Introduction to IM Case

Most literature reviews conclude that product development time is an important determinant of
new product profitability (e.g., Chen et al. 2005). Previous empirical research shows that
development time affects new product profitability through its relation with development costs
(e.g., Gupta et al. 1992) and through its positive association with new product sales (e.g., Bayus
1997). Moreover, prior empirical research suggests that these effects are contingent upon new
product characteristics such as product performance (Langerak et al. 2008). A common problem
for development teams at the start of a development project is deciding upon the projects
specifications in terms of its performance, development time, development costs, market entry
timing, and new product sales (e.g., Calantone and Di Benedetto 2000; Swink et al. 2006). This
profit maximizing decision making is even more difficult when the development team discovers
during project execution that the development project is running behind schedule.
The specific context for this Case Assignment comes from product development projects that
incorporate asymmetrical uncertainty: on the one hand, because product development projects
are uncertain and complex, workload is almost always underestimated in the beginning, and on
the other hand, project team size is usually overestimated because it takes more time than
expected to assemble a productive team. Underestimation of workload is caused by e.g. customer
preference uncertainty (Bhattacharya et al., 1998) leading to extra work when new customer
requirements are added to the existing workload, by technological uncertainty leading to extra
work to develop alternative conceptual solutions (Krishnan & Bhattacharya, 2002), or by rework
to correct development errors (Repenning, 2001; Lyneis and Ford, 2007). Assembling a
productive team takes time because of hiring and assimilation delays (Sengupta et al., 1999), or
because of turnover (Moore, 2000). As a consequence, it is likely that the project starts with an
understaffed team.
An understaffed team and an underestimated workload will lead to project delays. Research
indicates that a significant number of development projects dont adhere to the schedule (e.g.,
Griffin 1997). Making effective project interventions to deal with this unanticipated project delay
is often hampered by fallible mental models that development teams use to simplify decisionmaking (e.g. Sterman 1989; Abdel-Hamid and Sengupta 1993; Croson and Donohue 2006).
These models are applied because a comprehensive assessment of multiple tradeoffs is simply
not feasible (Roemer et al. 2000). Another difficulty is that decisions for projects that run behind
schedule are particularly susceptible to the problem of escalation of commitment, which refers to
the development teams continuation in a failing course of action (Biyalogorsky et al. 2006). As
such, mental models and escalation of commitment are a serious problem for making
adjustments to development projects that run behind schedule.
Despite the need to intervene, development teams tend to exhibit decision inertia by sticking to
the specifications set at the start of the project (Schmidt and Calantone 2002). These phenomena
can be disastrous for new product profitability because being behind schedule requires accurate
project interventions and adaptability on the part of development teams. Little is known how
development teams that inevitably suffer from these biases and inertia should make decisions to
adjust projects that run behind schedule.

The assignment
Suppose you are hired as an external consultant by an organization that is starting to develop a
product for the consumer market. Your main assignment is to study the product development
project from a dynamic perspective, and in particular, to provide alternative scenarios for the
team when delays are discovered.
Therefore the objective of this Case Assignment is to derive, specify and test a model for a
project running behind schedule that determines appropriate interventions during the project
across the performance metrics (time, costs, quality) to optimize new product profitability.
The product development team can respond to delays in the project in a number of ways
(intervention decisions):
1. Doing nothing, simply be late, increasing project costs, and take the loss of customers
that are not willing to wait and buy the product from a competitor.
2. Hiring extra team members, increasing project costs, while speeding up the development
rate as soon as these new team members are productive.
3. Reducing product performance, decreasing project costs (the product becomes less
attractive, less difficult to make, reducing workload), while decreasing the number of
potential customers (because of the decreased attractiveness of the product).
4. Increase both product performance and team size, increasing project costs and probably
time, but also increasing the number of potential customers (because the attractiveness of
the product is increased).
It is your task to advice the team which intervention decision is best at what time of the project.
Note that the best alternative is probably a function of the elapsed development time. When the
team discovers a delay in the beginning of the project, the most suitable intervention decision
probably differs from the intervention decision that is required when the delay is discovered at
the end of the project.
Of course the main goal for the organization is to make a profit. Profit is defined here as the
difference between revenues (actual customers that bought the product * sales price per product)
and costs (resource costs of the development team). You can assume that no production or
marketing costs are made (outside the scope). The product life cycle is short. Only three years
after the start of the product development project, the product is obsolete and no customer will
buy the product anymore. This means that the market window (number of weeks that the product
is actually sold to customers) is equal to 3 years minus the development time.

The Projects Specifications

-

Scheduled Development Time (SDT) = 60 weeks

Planned Team Size (PTS) = 10 persons

Planned Product Performance (PP) = 1.45 (in which 0.5 PP 2)

PP = 1 means that the product is similar to products that are already on the market. So the
higher the PP, the better the product is compared to products of the competition, and the
more potential customers (PC) the company can interest in buying the product. This
relationship is reflected in the following equation:
Initial Potential Customers = PC(0) = 10000*PP

Besides PC, also the sales price (sp) is dependent on the PP. The higher PP, the higher
the sales price customers will be willing to pay for the product. This is reflected in the
following equation: sp = 41.72 * PP [euro/product]

The labor costs of Rookie Engineers is 750 [euro/person/week]

The labor costs of Experienced Engineers is 950 [euro/person/week]

The time that an experienced engineer requires on average to develop 1 task is 4.18
[weeks/task/person]

A rookie engineer needs on average 67% more time to do a task.

Each rookie needs to be supervised by one experienced engineer. This supervision costs
the experienced engineer 20% of his time (for each rookie). So, 1 experienced engineer
can supervise a maximum of 5 rookies.

The project uncertainty (pu) is 33%. This means that at the start of the project 33% of the
final workload is not yet discovered. The number of tasks that are discovered (Project
Tasks in Execution (TE) in the beginning is: TE(0) = (1-pu) * 100 * PP. The number of
project tasks that are undiscovered (UT) in the beginning is: UT(0) = pu * 100 * PP.
These undiscovered tasks are gradually discovered during the project. The average
discovery delay of these undiscovered tasks is 12 weeks.

When project tasks are executed, they flow to the state Project Tasks Finished (TF). As
soon as > 99% of all tasks (= 100 * PP) are finished, the project is considered to be
complete and the developed product can be sold to customers that are ready to buy the
product.

Approach
In the book of Sterman (2000) the five steps of the modeling process are given. The first step
(problem articulation) is already described in the text above. Therefore, in this assignment, we
will only focus on steps 2 to 5.
You will need to make additional assumptions (other than the ones given in this document),
these assumptions must be made very explicit in your report!
1 Make a causal loop diagram, with the main variables and feedback loops, loop and link
polarities. (max 15 points)
a. Your causal loop diagram has to consist of at least: the hiring loop and the product
performance loop (but there are more loops in this system of course). Both loops are
triggered by the variable pressure to intervene (PI) which is determined by the
Feasible Development Time (FDT, according to the team, based on the latest
information on the project) and the Scheduled Development Time (SDT, the time
originally scheduled for this project, which is equal to 60 weeks). So:
PI = FDT/SDT
b. Explain the diagram in words, explain why links are positive or negative, and explain
why loops are positive or negative.
c. Explain what is so special about the product performance loop (hint: use the
interventions described on page 2).
2 Develop a complete stocks and flows structure (i.e. a system dynamics model) of the
described project management problem. Your model has to include the following processes
(and of course the variables that connect these processes): (max 30 points)
a. The product development process. You can assume that product development tasks
are in one of the following three states: undiscovered project tasks (UT), project tasks
in execution (TE), and project tasks finished (TF). You can also assume that all tasks
that are developed are correct, so there will be no rework. Explain why these stocks
are necessary.
b. The human resource process. You can assume that when team members are hired,
they are rookies and after on average 20 weeks, they will become experienced. The
hiring delay is approximately 12 weeks. Because SDT is only 60 weeks, you can also
assume that no team member quits the team during the project. At the start of the
project, the team consists of 6 experienced members. The rest needs to be hired.
Explain why these stocks are necessary.
c. The customer ordering process. You can assume that customers are in one of the
following four states: potential customers (PC), customers that are ready to buy
(CRB), actual customers (AC), lost customers (LC). Explain why these four states are
necessary in the model.
- The customer readiness rate (crr) in which customers flow from PC to CRB is:
crr = (TM - PC) * pcc * wom, in which:
TM = Total Market = PC + CRB + AC + LC
pcc = potential customer concentration = PC/TM
wom = word of mouth factor = 0.1939 [per week]

- Because the crr is in this situation only determined by the wom (and not by some
exogenous advertising effectiveness), the CRB(0) has to be a little bit greater than
0. Therefore, we define: CRB(0) = 0.00338 [customers].
- If the project is not finished by the time customers are ready to buy the product,
these customers immediately move to the state LC. Otherwise, they buy the
product, become actual customers and move to the state AC.
d. The process of estimating the FDT. FDT is modeled as a stock, because it is the
perception of the team of what development time is feasible. The net flow is
influenced by the known or discovered development tasks that are in execution and
the productivity of experienced engineers and the planned team size. Explain why
these three variables influence the net flow. You can assume that the perception
adjustment delay is 4 weeks.
3 Determine the equations used in stocks, flows and variables (motivate the assumptions you
made, if these assumptions are not given in this document already). Also clearly state what the
values are of the exogenous variables (the ones that you invented yourself and were not
given). Furthermore, make sure the units are correct. Provide a list of all the equations in the
appendix of your report. (max 10 points)
4 Design the scenarios that you will simulate to examine the problem statement (max 15 points)
5 Formulate your advice to the project team. Indicate to what extent your advice is consistent to
common practice (which is intervention decision 1: do nothing, simply be late). (max 20
points)
6 Test the robustness of your advice to at least 3 of your assumptions (test to what extent your
advice changes if you change the values of your assumptions). (max 10 points)
So, in total, you can earn 100 points for this assignment, leading to a grade 10. Together with the
grade for the multiple choice test, and the grade for the poster session, this will determine your
final grade for the System Dynamics course (see the study guide for specific information on
this).
Please note that there is not one correct, exact answer! Therefore, motivating the choices you
made in developing the model and making the assumptions is VERY important!
Your assignment report, together with a working System Dynamics model, is due on December
21, 2014, before midnight. Please send in your report and model by email (b.walrave@tue.nl) mention your group number in the subject field!.
When your report & model are delayed, at least 10 points will be subtracted from your
assignment score (the longer the delay, the more points will be subtracted).
The Q&A sessions:
If you encounter a problem during the assignment, or you want to have feedback on your model,
you can register for a Question & Answer session (see http://www.bobwalrave.com/registration-

qa-sd/). The available hours are split into 15 min blocks (in order to prevent long queues during
these sessions). Note that for every Q&A session there are 14 slots available (FULL = FULL).
Also note that there will be a poster discussion session. Please see the study guide for more
information.

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