Critical decisions in new product introduction and development—a mathematical modeling approach

Journal of the Academy of Business and Economics, March, 2004 by Atanu Chaudhuri, Kashi N. Singh

ABSTRACT

Choosing products to launch from a set of platform based variants and determining their prices and launch sequences are some of the critical decisions involved in any new product development (NPD) process. In this paper we present mathematical models which facilitate such decision making. The products considered are commercial vehicles, and representative data from a commercial vehicle manufacturer in India have been used for analysis. Our model which determines launch sequence as well as price of the products provides useful insights on the impact of economic conditions like boom or recession on prices, and also cannibalization.

1 INTRODUCTION

In a competitive market firms have to cater to the needs of the customers by offering a variety of products, and at the same time keep the development and manufacturing costs low. Many of the successful firms, particularly in automobile and consumer durable industries, owe their success to developing an effective platform from which they are able to launch a series of derivative products. But the firms need to judiciously balance the conflicting marketing requirements of variety on one hand and complexity of operations and development, and hence, escalating costs on the other. The common trend in automobile industry is to organize design groups on the basis of product platforms. In many of the firms, including the one under study, Vehicle India Ltd. (name disguised for confidentiality), a separate group consisting of personnel drawn from marketing, design, engineering and process planning is responsible for the critical decisions in any development program. We consider the intertwined decisions involved in NPD projects starting from choosing a set of platform-based variants to determining their launch sequence and prices. These decisions are taken after the features of product concepts have been finalized based on market responses and tools like Quality Function Deployment (QFD).

We consider the platform extension problem from the point of view of decision makers evaluating NPD projects, and add to the literature by considering not only development costs but also plant configuration change costs, productionising and technology acquisition costs, complexity costs of maintaining the variants, and labor and material costs in a mixed integer linear programming (MILP) model. The model, instead of evaluating each product development program individually, helps in allocating manpower for each department and choosing the products together subject to the resource and project duration constraints. For the platform extension problem, our endeavor is to determine the platform extensions to be launched for each platform, given that the base models will always be launched. The objective of this simple model is to provide the managers with insights on the binding constraints for each variant and the threshold level of cannibalization that can be allowed. Evaluating new products individually on the basis of net present value as done by Vehicle India Ltd., does not take into account the sharing of resources by the products, and run under the risk of providing a suboptimal solution. The comprehensive MILP model of ours, which is solved using GAMS 21.0, helps in choosing the optimal set of products, considering the relevant costs and satisfying the constraints. Given the available manpower in design and technical support departments, the firm has to satisfy the manhour requirements for design, prototyping, testing and production ramp-up to launch the products on time. Our model helps managers take decisions about the manpower requirements for different departments.

Appropriately pricing the platform based variants and determining their launch sequences are another set of critical decisions faced by the firm. Sometimes the launch dates of new products may be externally enforced as in the case of launch of vehicles satisfying latest emission norms. But the firm can exercise the options of staggering the launch of various products and price them appropriately according to the boom and recessionary conditions in the industry at the time of launch. Several researchers from operations, marketing and economics have studied the problem of determining price and launch sequence. Seminal work [9] helped in choosing between simultaneous and sequential product launches depending on the varying levels of cannibalization. In [7] they made a significant contribution to this class of problem by developing launching sequences for platform-based products. The impact of concurrent technological development on launch sequences for high technology products was studied in [1]. But the impact of economic conditions on launching sequences and prices does not seem to have been considered in the literature before. The motivation of the study stems from the following questions

* Whether there will always be cannibalization if a base model is launched ahead of the platform extension model?

* Can cannibalization of the base model by its extension(s) be allowed? If yes, under what condition this so-called "reverse cannibalization" be allowed?