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MANAGING ENGINEERING CHANGE: MARKET OPPORTUNITIES AND MANUFACTURING COSTS
Author(s) -
Balakrishnan Nagraj,
Chakravarty Amiya K.
Publication year - 1996
Publication title -
production and operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.279
H-Index - 110
eISSN - 1937-5956
pISSN - 1059-1478
DOI - 10.1111/j.1937-5956.1996.tb00404.x
Subject(s) - obsolescence , time horizon , competitor analysis , profit (economics) , product (mathematics) , new product development , product proliferation , business , lead time , product lifecycle , industrial organization , core product , marketing , computer science , operations management , product management , economics , microeconomics , geometry , mathematics , finance
Engineering changes in the design of a product, while attractive from a marketing viewpoint (in terms of increased sales opportunities, matching competitors innovations, etc.) cause disruptions in the manufacturing function of a firm. These disruptions include delays or backorders in the delivery of both committed‐orders and forecast‐demands of existing products, increased capacity requirements that could result in greater use of subcontracts, higher component inventories, and obsolescence of certain components. In this paper, we establish how the marketing opportunities and manufacturing costs associated with engineering changes can be managed so as to enhance the firm's profits over a planning horizon. Using an optimization model, we show that an enhanced product with increased marketing opportunities may not immediately replace the existing product; it may be phased in over a period of time. We further illustrate how the firm's overall profit, and the mechanics of phasing out the old product and phasing in the new product, are affected by factors such as the manufacturing lead time of the new product, its market attractiveness as compared to the old product, capacity availability, subcontracting premiums, and backorder costs. We develop several insights that allow managers to quickly establish whether an engineering change would be desirable and discuss a multitude of options that may be used to further enhance their desirability. Finally, we show that if the phase out period of the old product is set arbitrarily, rather than optimally, the result may be a substantial reduction in overall profits.