Management And Accounting Web

Product Life Cycle Management Summary of Summaries

Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Product Life Cycle Management Main Page

Citation: Martin, J. R. Not dated. Product life cycle management. Management And Accounting Web. http://maaw.info/PLCSummary.htm

Stages of the Product Life Cycle - Susman 1989

Marketing or Sales Perspective

Startup - Growth - Maturity - Decline - Abandon

The length and sequence between the stages is not predictable. The sequence could be one of the following:

Startup - Decline - Abandon

Startup - Growth - Decline - Abandon

Startup - Growth - Maturity - Decline - Abandon

Startup - Growth - Maturity - Revitalization - Decline - Abandon

Startup - Growth - Maturity - Revitalization - Decline - Revitalization - Decline - Abandon

Production Perspective

Conception - Design - Development - Production - Logistical Support

Customer or Consumption Perspective

Operations - Support - Disposal

Note the difference between Revenue Producing Life Versus Consumable Life Perspectives

Revenue producing life - producer’s perspective

Consumable life - consumer’s perspective.

Industry Life Cycle Versus Product Life Cycle

Industry examples - Automobiles, Steel

Product examples - Pontiacs, Edsels

Product classes, forms and brands, e.g., Automobiles, convertibles, Pontiacs

Objectives From Producer, Customer and Society Perspectives
Perspective Objective Methods
Producer Maximizing life cycle profits Revenue enhancement and cost reduction (See Susman’s Exhibit 2)
Customer Maximize performance relative to price and after purchase costs Perform life cycle trade-off studies
Society - Government Minimize externalities - e.g., pollution, unsafe products Laws, regulation, fines etc.

Relationships over the Products Life Cycle*
Production Stages Conception, Design & Development Production & Logistical Support Production & Logistical Support Production & Logistical Support Production & Logistical Support
Marketing Stages Startup Startup Growth Maturity Decline, Revitalize or Abandon
Strategic objectives
Design for low production & consumption costs. Sales growth Sales growth. Profits Cash flows& profits
Performance indicators Quality Quality Quality Price Price
Expense indicators High Product R&D, Moderate Process R&D High Product R&D, Moderate Process R&D &Advertising, Low Plant & Equipment. Moderate Product R&D, High Process R&D, Advertising and Plant & Equipment. Moderate Product R&D, High Process R&D, Moderate Advertising and Plant & Equipment. Low Product R&D, Process R&D, Advertising and Plant & Equipment.
Profits Zero Negative, but increasing. Positive & Increasing for innovator. Profits vary depending on company’s position in the industry. Peak then decrease. Decrease.
Risks High technological risk for innovator. Lower market risk for innovator. High market risk for non-innovator.      
Traditional costing R&D treated as period costs. Measures production costs. Measures production costs. Measures production costs. Measures production costs.
Life cycle costing Measures product design & process innovations to lower fabrication & assembly costs e.g., parts reduction, snap together parts. Measures production, logistical support costs & consumption costs. Measures production, logistical support costs & consumption costs. Measures production, logistical support costs & consumption costs. Measures production, logistical support costs & consumption costs.
* Based mainly on Susman (1989)

Benefits of Product Life Cycle Perspective - Based mainly on Susman (1989)

The life cycle perspective:

1. Recognizes that maximizing revenue and minimizing costs at every stage might not maximize profits over the product life cycle. For example, standardizing the product design to lower costs sacrifices flexibility. Charging high prices to enhance revenue invites competitors to enter. Supports a forward pricing strategy based on the experience (learning) curve.

2. Provides a long term perspective that produces decisions that lead to better long term results. For example, the life cycle concept recognizes that actions taken in the design and development stages to generate revenue and lower costs provide long run benefits.

3. Supports the value chain concept while traditional cost accounting supports the value added concept. traditional accounting systems measure only production costs or the value added by production.

4. Recognizes that customer consumption costs are important. The ratio of the operating and support costs to the acquisition costs of a product is an important consideration for the customer. this shows that low consumption costs must be designed into the product.

5. Helps provide better information for investment decisions, i.e., related to the long run and value chain.

Places emphasis on designing products to lower fabrication and assembly costs, such as reducing the number of parts, using more molded parts - plastic and snap together parts, and common interchangeable parts.

the PLC perspective also places emphasis on lower logistical support costs such as storing finished goods, delivering products to customers and installing products and training customers to use them.

CAM-I Cost Breakdown Structure (Berliner and Brimson 1988, 56: Susman 1989, 18)

1. By life cycle stage.
2. By function within stages.
3. By activities within functions.
4. By tasks within activities.

total Life Cycle Costs = Sum of the costs across all the life cycle stages.

Why companies are reluctant to use the life cycle concept.

1. Short term mentality.
2. Cash flow problems.
3. High hurdle (discount) rates used for investment justification.
4. Lack of data needed to understand the product life cycle.
5. Benefits not distributed evenly to functional groups. For example, purchasing, quality control or maintenance may shrink as a result of designing more reliable products.

Life cycle strategies

1. Standardize the product quickly and compete on the basis of low cost.
2. Modify the product continuously and compete on the basis of product uniqueness. Charge premium prices.

Stages in the Product Life Cycle (Czyzewski & Hull 1991)

Startup - Growth - Maturity - Harvest

A product life cycle budgeting system is an improvement over traditional budgeting because the underlying assumptions change over the products life cycle stages.

Four Components of Life Cycle Management (Adamany & Gonsalves 1994)

1. The Life Cycle Model has Seven Stages

Analysis - Startup - Entry - Build or Growth - Maturity - Decline - Withdrawal

2. A Balanced Set of Performance Measures - refers to balancing process measurements and results measurements based on the critical success factors at each stage.

Factors Critical at Each Stage
Critical Factor Analysis Startup Entry Growth Maturity Decline Withdrawal
Time x x x      
Customer requirements & satisfaction quality x   x x x    
Target pricing x x x x x x  
Resource requirements x x x x      
Continuous improvement x x   x x    
Cash flow x x x x x x x

3. Advanced Cost Management Systems (based on a process view of the business) provide the link between the budgeting process and the reporting process.

4. Portfolio theory - allows managers to evaluate a company’s investments as a whole. The portfolio approach helps managers smooth the peaks and valleys of the investment cycle. For example, it helps show how mature, cash generating investments can be used to fund startup, cash using investments.

It is also helpful in planning resource requirements and budgets at each functional level, as well as measuring the effects of various "investment kickers".

Producers Costs - (Artto 1994)

1. Product conception.
2. Design.
3. Product & process development.
4. Production.
5. Logistics.
6. Marketing.
7. Service.
8. Guarantees.

Final Customer Product Life Cycle Costs (Artto 1994)

1. Purchase price.
2. Cost of delivery problems and delay.
3. Installation costs.
4. Operating costs.
5. Support costs.
6. Maintenance & revitalization costs.
7. Net disposal costs.

Life Cycle Costing trade-off Study - Consumption Perspective (White and Ostwald 1976)

The life cycle concept is obviously important from the consumption perspective. A trade-off investment study is illustrated below based on an example provided by White and Ostwald (1976). An aerospace firm requested bids on a vacuum chamber designed to simulate high altitude pressures for electronic equipment. two vendors submitted bids and data that are used in the cost calculations in the table. to keep it simple, they used a two year life for the equipment and did not discount the cash flows. the idea was to illustrate the type of analysis that needs to be performed.

Product Product from Vendor A Product from Vendor B
Characteristics Data* Costs Data* Costs
Product price   $200,000   $170,000
Life 2 years   2 years  
Installation costs   3,000   4,000
Labor requirements
Labor rate
1 man
$8 per hour
  2 men
$8 per hour
 
Machine run time 2,920 per year   2,920 per year  
Labor costs (2,920)($8)(2yrs) 46,720 (2,920)(2 men)($8)(2yrs) 93,440
Maintenance labor rate $6 per hour   $6 per hour  
Corrective maintenance:
Mean time between failures.
Mean time to repair.
Costs (Round cycles)
500 hours

1 week (i.e., 40 hours)
(2,920÷500)(40)($6)(2yrs)

2,880
300 hours
2 weeks i.e., 80 hours.
(2,920÷300)(80)($6)(2yrs)

9,600
Preventive maintenance:
Cycle Downtime
Cost (Round cycles)
After 160 hours of use.
4 hours per service (2,920÷160)(4)($6)(2)

864

After 180 hours of use.
8 hours per service. (2,920÷180)(80)($6)(2yrs)

15,360
Parts & Supplies cost (% of product price)
1%

2,000

2%

3,400
Input power:
Kilowatt hours per machine hour.
Cost per kilowatt hour.
Power costs
8 kilowatt hours
$.025 (2,920)(8kwh)(.025)(2yrs)
1,168 9 kilowatt hours
$.025 (2,920)(9kwh)(.025)(2yrs)
1,314
Total   $256,632   $297,114

* Data from vendor specifications and local management estimates.

A note on Shields and Young 1991

80-85% of the life cycle costs are committed early in the products life cycle. $1 spent on pre-manufacturing activities can save $8-$10 on manufacturing and post manufacturing costs.
(See CAM-I Figure 2-3 and Figure 2-4).

Shields and Young make a distinction between life cycle costs and whole life costs. Life cycle costs include the producers cost. Whole life costs include the consumers costs as well as the producers costs.

There are three ways to estimate life cycle costs:

1. Analogy - estimate costs based on similar component or product.

2. Parametric models - use non-linear regression models.

3. Industrial engineering and cost accounting - estimate costs of DM, DL and the usual overhead application.

Consumer Perspective

Purchase - Operating - Support - Maintenance - Disposal

Societal Perspective

Disposal costs plus externality costs, e.g., health costs from pollution.

Problems created by traditional focus:

1. Vertical organizations have a myopic focus - need horizontal communication and control.

2. too much hierarchy. Need flatter organizational structures.

3. too little employee participation - need employee empowerment.

4. Over the wall structures - need cross-functional teams including both design and
manufacturing engineers. (See the Hertenstein & Platt summary).

5. Standard cost for planning and control. Need to eliminate variance analysis.
Need target cost strategy.

The Process-Product Matrix

Two articles by Hayes and Wheelwright combine the stages of the process life cycle with the stages of the product life cycle. In the first article the emphasis is on competitive strategy, i.e., how to compete. In the second article the authors emphasize how to deal with changes in the competitive environment. Both articles use the process-product matrix illustrated below as a basis for discussing strategy. The matrix shows a different view of the product life cycle than most of the articles mentioned above. The idea conveyed in the matrix is that products tend to evolve from low volume, one of a kind specialty items, to multiple low volume products, to higher volume major products, and in some cases to higher-volume commodities. Although some products do not evolve in this way, many do move down the diagonal of the matrix as indicated by the arrows. For more on the process-product matrix see the Hayes & Wheelwright summaries.

Product-Process Matrix

A note from Allmendinger and Lombreglia HBR October, 2005

The Product Life Cycle from a customer's perspective, p. 136:

Determining requirements and justifying purchase of the product.
Finding a product supplier.
Financing the purchase.
Installing the product.
Modifying other products or processes to work with the product.
Adapting the product to its environment or to a specific use.
Maintaining the product and replacing parts.
Replenishing materials (e.g., paper and toner for a copier).
training personnel to use the product.
Using the product.
Upgrading the product.
Disposing of product waste.
Disposing of the product.

Looking at the PLC from the customer and societal perspectives leads to the areas of environmental cost and of social accounting. See the links to those topics below the references for more information.

_____________________________________________________________________

References and summaries:

Adamany, H. G. and F. A. J.Gonsalves. 1994. Life cycle management: An integrated approach to managing investments. Journal of Cost Management (Summer): 35-48. (Summary).

Allmendinger, G. and R. Lombreglia. 2005. Four strategies for the age of smart services. Harvard Business Review (October): 131-145. (Four basic business models for companies that embrace smart services: the embedded innovator, the solutionist, the aggregator, and the synergist).

Artto, K. A. 1994. Life cycle cost concepts and methodologies. Journal of Cost Management (Fall): 28-32. (Summary).

Berliner, C., and J. A. Brimson, eds. 1988. Cost Management for today's Advanced Manufacturing: The CAM-I Conceptual Design. Chapter 5. Boston: Harvard Business School Press. (See the CAM-I main topic page for summary).

Blanchard, B. S. 1978. Design and Manage Life-Cycle Cost. Portland, OR: M/A Press.

Czyzewski, A. B. and R. P. Hull. 1991. Improving profitability with life cycle costing. Journal of Cost Management (Summer): 20-27. (Summary.)

Hayes, R. H. and S. C. Wheelwright. 1979. Link manufacturing process and product life cycles. Harvard Business Review (January-February): 133-140. (Summary).

Hayes, R. H. and S. C. Wheelwright. 1979. The dynamics of process-product life cycles. Harvard Business Review (March-April): 127-136. (Summary).

Martin, J. R. Not dated. What is a learning curve? (Summary).

Shields M. O. and S. M. Young. 1991. Managing product life cycle costs: An organizational model. Journal of Cost Management (Fall): 39-51. (Summary).

Susman, G. I. 1989. Product life cycle management. Journal of Cost Management (Summer): 8-22.

White, G. E. and P. F Ostwald. 1976. Life cycle costing. Management Accounting (January): 39,40 and 42.