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as the marginal cost to deliver a unit (Figure 2.36). Note the relatively minor position of the processor logic itself in Figure 2.35. A significant amount of hardware cost is accounted for by frames, cables, covers, boards, and power supplies. It is this mechanical and electromechanical hardware that is influenced by processor design, but not directly accounted for by a particular design. For example, less dense logic that spreads across several boards and consumes a great deal of power increases the overall project manufacturing cost out of proportion to its own intrinsic cost (due to power supply, interconnections, cooling, etc.). Similarly, the marginal cost to deliver a processor is significantly greater than the cost of the processor itself, as it includes market support, transportation, warranty costs, sales, documentation, and ordering costs as well as delivery of associated I/O products. I/O products are generally procured OEM (original equipment manufacturer)that is, from an OEM supplier at a discount of perhaps 50% off the list price. The sales representative attempts to sell the I/O equipment at list price, presumably with varying success, as a large customer will have direct access to the OEM supplier itself. In any event, it is assumed that the OEM sales are excluded from the total project, since they contribute little, conservatively, to the overall profit of the project. Of course, during the third phase of the project, that is, the production phase, software and hardware development must continue. Design flaws reported by service personnel must be attended to. In order to extend the life of the product, additional functionality and featuresperhaps performance enhancements in hardware and softwaremust be made available, perhaps taking advantage of new logic parts unavailable to the original designer. A good deal of this continuing development effort is focused on extending the life of the product and broadening its market applicability. |
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2.5.4 Phase 4: All Good Things Must Come to an End |
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Despite continuing development effort, the product cycle closes when new products have been introduced that generally supersede the capacity/functionality/performance of the existing products. Hitherto we have said nothing about service other than recognizing warranty costs. This is because equipment service is its own profit center. Customers purchase service either through a contract or as required, and through these service calls the service department remains a profitable sub-venture. Long after the last machine has been shipped from the factory, the service department retains a parts inventory to support the product. |
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The bottom line is: did the project make a profit? From the preceding, it is easy to see how sensitive the project is to the product life and to the number of products shipped. If market forces or competition are aggressive and produce rival systems with expanded functionality and performance, the project life may be shortened and deliver only 5,000 units. This could be disastrous even though the ultimate manufacturing cost has been reached well within the 5,000-unit schedule; there are simply not enough units over which to amortize the fixed costs to ensure profit. On the other hand, if competition is not aggressive and the follow-on development team is successful in enhancing the product and continuing its attractiveness in the marketplace, the project can be one of those rare jewels in a company's repertoire, bringing fame to the designers and smiles to the stockholders. |
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