product lines, high investments have to be made in R&D, facilities and after-sales services such as warranty management and repairing services. To input all this costs in amanageable way, the lifecycle costing method is highly advisable. In conclusion, a hybrid costingmethod will be deployed for bicycle project at Ikea, mixing the lifecycle costing with a target costingapproach.2. Product costing modelIn this section, the hybrid lifecycle target costing method will be depicted step by step, identifyingand arguing the inputs and parameters to justify its utility.2.1 Bill of MaterialsWhen we want to make profit from a product it is mandatory to take into account that the totalrevenue will exceed the total costs incurred in the project, even if those costs are incurred before,along or after the product is produced. In essence, all costs should be taken into account whendrawing the profitability model. Moreover, costs are linked. For example, more attention to designcan reduce manufacturing costs in the future. In the same way, more training can lead intoimprovements on employee’s efficiency and thus, labour reduction.The most straightforward cost of all is the bill of materials (BOM), where all the component’s cost ofthe Bikea are detailed (Figure 2):
5BikeaComponent Comments Unitary cost (€) % of costchain Steel 1,1 0,59%Bar stem Aluminium 2,5 1,35%Seat post Aluminium rims, steel hubs 2,6 1,41%Pedals Plastic 2,7 1,46%Lights LED 2,8 1,51%Shifters Plastic 3,6 1,95%Saddle Plastic/foam 3,7 2,00%Fender Plastic 3,7 2,00%Handle bar Aluminium 3,9 2,11%Kickstand Steel 4,1 2,22%Brakes Steel 4,4 2,38%Headset Steel 5,3 2,87%Carrier Leather 6,2 3,35%Tires OEM Taiwan aluminium 6,3 3,41%Bottom bracket Sealed cartridge 6,4 3,46%Fork Steel 12,1 6,54%Drive train Steel 26,2 14,17%Wheels Aluminium rims, steel hubs 37,9 20,50%Frame OEM Taiwan aluminium 49,4 26,72%Total 184,9€ 100%Figure 2: Bill of materials for BikeaThe next charts shows in a more visual way which are the costs that have more impact in the finalcost in the bill of materials (figure 3). Those are the frame, the wheels, drive train and the fork:Figure 3: Visual inspection of % of each component in the total cost
62.2 Lifecycle costsThe next step is to identify all of the costs associated with the product life-cycle of the Bikea project:1. R&D: Bikea project will consume HR resources from Ikea workforce. Designers will work on theinnovative frame design over the first half year. Once a successful design is achieved and approvedby marketing department, it will be sent to the Taiwan manufacturer to start production. In thesecond half of the first year, some designers will remain involved part time to verify and improve themanufacturability of the design, if it is needed. As the project has a lifecycle of 3 years, no othermodels are planned for years 2 or 3, however some other costs will be allocated in those years toimprove existing models (10.000 € per year). The whole project’s R&D is estimated in € 2 Million,which is fixed a cost.2. Facilities expenses: Ikea has decided not to build new facilities for this project but reusing anunderused warehouse. The budget will be mainly used for the setup of this old warehouse to aconvenient place to assemble bicycles. The cost is fixed and is committed in the first year rising600.000€, but will be paid in three instalments over the 3 years. Moreover there will be anassociated a yearly cost for depreciation of the whole place of 10%.3. Production: All the cost incurred during the manufacture process of Bikea are taken into accountin this section. As Bikea manufacture process is mainly assembly of the components into the frame,the associated costs are:- Component: costs for each Bikea extracted from the bill of materials (variable cost).- Labour cost: Ikea will make use of his workforce to adapt the number of employees to theproduction conditions in order to maximize efficiency. In that way, labour cost (assembly of thebicycles) can be considered as a variable cost. It is estimated that the gross man hour cost will be20€ and one bicycle assembly will take 1 hour.- Maintenance: These costs have to be taken into account as expenses for the correct developmentof manufacture process. Maintenance has a fixed and variable nature: fixed because some cost areincurred even if no Bikea is produced (maintenance of the building and facilities) and variableassociated to the wear of tools during the assembly process. Those proportions have been definedas follows: fixed cost of 150,000€ over the three years plus 1€ of cost per Bikea produced.- Utilities: these costs follow a similar cost pattern as maintenance, with fixed and variable costs:250,000€ per year of fixed cost (€ 0.75 Million over the three years) plus 3€ per each Bikeaproduced.- Insurance: this cost is related to the insurance cost of the warehouse where the assembly will becarried out. It is a fixed cost of 75,000 € over the three years.4. Marketing: Although is seems it has a fixed cost nature (we may think that it is independent of thenumber of Bikea sold), marketing activities go beyond promotion and advertisement. One of the
7main tasks for this department is assure accessibility of products (how products are easily reachedby the costumers) and this is certainly dependable on the number of Bikea being produced andshowed in the stores. Taking everything into account, a fixed cost for this department is budgeted asfollows: € 3 Million the first year, € 2 Million for the second year, and €1 Million for the last year.This budget distribution meets the demand of acquiring awareness of the product as soon aspossible. Regarding the variable cost of accessibility, it has been allocated 5€ per Bikea.5. Distribution: Again, a semi-variable cost with a fixed component of 250,000 € per year plus anaverage variable cost of distribution of 10€ per bicycle6. Customer service: The cost of having a small space in each of Ikea stores dedicated to after-saleservice and repairing is € 0.35 Million per year. Moreover, Ikea is very committed with clientsatisfaction and offers free of charge adjustment of any Bikea after one months of use. It has beencalculated to have a variable cost of 7€ per unit sold in terms of labour.7. Additional overheads: Bikea project will make use of some Ikea resources, as it will be a part ofthe existing product line. Those costs are mainly administration, software licences, patentsregistration. Some budget is reserved as well for lawsuits if patents are found to be broken by thecompetency. These costs are fixed and are forecasted to rise up to 225,000€ during the whole life-cycle.8. End of the life-cycle: If Ikea management decide to quit the project after the 3 initial years, thecosts involved in shutting down the warehouse and other related cost (waste management.) areestimated in 250,000€ and represent a fixed cost for the final year.2.3 Building the modelOnce we have identified and analysed all the associated cost for the life-cycle of the Bikea project,we can implement an structured table mapping all of those cost allocated across time (for fixedcosts) or allocated to product (for variable costs). We can draw some interesting conclusion fromcost table. Firstly, the variable cost associated to one Bikea has increased nearly 50€ from the initialnumber drawn from the Bill of materials. That give us an idea on how important and what is theimpact of giving an efficient customer service. Lifecycle costing method allows us to identify all ofthese costs that may have been unnoticed with other simpler costing methods.Secondly, we can understand how expenses are committed during the whole duration of the project.For example, the costs for the first year is nearly double that the other two years together. That isinteresting from a cash flow point of view because allows to envision how deep is the “first yearhole” in the project finances. However, product costing decisions such as selling price and marginshave to be forecasted taking into account the whole lifecycle of the project instead of one particularyear’s results or forecast.
92.4 Sales scenariosTo assess the profitability of the Bikea project, the marketing department has carried out a deepmarket research. As a result of this three different sales scenarios have been identified: worse case,best case, and average case. These sales forecast are shown in the next figure:Figure 5: Sales scenarios forecasted by the marketing departmentThe costing department together with the marketing department have agreed on the minimumprofitability margins that any product line of Ikea has to meet: 30%. The next step is to calculate, foreach of the forecasted scenarios, which will be the total cost of one Bikea, which are thepercentages of each cost attributable to one sold Bikea and whether the target margins are met. Themarket department, after comparing the competence, evaluating the targeted segment, assessingthe features included in the product and aligning it with the price strategy of the company hasdecided to launch the Bikea for 419€. With that price and the costing table for each sales scenario(see Figure 7) we can assess the total profits and margins for one unit of Bikea.Figure 6: Profits and margins per unit sold for each scenario based on Figure 7 detailed cost1st year 2nd year 3rd yearTotallifecycleScenariosBest 50.000 75.000 45.000 170.000Average 35.000 55.000 30.000 120.000Worst 20.000 25.000 15.000 60.000020.00040.00060.00080.000100.000120.000140.000160.000180.000UnitssoldForecasted sales scenariosCost allocation per unit, turnover and margins (€)Best Average WorseSelling price 419,00 419,00 419,00ExpensesR&D 11,88 16,83 33,67Facilities 3,88 5,50 11,00Marketing 40,29 55,00 105,00Distribution 14,41 16,25 22,50Customer service 13,18 15,75 24,50Additional overheads 1,32 1,88 3,75End of lifeclye 1,47 2,08 4,17Production costs 214,64 217,03 225,15Profit total 117,92 88,68 -10,73Profit margin 28,14% 21,17% -4,77%
10Figure 7: Detailed cost per unit.From both tables above, we can draw the conclusion that the product costing has not met therequirements established by the marketing department regarding sales and profit margins. In any ofthe three scenarios the targeted 30% of profit margin is met and moreover, in the case of the worstscenario losses are expected. Marketing department is very confident with their forecasts andhence, has required the costing department to reduce expenses in order to meet a minimum profitmargin of 30% for the average case and no losses in the worst case.Fixed cost Variable cost (€) Cost per unit for each scenario (€)lifecycle per unit Best Average WorseR&DDesign 2.000.000 - 11,76 16,67 33,33Improvements 20.000 - 0,12 0,17 0,33Total R&D 2.020.000 - 11,88 16,83 33,67Facilities expensesFitting-out 600.000 - 3,53 5,00 10,00Depreciation 60.000 - 0,35 0,50 1,00Total facilites expenses 660.000 - 3,88 5,50 11,00ProductionBOM - 184,9 184,90 184,90 184,90Labour cost - 20,0 20,00 20,00 20,00Maintenance 150.000 1,0 1,88 2,25 3,50Utilities 750.000 3,0 7,41 9,25 15,50Insurance 75.000 - 0,44 0,63 1,25Total production costs 975.000 208,9 214,64 217,03 225,15MarketingAwareness 6.000.000 - 35,29 50,00 100,00Accessibility - 5,0 5,00 5,00 5,00Total marketing costs 6.000.000 5,0 40,29 55,00 105,00DistributionLogistic management 750.000 - 4,41 6,25 12,50Average shipping - 10,0 10,00 10,00 10,00Total distribution costs 750.000 10,0 14,41 16,25 22,50Customer serviceReparing workshop 1.050.000 - 6,18 8,75 17,50Free 1st month adjustment - 7,0 7,00 7,00 7,00Total customer service costs 1.050.000 7,0 13,18 15,75 24,50Additional overheadsAdministration 195.000 - 1,15 1,63 3,25Patents 12.000 - 0,07 0,10 0,20Lawsuits 12.000 - 0,07 0,10 0,20Software licenses 6.000 - 0,04 0,05 0,10Total overhead cost 225.000 - 1,32 1,88 3,75End of life-cycle projectDecommissioning 200.000 - 1,18 1,67 3,33Waste management 50.000 - 0,29 0,42 0,83Total EOC costs 250.000 - 1,47 2,08 4,17Total accumulated costs 11.680.000 230,9 301,08 330,32 429,7Attributable to fixed costs 70,18 99,42 198,83Attributable to variable costs 230,90 230,90 230,90
112.5 Driving improvements through target costing principlesThe restrictions imposed by the marketing department on the price of Bikea are driven by the needof an answer to the following questions:1. What is/are the segments that we want to target with our product?2. What characteristics are the customers want in the product?3. What is the price the customers would pay for the product?4. What is the competence regarding our product?5. What is the cost of advertising the product?The conclusion drawn to the answers of these questions is that often engineers, management andaccountants work in a forward way, calculating the costs, adding a mark-up and finally, establishing aselling price. Target costing approach is right the opposite: establishing a price that customers will bewilling to pay and then work backwards to find out the cost (features included in the product) takinginto account the profit margins. The target costing model is clearly self-explains in the followingfigure:Figure 8: Summarized flow of target costing principles. Source: MIT Sloan Management ReviewTarget costing is not mutually exclusive with any other costing method, nor is with the lifecyclecosting method developed for the Bikea Project, and In fact they are both often presented togetherin hybrid forms. The next steps based in target costing principles have been identified and will allowthe costing department to meet the requirements set by marketing:1. R&D: Although one may think that the expense on R&D is high and would be room forimprovement, the costing department agrees that is a key point of the whole development of Bikeaproject cut down should be made. Moreover, some TQM improvements will be implemented toachieve a lower manufacturability cost and lower rate of failure, which will lead into customer
12service cost reduction. Hence, there will be allocated 30000€ per year in TQM activities, whichimplies a growth of 4,5% in the whole R&D budget.2. Facilities expenses: The marketing department in has put emphasis in the most likely scenario(average) which is nearly 30% less than the best case scenario. In that way facilities will be optimizedfor the production of this this forecast. This leads into savings of 30% (198000€).3. Production: Thanks to the use of QFD methodologies, some features initially included in the bikewon’t be any longer included in the improved version, as they don’t add value to the customers:carrier, kickstand and fender are removed (saving 14€ per unit). Wheels are downgraded (saving 5€per unit) and thanks to TQM the same quality frame can be produced for 3€ less. In total, BOMmaterials has been reduced from 184,9€ to 162,9€.Through the improved design in manufacturability, assembling time will be reduced. Labour cost perunit will decrease to 15€.As the facilities have been scaled down, maintenance is less costly now (30% less) achieving a totalsavings of 45000€ in the whole lifecycle. In the same way we save 30% in utilities and insurance.4. Marketing: No cost reduction is considered.5. Distribution: Designers have found a way to ship batches of 5 bicycles for container; hence thecost per unit has decreased in 50%. Logistic management will be integrated in Ikea’s normal productlines, which implies savings of 150000€.6. Customer service: Average free 1stmonth adjustment will be reduced in 2€ as the design has beenimproved and the fixed cost associated to repairing booths in Ikea’s shop will be reduced in a 30%.7. Additional overheads: Administration overheads will be again integrated in Ikea’s administrationdepartments, saving up to 50% of the total cost.8. End of life-cycle project: The end of life-cycle project will be externalised to a specialized companythat will allow saving 50% of the decommissioning and waste management cost.As a summary of improvements driven by target costing can be summarized as follows:-The total fixed costs for entire lifecycle of the project have been reduced from to € 11.68 Million to€ 10.83 Million (- 9,2%)-The variable cost has been cut down from the initial 230,9€ to 196,9 € ( -8.5%)The next tables (Figure 9) show the detailed new costing and the allocation of each cost (variableand fixed) to each unit according to sales forecast scenarios, as well as (Figure 10) total profits andmargins for the improved costing model:
14Figure 10: New figures for profit and marginsThe improvements introduced thanks to the costing model have enabled to meet marketing’srequirements. In the worst case scenario the profit margin stands up to 21%, while in the averagescenario we reach 31%. Next figures show in a more visual way how are the costs finally allocatedper unit:Figure 11: Profit and total cost allocation per unit for each sales scenario.Cost allocation per unit, turnover and margins (€)Best Average WorseSelling price 419,00 419,00 419,00ExpensesR&D 12,41 17,58 35,17Facilities 2,72 3,85 7,70Marketing 40,29 55,00 105,00Distribution 8,53 10,00 15,00Customer service 9,32 11,13 17,25Additional overheads 0,66 0,94 1,88End of lifeclye 0,74 1,04 2,08Production costs 185,91 187,59 193,28Profit total 158,41 131,88 41,65Profit margin 37,81% 31,47% 21,55%
153. Performance management systems3.1 Introduction to performance measurement systemsThere have been several approaches to performance measurement in the past. Going back to 80s,researchers agree that more integrated performance measurement systems were needed to matchwith the tendency of globalisation that emerged from the aim of companies to be more competitive.Hence, from that point we have been testimonies of the birth of many frameworks and models suchas the SMART and the performance measurement questionnaire (Bititci et. al 2005).A more recent approach to performance measurement appeared with the birth of the balancescorecard (1996) and the European business excellence model EFQM (1998). Both models give cluesin terms of what kind of measurements should be deployed and what conclusions should beextracted from them. In 1998, the EPSRC established the concept of integrated performancemeasurement systems, which was developed upon the balance scorecard and the EFQM models(Bititci et. al 2005). Since then, other hybrid frameworks have used approaches from the abovementioned models. Examples of this are the performance measurement systems and themeasurement workbooks.Apart from the more generalist frameworks mentioned above, there have been other performancemeasurement systems more focused in certain business areas and processes such as production andplanning, product development process, human resources or even for service management.In conclusion, all the performance measurement systems, both the generalist and the more businessfocused, should have in common a set of characteristics such as being balanced (regarding therequirement of the stakeholders), being integrative (different measures need to be interlinked),informing of the strategy (useful as an input for the strategy), deploying strategy (being able tocommunicate business’ strategy), focusing on activities that deliver valuable (principle of the EFQM),including competencies and stakeholder contribution (Bititci et. al 2005).3.2 New product development performanceThere is consensus among the researchers that product development is one of the most importantthings in the future sustainability of any company, and especially those in the technological field.New product development is becoming, as most of other business areas and processes withincompanies, a more globalised activity where changes occur fast due to constantly changingcustomer’s needs (Goffin and Mitchell 2005).Product development is, as any other process in a business, able to measured and improved.Although researchers have deeply analysed the product development process and contributed tounderstand it, most of the companies are still reluctant to measure their product developmentprocesses because the challenges that implies: complexity, uncertainty, intensive decision making,short financial term vision, shorten time to market approaches, etc. This is the reason why
16performance measurement within product development has been historically limited to cost andtime only, forgiving maybe the most important aspect, value of creation (Koller et al. 2005).Other challenges that an effective performance management system for product developmentshould consider are for example: the different capabilities and activities that are required within theorganization in order to be successful, the alignment of business strategy with the product and withcustomer needs, the alignment between the product development strategy and the businessstrategy, competitive advantage (in the long term) and the rise of competitive environment amongcustomers and suppliers (Cedergren, S. 2008).3.3. Role of supply chain performance in new product developmentHow can an effective performance supply chain help in the new product development? Take theexample of Inditex, the clothes fashion empire, where the perfectly fitted and extremely efficientsupply chain has been the true clue for its tremendous success. Although it doesn’t stands as hightechnological new product development (as clothes cannot be considered) it is useful to illustratehow the clothes development is boosted by its supply chain, able to supply the market with low costand high speed service. Another key point is its vertical integration and how coordinated are thedifferent departments associated to product development. As an example, it is interesting to notethat they can respond to a new market need within two weeks. Vertical integration plays animportant role as well, as stocks are just around 7% of the incomes. This integration strategy allowsthe company to reduce costs and acquire some flexibility, reducing in that way the potentialnegative impact of uncertainty during product development and the presences of specific activesalong the chain value.Furthermore, Inditex takes the concept of supply chain to the extreme by establishing the role ofshops away from the “end of the chain” concept to a more “place to get user’s feedback” concept.To do, shops are technologically equipped and staff trained to retrieve invaluable design informationthat customer’s hint at during their visits. Inditex has certainly grown thanks to the competitiveadvantages that its supply chain has brought, making it a clear example of an extended enterprise.According to Childe (1998) an extended enterprise is a conceptual business unit or system thatconsists of a purchasing company and suppliers who collaborate in such a way as to maximise thereturns to each partner. That means that the extended enterprise is a knowledge-based organizationthat uses the distributed resources and capabilities through the supply chain in order to maximizethe competitive advantage and performance of the entire organization (Bititci et. al 2005), includingof course the product development processes.3.4 Performance management models for NPD within supply chainAs it has been argued in the section before, supply chain management (and extended enterprisemethodologies that emanate from it), allow companies to take advantage from its network ofsuppliers through upstream and downstream linkages that produce a value in the form a new
17product or service to ultimately meet or exceed customer expectations. In practise, there are somemodels that are specifically designed to manage performance of those extended enterprises. Forexample, Gunasekeran et al. (2001) presents that the measures are arranged in three different levels(strategic, tactical and operational) through the supply chain: plan and source performance,production performance, deliver performance and client satisfaction. This model is in essence verysimilar to the supply chain operations reference SCOR model and its six key activities (plan, source,make, deliver, return and enables). Another model was introduced by Beamon (1999) and arguesthat a framework for supply chain measurement should tackle at least one measure for each of thefollowing steps: resource measure, output measure and flexibility measure. In addition, Kochar andZhang (2002) proposed a model in which each company have its owns performance measurementsystem that asses how coordinated and synchronised are companies between them in a givennetwork.The essence of all these frameworks is to bring up to the surface the same measures proposed fortraditional single enterprise measuring systems (balance scorecard, EFQM, IPMS, performanceprism, smart pyradmid, etc) but suited to the supply chain. It is interesting to note how aligned isthe supply chain management goal’s with the new product development’s goals. The following list,extracted from CIPS (2010) highlights the most prominent ones:1. Reducing the non-value-adding activities through the supply chain (processing, inventory, waste)2. Reducing cycle times to support innovation and fast new product development.3. Enhancing quality through collaborative quality management, TQM initiatives, supplier motivationand supplier commitment4. Reducing total costs through better coordination and planning increased plant capacity utilisation,waste reduction, less inspections and defects.5. Optimising the balance of service levels and costs6. Improving supply chain communication to boost all the above mentioned goalsAs a conclusion, we provide a table linking those supply chain goals (according to their number) withtypical performance indicators associated to new product development (Slack et al. 2007)
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