Transactional process: Exchange of goods & money (simple process of buying) maximising leverage, reducing maverick spend, supplier
spend, supplier rationing and strategic Cost analysis: Process of analyzing each individual cost element (Direct
Every supply chain will be connected by a series of purchasing activities and each
point has a transaction
Purchase requisition: Request for buy/placing an order for a buy
New competitive environment: Sophisticated customer base (more perf, lower
$), widely avail info sources, balance of power between buyers and suppliers,
greater levels of outsourcing
CSX Purchasing case:
Challenges: △ing supply base (∵ ↓in # rail roads & consolidation of purchase)
Concern: Limited # of domestic supplier (∵ growth in shipments)
Strategy: Develop more global perspective/strategic approach to sourcing, ↑ skill
sets & attain status of Certified Professional in Supply Mgmt (CPSM) → Solution:
Reorganised resources & form a team focused on developing current suppliers and
↑ supply base (Mission: identify commodities with sourcing sensitivities and
develop new or existing suppliers to meet needs of company)
Success e.g.: Development of new steel rail supplier from Eastern Europe.
Rationalising: Companies want to shrink their supply base
Procurement = sourcing + purchasing 

5Rs of purchasing:Getting right quality, qnty, time, price and from right
sourceImportance of purchasing:
1. Increases values and savings: Suppliers have substantial impact on firm’s
total cost (Dupont model). Suppliers help differentiate producers’ final G&S. In
manufacturing, purchased content is more than 55% of revenue (direct spend).
Cost is made up of direct spend and indirect spend (overheads cost)
Purchased G&S can be grouped as: Raw materials, supplementary materials,
semi-manufactured materials, components, finished products, investment goods
or capital equipment, maintenance, repair and operating materials, services.
2. Builds relationships and driving innovation: Traditional approach -
bargain hard for price reductn, new approach - conduct joint cost reductn with
suppliers. Both buyer and supplier must benefit. Suppliers can contribute
innovative ideas
3. Improves quality and reputation: Buyers focus on core competencies and
outsource non-core activities and materials. Supplier quality leads to product
quality.
4. Reduces time-to-market: Includes suppliers early in product design process
to take adv of their expertise → avg. 20% improvement on material costs, quality
and product development time
5. Manage supplier risk: Supplier risk is magnified by sourcing strategies (i.e.
global/single sourcing, JIT Stock). Need to develop BCP’s to mitigate risks
6. Generates economic impact: monthly ISM report on business is closely
followed national economic indicator. Manufacturing and non manufacturing
components. Purchasing Manager’s Index (PMI) [>50: expanding economy,
otherwise contracting]
7. Contributes to competitive advantage: Leading indicator of health of
economy. Growing recognition of supply management’s contribution to firm’s
profitability. More supply managers are graduates. Increased # of supply managers
with certifications like CPS
Supply management: strategic approach to plan for and acquire firm’s current
and future needs through effectively managing supply base, utilising process
orientation in conjunction with cross functional team to achieve organisational
mission (ISM’s definition: identification, acquisition, access, positioning, mgmt of
resources and related capabilities an org. needs to attain its strategic objectives)
Strategic Role: Activities which have major long term impact on firm
performance, must be aligned with overall mission and strategies of firm
Managing supply base: work directly with suppliers to provide world class perf.
Process approach: Collaborating with and coordinating other functional areas
as they pertain to suppliers. Move across functional area boundaries
Cross functional: Sharing info, suppliers seen as extension of buying firm
Purchasing managers are expected to do: supplier relationship management,
total cost analysis, purchasing strategies, supplier analysis, competitive market
analysis, need for close collaboration with suppliers, need for close internal
coordination
Purchasing objectives: 1. Supply continuity assurance (Source products
services at right price from right source at the right specification that meets user
needs for the right quantity and arrange for delivery and/or service perf at right
time to right internal customer) 2. Manage sourcing process efficiently and
effectively 3. Develop supply base/supplier performance mgmt 4. Develop aligned
goals with internal stakeholders 5. Develop integrated purchasing strategies that
support organisational goals and objectives
Elements of purchasing process: 1. Identify user requirements 2. Evaluate
user needs efficiently and effectively 3. Identify suppliers to meet need 4. Develop
agreements with suppliers 5. Develop purchase order mechanism 6. Ensure
payment occurs promptly 7. Ascertain that need was effectively met 8. Drive
continuous improvement
Procure to pay process: 1. Forecast and plan requirement 2. Need clarification/
requisition 3. Supplier identification/selection 4. Approval/Contract/P.O
Generation 5. Receive Material and documents 6. Settle, pay and measure
performance
Managing procure-to-pay process: Automation of all transactional activities
incl. requistioning, RFX (RFI, RFP, RFQ), contract award, orders, approval,
receipt, payment
Benefits of e-procurement: Virtual elimination of paperwork, reduced time
between need recognition and order release and receipt, improved communication,
reduced errors, reduced overhead costs, reduced purchase order and invoice
processing time
NSC Case: Procurement process: 1. Establishing needs (+ calculate and justify
EPV, adding a buffer to total value) 2. Determine Procurement approach (i.e. open
tender) 3. Specify requirements (conduct mkt research, give accurate specs
(technical [timeliness, design details] and non technical specification [additional
value add service] ), provide evaluation criteria and critical criteria which incl. price
competitiveness) 4. Source (publish tenders) 5. Evaluate (selecting based on VFM
principle) 6. Seek Approval (compute price competitiveness score, final APV
calculated)7. Contract (publish award notice) 8. Manage contract
Integrative strategy development: Corporate strategies (definition of biz in
which to participate, acquisition and allocation of resources to these biz units) →
Biz unit strategies (scope/boundaries of each biz and links with corporate strategy,
basis of competitive advantage) → Supply mgmt strategies (support desired
competitive biz-level strategy, how to complement other functional strategies →
Category/Sourcing strategies (how to purchase commodities to support higher level
strategies)
Translating objectives into procurement mgmt goals: Cost Reduction
obj: Be low cost producer in industry (reduce mat. cost), reduce levels of inventory
required to supply internal customers (reduce raw mat. inventory) Technology/
new pet dvpt obj: Outsource non-core competency activities (qualify new
suppliers for all major services) Reduce pdt dvpt time (develop formal supplier
integratn process manual) Supply base reductn obj: Reduce # of suppliers
used, Joint problem solving with remaining suppliers (identify cost savings with
suppliers). Supply assurance obj: Assure uninterrupted supply from identified
suppliers (reduce cycle times on key parts) Quality obj: Increase quality of service
and pdts (reduce avg defects on all material receipts)
Category management: Interactive business process whereby buyers and sellers
work together in mutual cooperation to manage categories as strategic business
units
Job of category manager: Engage internal stakeholders and fully understand
their requirements, scan marketplace to understand market trends, cost drivers
and risks, build a strategy that aligns stakeholder requirements with supply market
realities, conducts spend analysis
Spend Analysis: Process of identifying, collecting, cleansing, enriching,
classifying and analyzing expenditure (spend) data with the aim of reducing
procurement costs, improving process efficiency, monitoring compliance,
sourcing
Attributes to capture in spend analytics: 4W1H: who procured it? What was
procured? When and how often did we procure it? With whom did we procure it?
How did we procure it? How much did we pay for it?
Conducting Spend Analysis: What did the biz spend its $ on over the past yr
(min)? Did it receive right amt of pdts and service given what it paid for them?
Which suppliers received majority of biz? - turn tactical to strategic (DA contracts)
Did suppliers charge accurate price across all divisions vs PO requirements,
contracts and SOWs? Which divisions spend their money on products and services
that were correctly budgeted for? Are there strategic outcome opportunities to
combine volumes of spending from diff biz, standardize pdt req., reduce number of
suppliers, exploit mkt conditn for better pricing?
Spend Analysis scope
Challenges in conducting: Difficulty in obtaining timely & accurate info on
mundane things (NET invoice line value, VAT Invoice line value, Invoice Document
count, PO Document Count, Supplier Count), Impact of M&A (diff. recording
procedures, accounting systems, difficulty in translating data btw systems)
Typical spend analysis spreadsheet: sort data by commodity, find total spend
by commodity, chart top 10 by desc. $ spend, find # of suppliers by commodity,
chart top 10 by desc. # of suppliers, find avg spend/supplier/commodity, apply
Pareto analysis for opportunities
Delivery options for spend analysis: outsource (spend analysis service), in-
house (technology - RDBMS [oracle, SQL server, Access], Business intelligence
tools, MS Access, Excel), Buy in data (supplier cleansing, normalisation,
classification), Obtain data from your supply base (category specific data)
Conducting market research on suppliers: Understand purchase rqrmt
relative to biz unit obj, conduct thorough spend analysis (each commodity &
supplier, total expenditure as % of total spend), identify internal users, identify
current suppliers, research supply mktplace, info required(total annual purchase
vol., interview with SH for forecast, external mkt research on key supplier, avail.
capacity, tech trend, price data & trend, cost data & trend, tech rqrmt, envir. Issue,
regulatory issue, other avail. Data) , Triangulation [explore, compare, contrast data
from multiple source (trade journals, annual report, internet, books, trade
consultant, headlines, suppliers, investment report, industry analyst, other
source)], Porters 5 forces model, SWOT analysis, Supplier analysis (establish
benchmarks through industry databases, value chain analysis, supplier research)
Kraljic’s Purchasing portfolio analysis: (looks at purchasing turnover and
supplier base) recognize that diff products require diff supplier strategies and is
based on 2 variables: 1. Purchasing’s impact on the bottom line (profit
impact of given ss item measured against criteria i.e. cost of mat., total cost, vol.
purchased) 2. Supply risk assoc. with purchase of specific item (measured
against criteria i.e. ST & LT availability, # of potential suppliers, structure of ss
mkt) It further analyses 4 pdt category into:
Strategy → Tactics → Actions
Four basic supplier strategy
Other types of supplier strategies: Insourcing/outsourcing, supply base
optimisation, supply risk management, global sourcing, long term supplier
relationships, early supplier design involvement, supplier development, total cost
of ownership, e-reverse auctions
Purchasing chessboard: differentiates between the powers of dd and ss → basic
purchasing strategies is developed (high ss, low dd: Change nature of dd, high ss,
high dd: Seek joint advantage with supplier, low ss, low dd : manage spend, low ss,
high dd: Leverage competition among suppliers)
3 levels of hierarchy: 4 basic strategies, 16 levers/approaches, 64 methods
Similarities of purchasing chessboard and Kraljic: portfolio approach, strategies
and most of the tools used (i.e. partnerships, re-specification, tenders) — only diff
wording
Differences: Different views (product/profit & risk view VS Balance of power),
Chessboard seems to be more price focused, even non critical items are handled
with much bigger effort, some tools (i.e. globalization, volume bundling) are
allocated to different sectors of portfolios, Kraljic 8-10 tools (too simplistic?) VS
chessboard 64 tools (too complicated?)
Value Equation: 
 projections, asset base and rate of return requirements, when cost sharing savings
From MHGP, Value = (Quality + Technology + Service + Cycle time)/Price
Johansson perspective of value: V = (Quality * Service) / (Cost*Cycle time)
Price analysis: Process of comparing supplier price against external P
benchmarks w/o direct knowledge of supplier costs (focus on price only and not on
suppliers’ COP)
materials, direct labour, overheads, SGA, Profit margin) that makes up final price
from supplier
Total cost analysis: Applies value equation = (quality + technology + service +
cycle time) / price across multiple processes that span 2 or more firms across SC.
Price analysis is the easiest as it is the cheapest, followed by cost analysis (will need
to go into the company.( Total cost analysis as it is the hardest (information not
transparent nor forthcoming)
Buy rates ≤ sell rates ≤ rack rates
Sell rates: sold to existing customers, Rack rates: Public info
Every supplier will not share buy rates (highly controlled, only few people know)
Historical cost reduction approaches: Value analysis (systematic analysis
that identifies and selects the best value alternatives for designs, materials,
processes and systems. It proceeds by repeatedly asking can the cost of this item or
step be reduced or eliminated, without diminishing the effectiveness, required
quality or customer satisfaction), process improvements, standardisation,
improvements in efficiency using technology
Places and focus of cost mgmt: Supplier integration, standardisation, value
engineering(modification of designs and systems according to VA), Design for
manufacturing → improves opportunity to use standard parts & techniques,
leverage volumes and create opportunities for cost savings
During product/service launch: Adopts more traditional cost-reduction
approach, competitive bidding, negotiation, value analysis, volume leveraging,
service contracts, focused on savings, linking longer pricing to extended contracts
Nearly EOL: Supply management cannot ignore potential value of environmental
initiatives to remanufacture, recycle, refurbish → eliminates landfill costs
Strategic Cost mgmt process: Strategic cost mgmt → supply chain cross
enterprise focus (joint effort)→ Value engineering/analysis, onsite supplier
development, cross-enterprise cost improvement, joint brainstorming for cost
improvement, supplier suggestion programs, supply chain compression
Managing life cycle costs
Recall Kraljic: Critical (cost analysis, collaborative cost reduction efforts
focused on TC), Leverage (leverage preferred suppliers, price analysis using
market forces), routine (cost analysis-reverse pricing, standardise rqrmt),
bottleneck (total delivered cost, automate to reduce purchasing involvement )
Note: Cost analysis is for critical and routine while price analysis is for leverage and
bottleneck. Total cost analysis is used for everything
Cost Analysis techniques: Cost based pricing model, product specification,
estimate supplier costs using reverse price analysis, break-even analysis
Cost based pricing model: Suppliers moving aware from price management to
cost management. 3 common models:
1. Cost Markup Pricing Model: Estimate costs (direct spend +
overheads) and add markup % of cost for desired profit. Supplier must be
clear if they want markup to be based on product cost or total cost. SP = CP
+ (%)CP or = (1+x)CP
2. Margin pricing model: Establish profit margin that is predetermined
% of quoted price. Similar to cost markup pricing model except “markup”
based on sale price. SP = CP/(1-x%)
3. Rate of return pricing model: Desired profit on financial investment
(& learning curve effect) is added to estimated cost. Focus here is ROI rather
than cost
Reverse Price Analysis = “Should cost” analysis: Can be used when
supplier is reluctant to share its proprietary cost data .
- Decompose cost into basic components (DM, OL, OH, SGA, PM).
Techniques: internal engineering estimates, historical experience and
judgement, review of public financial documents
- Estimate components that make up supplier’s theoretical unit price (take
from RFX)
Cost = Price - Profit
Price often set by the market or by negotiations. Cost is impacted by
underlying decisions i.e. cost drivers
Common terms in Should-cost pricing:
Net sales = Gross sales - Returns and discounts
Cost of goods sold (COGS) = Material + Direct labour + Factory overhead
Gross Profit = Net sales - COGS
Operating expenses interest, miscellaneous expenses
Profit before tax = Gross profit - operating and other expenses
Total cost of Ownership (TCO): Present value of all costs
associated with product/service/capital equipment incurred over
product/service/equipment’s expected life → Allow buyer to identify
and measure costs beyond standard unit price, transportation when
evaluating suppliers’ proposals or performance.
Cost and time intensive activity with 4 main parts: 1.
Purchase price (Invoice amount paid to supplier (make sure PO cut
properly)) 2. Acquistion costs (Cost  of bringing product to buyer
(incl. sourcing, INCOTERMS, taxes, freight) 3. Usage cost
(Conversion from Raw materials to Finished Goods and support costs
(warranty, maintenance, training, opportunity, downtime costs))
4. End of life cost (Net of amounts received/spent at salvage
(disposal, salvage, clean-up, liquidated damages))
Steps in conducting TCO analysis: 1. Map the procurement process
(needs discussion, sourcing, evaluating, assessment, selection, use,
EOL) and develop TCO category (needed in category mgmt) 2.
Determine cost elements for each category 3. Determine how each cost
element is to be measured (metrics) e.g. work/piece rates, learning
curve, etc) 4. Gather data and quantify costs (SAP, open source) 5.
Develop cost timeline (for length of life cycle) 6. Bring costs to present
value (NPV, cost of capital)
Factors to consider in TCO: use for evaluating larger purchases, obtain senior
mgmt buy-in, work in teams (usually cross-functional), focus on big costs first, then
drill down to component level, obtain realistic estimate of life cycle (3 years, 5 years
depending on industry), use as cost based decision making tool for in-house,
outsourcing choices, consider all relevant costs in global sourcing throughout
supply chain (TLC)
Collaborative Cost Management
When to use collaborative cost approach: not appropriate for all times,
supplier contributes high levels of value-added, complex, customised items, for
products requiring conversion from raw materials through supplier’s design, make
supplier more cost efficient and focused.
2 methods:
1. Target pricing/costing
Used in NPD; use cost of new product as input to product design process
Sale price - Profit = Allowable cost; “to be” or target cost of supplier
Gap in cost(allowable cost - product cost) becomes cost reduction goal between
buyer & seller
Target price = price buyer wants to get from supplier (i.e. set by buyer)
2. Cost savings sharing
Joint identification of supplier’s full cost
Sharing of continuous improvement benefits, profit is shared between B-S
Financial incentives for supplier to pursue cost reduction, invest in assets, have
win-win
Supplier should improve operations over and beyond contract.
Target cost based pricing: Agreement on supplier’s full cost (need visibility
here), built upon higher degree of trust, information sharing, joint problem solving.
Identify and agree on: product volumes (esp volume variability), target product
costs at diff points in time, quantifiable productivity and quality improvements
starts and how calculated, Need to manage risks associated with target pricing (esp
volume variability and min. vol. guarantees)
Elements of sustainable PMM: Green purchasing and inbound logistics, green
product design, clean production processes & waste management, Green outbound
and reverse logistics
Strategy for successful closed loop business models: Take advantage of
knowledge obtained by examine used products, take advantage of the knowledge
obtained and shared through multiple customer contacts , Make profits on the
service provided by products not on the products themselves → creates proper
incentives for use-stage consumption, product life extension and end of life
solutions (i.e. rolls Royce airplane engines, Zipcar, carpeting, printing…) , flexible
small scale manufacturing/service facilities close to customers to facilitate reverse
logistics for reuse, remanufacturing, recycling
Design for environment:
Reduce material weight and volume in products and packaging which also saves on
transportation
Use materials with low environmental impact (low/no toxicity), low energy
content, recycled content, recyclable (i.e. can replace with virgin materials like
steel, aluminum, PET), renewable & biodegradable
Use clean production processes: fewer steps (design for manufacturing), energy
efficient, low additives/emissions, reduce waste, find outlets for by-products/waste,
green buildings
Optimise logistics and transportation: Avoid empty trucks, use sea to avoid air
Use suppliers that score high on design for environment
Reduce use-stage energy consumption (i.e environmental impact of coffee machine
mostly occurs in the use phase)
Reduce use-stage material consumption and emissions: Avoid leakage
Extend product life: durability, easy, mistake proof, maintenance, repair, easy
upgrade and refurbishment (use modularity)
Consider and develop end-of-life solutions for products and packaging: Reuse,
refurbish, remanufacture (i.e Xerox, Caterpillar), recycle (to replace virgin
materials), in support of reuse, refurbish, remanufacture, recycle (make products
easy to disassemble, materials easy to separate, reduce # of materials), incinerate,
biodegrade
Project management
Project: temporary (non-repetitive) operation. Have a limited time frame, >1
specific obj. And a temporary organizational structure
Activity time: Amt of time it takes the resource to complete the activity once it
has started to work on it
Precedence relationship is used to described activities that are dependent on
each other (i.e. B requires completion of A — A is the predecessor of B and B is
sequentially independent of A)
Sequentially independent: A form of independence in which successor depends
on predecessor (A is predecessor, B is the successor)
Such relationship can be summarized in a dependency matrix where each
column represents an activity that provides info (predecessor) and each row
indicates activity that receives info (successor)
If there exist no relationship between the 2 activities, the activities are
independent of each other
Interdependent: A depends on B and B depends on A. When executing
interdependent activities, we have to carefully coordinate activities. Such
coordination take 2 forms:
1. Static: getting team members in
charge of interdependent activities tgt
and engaging them in a dialogue (an
attempt to understand obj. And
constraints of other activities when
executing your own activity)
2. Dynamic: iterating (going back and
forth) btw 2 interdependent activities

= concurrent engineering
(simultaneous execution of multiple
dvpt activities w/ strong emphasis on
coordination)
The activity network
Multiple approach to use graph to represent dependencies in project mgmt
Activity on node (AON): nodes correspond to proj activities and arrows
correspond to precedence relationships (arrow go from predecessor to successor
activity) — similar to process flow [1. Create a node with activity name and
expected activity time 2. Draw the respective arrows out of each activity for each
dependency]
The Critical Path method
Process mgmt: Direct attention to resource with lowest capacity - bottleneck
(activity with longest processing time)
Project mgmt: What matters is not the individual activity times but the
completion of the last activity (requires ALL activity to be completed)
Path: A sequence of nodes (activities) and (directional) arrows
Every path can be assigned a duration by simply adding up the activity times of the
activities that constitute the path.
Critical Path: The path with the longest duration is the
critical path
Compute project duration:1. Start with activity that
has no info providing activity and label that activity as
start. Earliest start time (est) is 0. Earliest completion
time (ect) is the activity time of the activity. 2. Identify all
activities that can be initiated at this point. For a given
such activity i, compute EST as EST(Ai) = Max {ECT(Aj)}
where Aj are all activities providing input to Ai.
3.Compute the earliest completion time of Ai as ECT(Ai) = EST(Ai) + Activity time
(Ai) 4. Consider activity i as completed and identify any further activities that now
can be initiated. Go back to step 2
Slack time: Amt of time an activity can be delayed without impacting the overall
completion time of a project (Determined based on late start schedule)
Computation: Compute latest start time (LST) and latest completion time (LCT) for
each activity such that the proj still completes on time. We do this by beginning
with last activity and working our way backward through the proj until we reach
the beginning LCT(last activity) = ECT(last activity)
LST (last activity) = LCT(last activity) - Activity time (last activity)
LCT(Ai) = Min {LST(Aj) for which Aj is a successor of Ai}
LST(Ai) = LCT(Ai) – Activity time (Ai)
Slack time = Latest start time - earliest start time = latest completion
time - Earliest completion time
Note: LCT & LST are computed by going backward through the proj graph. Slack
time of all activities on critical path is 0
Benefits of knowing slack time: 1. Potentially delay the start of activity (Prefer
later start > earlier start as starting an activity is often associated with spending
money i.e. renting equipment, hiring ppl) 2. Accommodate availability of
resources: internal & external resource may not always be avail. When we need so
slack time allow us to adjust schedule without compromising completion time 3.
Insights and understanding about project dynamics: help direct attn when the
project is executed by knowing which activity has little slack
The Gantt chart: timeline with activities included as horizontal bars (most
commonly used visualization for project timelines) Does not capture dependencies
of activities
Common to include: critical path (choose different colour), important
dependencies (drawing arrow from end of activity to beginning of successor), slack
time (extend bars)
Uncertainty in activity times and iteration: Duration of many actives can
vary considerably with initial prediction, typically not in desired direction (taking
longer than expected) → random activity time → later completion time of
project
Variation in activity time will not average itself out. When some activities are
completed early and others are completed late, project will be delayed
Iteration & Rework: When project activities are interdependent, oftentimes,
iterations are required. Such iterations are typically for product development and
innovation projects where problem solving can a more organic, iterative process. It
is often referred to as rework.
Rework: Repetition of activities or an extra set of activities that have to be
completed by a defective flow unit in order to be restored to a good flow unit
Unknown unknowns (unk-unks): Uncertainties in a project that the proj
mgmt is not yet aware of. It lies in the nature of many high-uncertainty projects
that they will not be completed. Timely abandonment often is the goal as it avoids
escalation of costs. Often, a useful exercise is simply to list all variables in the
project that are currently not known and look for activities that would help resolve
these unknowns
Discovery driven planning: Attempting to spend as little as possible to learn
enough to decide whether to move forward with the project. → help resolve some
uncertainties and identify new ones
Project Management Objectives: Not just completing proj on time, but also
project cost (plannintg on how to spend money) and scope (determines what must
be accomplished in order for the project to be completed, should state a set of
quality specifications that project needs to achieve)
Project management triangle: Conflict between the 3 objectives
Reducing a project’s completion time: 1. Start the project early 2. Manage
project scope 3. Crash activities 4. Overlap critical path activities
All these only work if applied to the critical path. Trying to overlap non-critical
path activities will not reduce project completion time.
Organising a project: Defining the project (defining and negotiating the 3
var. that make up the proj triangle), Planning the project (execution of work,
apply the tools - dependency matrix, draw activity network , find critical path,
create Gantt chart) , identify person i/c of each activity and cfm that Gantt chart
is feasible), Controlling the project (tracking its progress i.e. tracking Gantt
chart to check that all activities take place as planned)
Impt to define a set of milestones that provide realistic picture of the progress of
the project. Project should by carefully reviewed & progress should be carefully
evaluated relative to scope, budget and time
Dedicated project team: Proj team in which team members spen 100% of
their work time on proj
New product development:
Ensures new products or services supplied by organizations match the market
demand of those who are supposedly buying them Sales Forecast: Demand inventory for new product/service so that the company
Translate the opportunity into a new product or service that the organization then can either pre-produce the appropriate amount of inventory before the launch or
supplies and its customers demand. (Opportunity → create value → Innovation) put the necessary service capacity in place at the launch.
Innovation: Novel match between customer needs (the foundation of demand) When doing survey:
and solutions in the form of physical goods or services (the supply) → Create value 1. Identify customers in market segment relevant to innovation. Customers are
(Novelty can come either from customer need or from solution) asked to express their purchase intent (definitely buy, probably will, may or may
Opportunity: An idea — a new product or service at the embryonic state not, probably not definitely will not)
Each innovation horizon corresponds to a comparable degree of novelty. As we 2. Compute purchase probability
move to upper left of the figure, we increase novelty in customer needs (i.e. 3. Discount the purchase probability
entering new markets = may be entirely new, customers currently not served yet). Purchase Probability = Cdefinite x Fraction “definitely buy” + Cprobably x
As we move to the bottom right, we increase the novelty of the solution approach Fraction “probably buy” + … where C is a constant (i.e. if Cdefinite = 0.4 it means
(solutions may not exist yet) that 40% who say they definitely will buy end up buying )
Firms can innovate beyond creating new products and services 4. Predict sales Sale forecast = Market size x Awareness probability x
Purchase probability
Cook Composites and Polymers Co. Learning objectives: Waste
management alternatives by turning waste into products is a form of recycling (can
be alternative to waste reduction. As a result, one may even use more of this (waste)
resource than before, turning (local) cost minimization into (global) profit
maximisation problem.
If a waste product can be sold at a profit, it will often have a positive impact on the
environment because it replaces the production of new materials.
Walmart Case:
How Walmart is deriving business value from its new strategy: price premium, cost
reduction, assurance of supply, creation of new revenue streams, right license to
operate
Product development process: A process that takes an opportunity as its
input and translates this into new product/service
The process includes needs identification, generation of product concepts,
empirical validation of the concepts and a business analysis, involving a sales
forecast. Upstream from the product development process is the process of
opportunity identification. Downstream of the product development process is the
actual productions, sales, and distribution of the product or service developed.
This process is sometimes iterative (“rework”) where 1 or several activities are
repeated one or multiple times
Understanding user needs
A consumer’s utility function determines to what extent a consumer desire a
pdt/service. Has many input variables: user needs. Consists of 3 sub-dimension:
performance (driven by product features i.e. durability, battery life, screen
resolution), conformance (whether the product work as well as the manufacturer
promise), and fit(affected by personal preference).
There exists a hierarchy of needs associated with a product/service starting with
a few high level needs (i.e. performance quality) which in turn consist of many low-
level needs (water-tightness) Top of this needs hierarchy: Primary need, Lower
levels: Secondary & Tertiary needs.
Kano Model: Consists of 1. Performance needs (needs that will lead to
customer satisfaction when fulfilled and dissatisfaction when not=linear satisfiers)
2. Delighters (needs that will lead to customer satisfaction fulfilled but will not
lead to dissatisfaction when not) 3. Must-haves (needs that will not really drive
customer satisfaction upward when fulfilled but could drive customer satisfaction
substantially downward when not fulfilled)
Comments: Latent needs: customers may not be aware of their needs when asked
about their needs and pref when they see it but once they see it, they love it =
delights in Kano Model. Some components can actually be classified in a different
category. Time drift: innovations diffuse and what once was a delight can soon be
taken for granted (become must-haves)
We need to know our customers with intimacy that we understand their latent
needs before they understand these themselves to gain competitive edge. Good
product development starts with careful assessment of customer needs
3 method of gathering customer needs: interviews, contextual observation,
focus groups
Concept generalization: Process of generating large, diverse set of concepts as
the foundation of the new product/service (user needs)
Product concept:Preliminary articulation of a solution for given set of user needs
(what are the needs that concept fulfills well, how are we going to fulfill the needs)
Prototype: Representation of the final product or service that allows the product
development team to predict how well a particular product concept might fulfill the
customer needs. → Primitive as they can only approx. the fulfillment of the needs
of real customers
Levels of fidelity of a prototype: 1. Low (Rough representations of final
solution, fast and cheap to make) 2. High (almost perfect representation and give
very accurate prediction of real customer response, expensive)
As product developt process unfolds, fidelity tends to increase
Decomposition: Breaking down problem into smaller, manageable sub problems
and solving these subproblems first (divide and conquer)
Attribute based decomposition: Focus on a subset of attributes of a new
product/service and try to generate a concept that performs well on these
attributes, even at the risk of performing poorly on others
Customer value curve: Graphic depiction of a new product’s relative performance
across the key attributes comparing it with existing offerings in the market
User interaction based decomposition: Decomposing the activities user go
through and picking one of it to generate concepts (useful in service setting: service
blueprint)
Service blueprint: Breaks up the flow of activities required to serve customer in
diag., distinguishes which activities are done by customers alone, which are done
with interaction with customer and which are done by us alone
Concept selection: Prioritisation of concepts (choosing the best + eliminating to
create # of high fidelity pdt concept) [need to consider need fulfillment, feasibility,
wow factor — compare the most promising concept along this 3 dimensions using
selection matrix]
Rapid Validation/Experimentation
Lean startup/pretotyping: Product development process that rapidly iterates with
real customers using simple and inexpensive prototypes
Development team evaluate attractiveness of product concepts based on true
purchase decisions that customers make i.e. pdt team selling product or service
pretending it is ready for use tho the pdt still requires several mth of dvpt
Minimum viable product: A prototype of a new pdt/service that allows the
team to collect the max amt of learning about customer preference with least amt of
effort
Common forms: 1. The fake door: offering sth you dont have yet 2. Fake back
end: once have customer order at hand, would order from existing retailer and
pretend pdt came to their warehouse 3. Impersonator: Prototype created using
mostly parts or system elements from an existing pdt/service 4. One night stand:
Test sthfor a limited time only i.e. setting up tent/koisk and building a temporary