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Monday, August 2, 2010

Why Systems Engineering is Required for Commercial Product Development

This is a guest post by Martin Coe, a systems engineer with extensive experience in the development of commercial products. I extend my thanks to Martin for allowing me to share this with everyone.

Introduction- Why is systems engineering required for commercial product development?  This article answers the question by illustrating the correlation between commercial product development and the application of systems engineering.  More specifically it:
§  Defines the main business objective of commercial product development
§  Introduces a product profit model that illustrates the relationship between this objective and 5 characteristics critical to successful commercial product development 
§  Utilizes the model to illustrate how product profit can be adversely affected if these 5 critical characteristics are not optimized
§  Identifies the relationship between systems engineering and these 5 characteristics critical to successful product development

Commercial Product Development’s Main Business Objective - Regardless of the commercial product being developed or the industry it will be sold, installed or operated in all commercial product development has a common business objective.  That being to ensure each product development project earns a sufficient profit.  While the definition of sufficient may vary among companies, products and projects the constant is that no company can continue to perform product development for any length of time without earning profits from the products they develop. 

Figure 1 is an example of a model that illustrates possible product revenue generated and lifecycle costs incurred over the lifecycle of a product development project.  Since

Profit = Product revenues – Lifecycle costs

we can utilize such a model to track project profits and therefore our progress toward meeting our business objective.

Development of the actual model begins early in a project when the lifecycle costs and size/ shape of the product revenue area are estimated yielding an estimated profit; use of the model occurs during the project when these parameters are measured yielding a profit snapshot; and after product end of life (EOL) when these parameters be confidently determined to yield a final profit value.  

Figure 1 The Product Profit Model tracks life cycle costs and product revenues over the life cycle of a product.

Our focus in utilizing this model is the area under the curve which represents the Total possible product revenue (+$) generated from any product and lifecycle costs (-$) both measured throughout the product development lifecycle.  From the model note:

  • At Release for Sale (RFS) the developed product is released for sale and product revenue generation begins
  • At End of Life (EOL) product obsolescence/retirement is imminent and product revenue generation ends
  • Lifecycle Costs are being incurred throughout the product development lifecycle (the entire length of the x-axis)

How Do We Meet This Objective? As the model illustrates meeting our profit objective means ensuring our total product revenue is maximum and that lifecycle costs incurred over the product development lifecycle are minimum.  As the number of factors affecting product revenue and lifecycle cost during product development are too numerous to manage consolidation to five critical characteristics is pertinent for our discussion.   To maximize product revenue and minimize lifecycle costs optimization of these five characteristics is imperative for any commercial product development project (tradeoffs between characteristics will be needed to optimize the highest priority characteristics for each specific project).

A brief introduction of these five characteristics within the context of product development begins to reveals how the size and shape of the product revenue curve and lifecycle cost value can be adversely affected for any project.

Meeting stakeholder needs
Every effort must be made to completely and accurately identify, define and satisfy project stakeholder needs as reflected in a comprehensive set of product requirements.  Inadequate, missing or poorly defined requirements can affect customer satisfaction (final slope) or market size (plateau).

Minimizing Development Time to Market (Schedule)
The time needed to develop a product from concept to release for sale (RFS).   Generally, increasing the time to market increases the lifecycle costs and shorter the revenue generation period (initial slope and less curve width).

Maximizing Product Performance
Product performance, measured from the customer/user perspective, covers many design characteristics such as reliability and quality.  Poor product performance can affect the size of customer base (plateau) or product longevity (final slope).

Minimizing Lifecycle Costs
The total product cost to the developer throughout the product development lifecycle.  Excessive lifecycle costs can affect the product market price (initial slope) and/or size of customer base (plateau) and directly impact profit margin.

Optimizing Risk
Product development risks can be cost, schedule, performance, requirements or programmatic related in nature.  Performing effective risk management throughout product development is an integral part of optimizing these critical characteristics.  Nonexistent or ineffective risk management can affect any or all aspects of the curve.

Figure 2 is an actual product revenue model with final product revenue (+$) and lifecycle costs (-$) defined for a product development project that did not optimize the five characteristics above.  Notice the size and shape of the product revenue curve and its relation to lifecycle cost value.  This product development situation is all too common when these five characteristics are not optimized or worse blatantly ignored during product development.  Ironically the fate of many product profit margins is doomed early in the project (often long before RFS) due to the lack of attention these critical characteristics get during product development.  It is obvious from the model this project does not realize a profit margin and therefore does not meet our business objective.

Figure 2 The Product Profit Model for a product with non-optimized characteristics

Systems Engineering is Directly Related to The Critical Five Characteristics - Any optimization of the five characteristics involves the application of systems engineering methods to product development projects.  If any one of these characteristics is measured, controlled, or managed during product development or special tasks/functions relating to these areas are performed then systems engineering methods are being applied to product development.  The table below clarifies how systems engineering is related to these critical characteristics with a brief list of systems engineering functions.  This is why systems engineering is required for successful development of commercial products.

Critical Characteristic
Related Systems Engineering Function
Meeting stakeholder needs
Voice of the customer, stakeholder analysis, requirements engineering, design verification, design validation
Minimizing schedule
Resource management, project schedule development, project scoping, work breakdown structures, earned value analysis, quantitative analysis
Maximizing product performance
Design for reliability/quality, requirements engineering, system integration, system architecting, software engineering, system analysis
Minimizing lifecycle costs
Lifecycle cost analysis, earned value analysis, business case analysis, engineering accounting
Optimizing risk
Risk management, root cause analysis, process validation, team development, six sigma processes
Coe, Martin, “Realizing maximum Product Revenue Utilizing a Product Revenue Model”; 18th International Conference on Systems Engineering, Las Vegas, NV, August 2005  

1 comment:

  1. Joe,

    Just stumbled on your blog post. I'm a systems engineer in the defense industry. I'm in the process of launching a systems engineering consultancy.

    I was looking for an clear explanation of how my current offerings are portable to the commercial sector. This post was a great resource.