Product Development Process – Economics and

Base Case Financial Models.

Presented By: Shivangi Dubey P004Rupsa Halder P005Mohit S. Harsolekar P00613th Jan 2016

WHAT IS PRODUCT DEVELOPMENT ?

EXAMPLE

IMPORTANCE

PRODUCT DESIGN

IMPORTANT TO UNDERSTAND ?

1) CONTRACT MANUFACTURING

2) CORE COMPETENCY>Provides potential access to a wide variety of markets>Increases perceived customer benefits >Hard for competitors to imitate.

PHASE 0 : Planning

PHASE 1 : Concept Development

PHASE 2 : System – Level Design

PHASE 3 : Detail Design

PHASE 4 : Testing and Refinement

PHASE 5 : Production Ramp - Up

PHASE 0 : Planning

» Corporate strategy

» Assessment of technology

development

» Market Objectives

» Project mission statement

» Set supply chain strategy

» Research

PHASE 1 : Concept Development

» Identify needs of target market

» Generate product concept

» Alternative concepts

» Analysis of competitive products

» Economic analysis

PHASE 2 : System – Level Design

» Define product architecture

» Generate geometric layout

» Define functional specificationsof subsystems

» Preliminary process flow diagram for final assemblyprocess

» Facilitate make-buy analysis

» Set target costs

PHASE 3 : Detail Design

» Complete specification of all parts

» Identification of all standard parts from

suppliers

» Define whole process plan

» Design tooling

» Define quality assurance processes

» Develop marketing plan

PHASE 4 : Testing and Refinement

» Construction and evaluation of

prototypes

» Obtain regulatory approvals

» Implement design changes

» Refine fabrication and assemblyprocesses

» Develop promotion and launch materials

» Develop sales plan

PHASE 5 : Production Ramp - Up

» Train workforce

» Place early production with key

customers

» Carefully evaluate and

identify remaining flaws

» Begin operation of entire

production system

» Product launch and widespread

distribution after transition to

on-going production

Economics Involved in

Product Development

Process

What is a Base Case Model..??

• A Financial analysis model which consists ofthe determination of the inflow and outflowof cash from all the major activities in theproject simultaneously taking intoconsideration the time required for eachactivity.

Developing a Base Case

Estimating Timing And Magnitude of Future Cash Flows.

Computing the NPV

The Cash Flow is obtained from the most basic activities..

• Development Costs.

• Ramp Up Costs.

• Marketing Costs.

• Production Costs.

• Sales Revenues.

NPV

Net Present Value (NPV) is the difference between

the present value of cash inflows and the present

value of cash outflows.

IRR• Internal Rate of Return

Defined as the interest rate that equates the

present value of an income stream to the

cost of the investment.

Time = Money

IIR with Different Development cost levels.

• Premium brand of Nestle which manufactures andsells coffee brewers.

• Brews coffee from the premeasured coffee podswhich are also produced by the company in differentflavours and combinations.

Net Present Value computation for Base Model

• The expected sales are assumed to be spread cyclically as 20%, 25%, 35% and 20%.

• Developmental Cost is $ 4 Million spread equally over 4 quarters.

• Production Ramp Up cost expected to be $ 1 Million.

• Equipment and Tooling Costs: 2 million upfront, then 1/2 million a year and scale up with volume of machines sold.

• Marketing expense calculation: Nestle'sexpense is $17,395 M.

• Nespresso will contribute nearly 4% toNestle's sales. Assuming the same 4% formarketing cost, Nespresso's marketing costwill be (17,395*.04) =$ 695.8. Per quarter costis 173.9.

• Assuming 50% of this is for machines and 50%for capsules, it is 86.9 for each.

Cost and Revenue Base Model.

Cost and Revenue of Base Model with Capsules

Summary

• Nespresso machines are a base equipment whose sales gaurantee the sael of the nespresso coffee capsules.

• Inturn the estimates of revenue generated from capsules is much higher to that of those generated from the machine.

• This helps us to take the Go/No GO decisions in the product development at every crucial stage.

• Financial analysis decides the feasibility of the product development project as a whole.