In previous articles, we've examined what constitutes a successful NPI. To summarize: an NPI or product launch is successful when a brand makes the most profit possible for that product. This leads to the question:
What is the greatest amount of profit an NPI can generate?
Since profit is determined by two values, expenses and revenue, we will explore each independently. In this article, we will examine NPI expenses and answer the question:
What is the least amount of money that can be spent on an NPI?
Consider the term expenses to mean all the money spent on the launch of a new product. These costs include expenses on manufacturing, marketing, logistics, design, fulfillment, etc. Depending on the business and product being launched, the relevant categories of expenses can change. To simplify the distribution of costs, we consider only two types of expenses: fixed and variable. In this context, these terms may take on slightly different meanings that what you may be used to.
As mentioned in previous articles, the maximum amount of profit a product launch can generate for a business is limited by the NPI plan. Therefore, we define fixed costs as those which are anticipated by the NPI plan. Some examples of fixed costs include:
At the beginning of the NPI process, there is a lot of opacity in the cost of these critical parts of bring a product to market. To mitigate this, businesses will form contracts with contract manufacturers, logistics providers, freight forwarders, and others to guarantee a particular price for the service provided. Often times however, final spending in a particular category is wildly different than projected spend. This is because things don't always go as expected. Problems arise, errors happen, etc. Therefore, it is important to note that fixed costs only comprise of the expected costs for a given NPI program. If the NPI is executed exactly as planned, there should be no differences between actual expenses and the forecasted fixed costs. In the event that thing's do not go entirely to plan, the difference between a forecasted fixed cost and its true end result is captured in variable costs.
When things do not go according to plan, costs change. Last minute changes often give way to large, unexpected charges. For the purposes of this discussion, the sources of these last minute changes can be categorized as either forced or unforced disruption. A forced disruption is that which is out of the control of the business but affect the business' ability to execute the NPI plan all the same. Some examples of forced disruptions:
- Due to diplomacy issues, national borders separating material supplier and contract manufacturer are closed → forced to find alternative material supplier in different region on short notice, likely yielding higher costs and potentially worse quality
- Unusually high maritime piracy force critical part of shipping route to be temporarily closed → shipping times double, forced to invest in air freight to meet deadlines
- Global pandemic changes product demand in unexpected ways → forced to adjust production volume last minute and pay higher unit costs
Alternatively, unforced disruptions are those which are produced by a failure of NPI planning or execution. Some examples of unforced disruptions:
- Manufacturing is delayed by inefficient design and engineering → forces business to spend in a number of ways to speed up remainder of timeline or compromise and delay entire timeline, thereby making less money relative to what is expected
- Demand for the new product is under forecasted → forced to change order volume with manufacturer on short notice, increasing unit costs and potentially delaying successive milestones
- Inefficient and fragmented communication between internal teams causes confusion and misalignment on broader NPI plan → requires ad hoc brute forced solutions to any number of issues , usually requiring investment of labor time an extra resources
We consider costs like these as variable because they vary relative to the forecasted expenses. Simply put, variable costs are those which are unplanned. Additionally, we consider all in-house labor costs to be variable. This may not seem to fit into our definition of variable costs however, when we observe in-house labor through the lens of efficiency, we see that zero labor hours spent on NPI is equivalent to a business' employees operating at 100% efficiency. Therefore, assuming our plan for NPI includes being as efficient as possible, and that the most efficient one can be is 100%, then it is natural to define any internal-labor as unexpected. Therefore we consider labor costs as variable.
By separating NPI costs into these two buckets, we have an opportunity to think about each independently. Fixed costs are a product of the NPI plan. In this way, a better plan means lower costs. Variable costs on the other hand, are a product of how well the NPI plan is executed. When mistakes are made, when work is done inefficiently, when circumstances out of your control disrupt your product, costs go up.
The question asked at the beginning of this article was about how to cut costs on NPI. Since, in this framework, fixed costs are those which are inherent to the NPI plan, the only way to reduce the amount of money spent on an NPI is to minimize variable expenses. In future articles, we will explore common sources of variable costs and best practices for eliminating them.