What is service design?

    Service design is the activity of planning and organizing people, infrastructure, communication and material components of a service in order to improve its quality and the interaction between service provider and customers. The purpose of service design methodologies is to design according to the needs of customers or participants, so that the service is user-friendly, competitive and relevant to the customers.

SERVICE DESIGN DEFINITION

During the last three decades, economic conditions have changed fundamentally in western industrial nations. Without doubt, a fundamental change from a manufacturing society to an information- and service-based economy is discernable. While the share of services in the gross economic product is around 60-70%, business start-ups and new jobs can almost exclusively be found in the tertiary sector. Along with such rapid developments came new economic challenges.In the past, investments within research and design were made primarily in the manufacturing industry. Means and processes of production were optimized  products innovated, and investments in market research, marketing and design of products were made as a matter of cause while research, development and design for services was an exception. This situation is now changing essentially – and this is where Service Design comes in.Within Service Design, Service Interfaces are designed for intangible products that are, from the customer’s point of view, useful, profitable and desirable, while they are effective, efficient and different for the provider.Service Designers visualize, formulate and choreograph solutions that are not yet available. They watch and interpret needs and behaviours and transform them into potential future services. In the process, exploring, generating and evaluating approaches are used similarly and a redesign of existing services is just as much a challenge as the development of new innovative services. 

Cost Planning for the
Product Life Cycle: 
Target Costing, Theory of Constraints, and Strategic Pricing

Learning Objectives

Ø  Explain how to use target costing to facilitate strategic management.

Ø Apply the theory of constraints (TOC) to strategic cost management.

Ø Describe how life-cycle costing facilitates strategic management.

Ø Outline the objectives and techniques of life-cycle pricing.

The Product Life-Cycle

Ø  Four costing methods discussed in this chapter:

v Target costing

v Theory of constraints (TOC)

v Life-cycle costing

v Strategic pricing

v All involve the entire product life cycle:

Managers now need to look at costs upstream (before manufacturing) and downstream (after manufacturing).

The Cost Life Cycle

Ø “Cost life cycle” refers to the following sequence of activities:

v  R&D

v  Design

v  Manufacturing (or providing the service)

v  Marketing/distribution

v  Customer service

v  It is the life-cycle of a product or service from the viewpoint of costs incurred

The Sales Life-Cycle

Ø Sales life cycle is the sequence of phases in the   product’s or service’s life:

v  Introduction of the product or service to the market

v  Growth in sales

v  Maturity

v  Decline

v  Withdrawal from the market

Ø   It is the life-cycle of a product or service from the         viewpoint of sales volume achieved

Target Costing

Ø Target costing: a costing method in which the firm determines the allowable (i.e., “target”) cost for a product or service, given a competitive market price and a targeted profit

Ø Two options for reducing costs to achieve the target-cost level:

v By integrating new manufacturing technology using advanced cost management techniques, (such as ABC), and seeking higher productivity

v By redesigning the product or service

Implementing Target Costing

1)    Determine the market price

2)     Determine the desired profit¹

3)     Calculate the target cost as market price less desired profit

4)     Use “value engineering” to reduce cost

5)     Use kaizen costing and operational control to further reduce costs

             ¹For example, expressed as a percent of sales dollars

Value Engineering

            Value engineering (step 4):

Ø Analyze trade-offs between product functionality (features) and total product cost

Ø Perform a consumer analysis during the design stage of the new or revised product to identify critical consumer preferences

For firm’s that can add and delete features easily, functional analysis (examining the performance and cost of each major function or feature of the product) can be used

Ø Benchmarking is often used in this step to determine which features give the firm a competitive advantage

Ø Goal: provide a desired level of performance without exceeding the target cost

Design analysis:

Ø  Useful when the firm that cannot add and delete features easily

Ø  The design team prepares several possible designs of the product, each having similar features with different    levels of performance and different costs

Ø  Accountants work with the design team to choose one design that best meets customer preferences while not exceeding the target cost

            Other cost-reduction methods:

Ø Cost tables: computer-based databases (costs and cost drivers)

v Firms that manufacture parts of different size from the same design can see the difference in cost and material usage for each size

Ø Group technology is a method of identifying similarities in the parts of products a firm manufactures so the same parts can be used in two or more products, thereby reducing costs

Kaizen

            Kaizen (step five): using continuous improvement & operational control to reduce costs in the manufacturing stage of the product life-cycle

Ø Achieved through:

v Streamlining the supply chain

v Improving manufacturing methods and productivity programs

v Employing new management techniques

Ø Used extensively in the time period between product redesigns

Benefits of Target Costing

Ø Increases customer satisfaction (design is focused on customer values)

Ø Reduces costs (more effective and efficient design)

Ø Helps the firm achieve desired profitability on new and redesigned products

Ø Can decrease the total time required for product development

Ø Reduces “surprises” of the type, “We did not expect it to cost that much...”

Ø Can improve overall product quality

Ø Facilitates coordination of design, manufacturing, marketing, and cost managers throughout the product cost and sales life-cycles

Target Costing Example

            Design analysis options

Ø  Alternative A: reduce R&D, replace parts, and change    inspection procedure–savings = $150

Ø  Alternative B: replace parts and change inspection          procedure–savings = $150

Ø  Alternative C: increase R&D to develop a     computer chip        type hearing aid, replace parts, change inspection procedure,    renegotiate new supplier contract–savings = $150

Management chooses alternative C because:

Ø Of the increase in R&D expenditures

Ø The increase in R&D will improve the firm’s competitive position in the future

Ø The move is strategically important: the new technology may be dominant in the future

Quality Function Deployment (QFD)

            QFD: the integration of value engineering, marketing analysis, and target costing to assist in determining which components of the product should be targeted for redesign or cost reduction

            Four steps in QFD:

1)     Determine & rank the customer’s purchasing criteria for the product
 

2)     Identify the components of the product and the cost of each     component

3)     Determine how the product’s components contribute to customer satisfaction

4)     Determine the importance (value) index of each component

QFD Example: Step 1

QFD Example: Step 2

QFD Example: Step 3

QFD Example: Step 4

QFD Example: Conclusion

Measuring and Improving Speed

Ø Many strategic initiatives undertaken by firms today focus on improving the speed of operations

Ø Manufacturing cycle time (lead time or throughput time) is the amount of time between the receipt of a customer order and the shipment of that order

v Start and finish time of the cycle can be defined in several ways

v Example: the start time could be defined as the time raw materials are ordered, and the finish time the time that production is completed

Ø Manufacturing cycle efficiency (MCE) is defined as processing time divided by total cycle time

v MCE separates total cycle time into:

ü Processing time

ü Inspection time

ü Materials handling time

ü Waiting time, and so on

v Most firms would like to see MCE close to one

Constraints are activities that slow a product’s total cycle time

The Theory of Constraints (TOC)

      TOC focuses on improving speed at the constraints, to decrease in overall cycle time

Five steps in TOC:

1)     Identify the constraint

2)     Determine the most profitable product mix given the  constraint

3)     Maximize the flow through the constraint

4)     Add capacity to the constraint

5)     Redesign the manufacturing process for flexibility and          fast cycle time

         

TOC Example:]

Step 1: TOC Example:

     Identify the Constraint

Ø Develop a flow diagram, which shows the sequence and time of each process

Ø Use the flow diagram to identify the constraint (see example, next slide)

v There is difficulty maintaining adequate staffing in all process areas except process 5

v The constraint occurs in process 4, perform final assembly and test; the other four processes have slack time

Flow Diagram: TOC Example

Step 2: TOC Example:

Determine the most profitable product mix given the constraint

Ø The most profitable mix provides the maximum total profits for both products

v First, using throughput margin determine the most profitable product given the constraint

v Throughput margin = selling price less materials cost

Ø In the example, the relevant measure of profitability is throughput margin per minute in final assembly and testing

Step 3: TOC Example

Maximize the flow through the constraint

Ø Look for ways to speed the flow by simplifying the process, improving product design, reducing setup, and reducing other delays

Ø An important tool used in this step is the drum-buffer-rope system (DBR), which is a system for balancing the flow of production through the constraint–all production is synchronized to the drum (constraint)

Ø Objective is to balance the flow of production through the rope (processes prior to and including the constraint) by carefully timing and scheduling those activities
 

Step 3: DBR System

Maximize the flow through the constraint (continued)

Ø Another method to use is Takt time (total time available to meet expected customer demand)

Ø Example: if a manufacturing plant operates 8 hrs./day; after allowing for break time, 400 minutes of manufacturing time are available/day. If average customer demand is 800 units, the Takt time is 30 seconds per unit, that is:

Steps 4 & 5: TOC Example

Step 4:  Add capacity to the constraint

Adding new machines or additional labor is a long-term measure that can improve flow through the constraint

Step 5:  Redesign the manufacturing process for flexibility and fast cycle-time

 This step involves the most complete strategic response to the constraint because simply removing one or more minor features of a product might speed up the production process significantly

TOC vs. ABC

Life-Cycle Costing

                    Life-cycle costing provides a more complete perspective of product costs and profitability

Ø Managers need to be concerned with costs outside the manufacturing process because upstream and downstream costs can account for a significant portion of total life-cycle costs

The most crucial way to manage these costs is at the design stage of the product and the manufacturing process

                Decision-making at the design stage is critical because decisions at this point commit a firm to a given production, marketing, and service plan, and lock in most of the firm’s life cycle costs.

Four common design methods:

Life-Cycle Costing Example

According to the “traditional” product-line statements below, ADI-1 appears to be the more profitable product

However, when upstream and downstream (i.e., life-cycle) costs are considered, ADI-2 is actually more profitable

Strategic Pricing

Strategic pricing decisions require information from:

                    a) The cost life-cycle

                    b) The sales life-cycle
           

The cost information for pricing is commonly based on one of four methods:

v Full manufacturing cost plus markup

v Life-cycle cost plus markup

v Full cost and desired gross margin percent

v Full cost plus desired return

Strategic pricing depends on the position of the product or service in the sales life-cycle

Use of Sales Life Cycle

Chapter Summary

Ø Target costing determines the allowable (i.e., “target”) cost for a product or service, given a competitive market price and a target profit

Ø The target costing approach involves five steps:

v Determine the market price

v Determine the desired profit

v Calculate the target cost (market price less desired profit)

v Use value engineering to reduce cost

v Use kaizen costing and operational control to further reduce costs

Ø The theory of constraints (TOC) focuses on improving speed at the constraints, which causes a decrease in overall cycle time

Ø Five steps in TOC:

v Identify the constraint

v Determine the most profitable product mix given the constraint

v Maximize the flow through the constraint

v Add capacity to “relax” the constraint

v Redesign the manufacturing process for flexibility and faster cycle-time

Ø Life-cycle costing provides a more complete perspective of product costs and product or service profitability because it considers the entire cost life cycle of the product or service

Ø Management accountants prepare information from both the perspective of the cost life-cycle and the sales life-cycle to help management make strategic pricing decisions