Case 1: SmartCOM, Inc. SmartCOM, Inc. manufactures internal modems for use with personal computers (PC). A modem is a device that allows a personal computer to communicate with other computers or fax machines through ordinary phone lines. The company is working with a PC manufac- turer who is thinking of bundling the SmartCOM modem as a standard component with each new PC. SmartCOM's marketing manager has determined that PC buyers would be willing to pay $110 for a modem. The cost to the PC maker of installing and testing the hardware and the software is $25. In addition, the PC manufacturer requires a 10 percent return on sales. The net selling price that SmartCOM can charge the PC maker, therefore, is $74. Research conducted jointly by the PC maker and SmartCOM's marketing personnel shows that customers want six features. These are: (1) ability to communicate at high speeds, (2) ability to send and receive clear faxes, (3) error-free communication over "noisy telephone lines, (4) voice mail capability for multiple mailboxes, (5) compatibility with most brands of PCs, and (6) ability to work in the background. Based on this research, SmartCOM's engineers have come up with a modem design that uses four main modules: (1) a converter module that would convert digital signals into analog signals so they can travel over standard phone lines; (2) a fax module that would provide the capability to communicate with standard fax machines; (3) a voice module that would take messages for multiple voice mail boxes; (4) a processing module that would direct traffic to the right place, that is, to the computer, fax/printer, or voice recording/ playback chip. Each module has several major components. A list of the major components in each module, together with preliminary cost estimates for manufacturing or buying each component, appears in Table 1 below. Table 1 Cost Estimate for SmartCOM Modem Module Component Quantity Cost Cost of Each $8.00 1.50 Converter Signal processor Phone I/O chip $8.00 1.50 Fax Interpreter chip Printer 1/O switch Fax signal chip 2.50 1.50 4.50 3.00 5.00 2.50 1.50 4.50 Voice 3.00 5.00 Processor Amplifier Voice chip Bus controller chip CPU Memory chips 1/O controller - 3.00 20.00 2.00 7.00 3.00 20.00 16.00 7.00 0 Total cost $72.00 In addition to the above, the marketing department estimates that order filling (primarily order processing and delivery) costs would run $4.00 per unit. General and administrative costs are expected to be $14.00 a unit. SmartCOM expects to earn a 15 percent return on sales. SmartCOM's engineers have determined the relationship or contribution of each of the various functional components to customer features. This relationship is shown in Table 2 below. Table 2 Function-Feature Mapping for SmartCOM's Modem Importance to Feature Customer Component % Contribution to Feature High speed 40 10 50 Send/receive faxes 40 40 20 Error-free communication 60 CPU Bus controller Phone I/O chip Fax signal chip Interpreter chip Printer I/O switch Signal processor Phone I/O chip Amplifier Voice chip CPU Signal processor Memory chips 1/O controller 40 Voice mail 40 60 Compatibility with PCs 70 30 Background operation 50 Required: a. What is the overall target cost for the modem? What is the target for the manufactur- ing cost of the modem? b. What is the cost gap between allowable and current cost? What is the gap for the manufacturing cost? c. Calculate a value index for the components of the modem. d. For each component, indicate what action is implied by the value index. e. Explain how value engineering can help in closing the gap between allowable and achievable target costs for the modem. List some of the major ideas you would con- sider for cost reduction. Case 1: SmartCOM, Inc. SmartCOM, Inc. manufactures internal modems for use with personal computers (PC). A modem is a device that allows a personal computer to communicate with other computers or fax machines through ordinary phone lines. The company is working with a PC manufac- turer who is thinking of bundling the SmartCOM modem as a standard component with each new PC. SmartCOM's marketing manager has determined that PC buyers would be willing to pay $110 for a modem. The cost to the PC maker of installing and testing the hardware and the software is $25. In addition, the PC manufacturer requires a 10 percent return on sales. The net selling price that SmartCOM can charge the PC maker, therefore, is $74. Research conducted jointly by the PC maker and SmartCOM's marketing personnel shows that customers want six features. These are: (1) ability to communicate at high speeds, (2) ability to send and receive clear faxes, (3) error-free communication over "noisy telephone lines, (4) voice mail capability for multiple mailboxes, (5) compatibility with most brands of PCs, and (6) ability to work in the background. Based on this research, SmartCOM's engineers have come up with a modem design that uses four main modules: (1) a converter module that would convert digital signals into analog signals so they can travel over standard phone lines; (2) a fax module that would provide the capability to communicate with standard fax machines; (3) a voice module that would take messages for multiple voice mail boxes; (4) a processing module that would direct traffic to the right place, that is, to the computer, fax/printer, or voice recording/ playback chip. Each module has several major components. A list of the major components in each module, together with preliminary cost estimates for manufacturing or buying each component, appears in Table 1 below. Table 1 Cost Estimate for SmartCOM Modem Module Component Quantity Cost Cost of Each $8.00 1.50 Converter Signal processor Phone I/O chip $8.00 1.50 Fax Interpreter chip Printer 1/O switch Fax signal chip 2.50 1.50 4.50 3.00 5.00 2.50 1.50 4.50 Voice 3.00 5.00 Processor Amplifier Voice chip Bus controller chip CPU Memory chips 1/O controller - 3.00 20.00 2.00 7.00 3.00 20.00 16.00 7.00 0 Total cost $72.00 In addition to the above, the marketing department estimates that order filling (primarily order processing and delivery) costs would run $4.00 per unit. General and administrative costs are expected to be $14.00 a unit. SmartCOM expects to earn a 15 percent return on sales. SmartCOM's engineers have determined the relationship or contribution of each of the various functional components to customer features. This relationship is shown in Table 2 below. Table 2 Function-Feature Mapping for SmartCOM's Modem Importance to Feature Customer Component % Contribution to Feature High speed 40 10 50 Send/receive faxes 40 40 20 Error-free communication 60 CPU Bus controller Phone I/O chip Fax signal chip Interpreter chip Printer I/O switch Signal processor Phone I/O chip Amplifier Voice chip CPU Signal processor Memory chips 1/O controller 40 Voice mail 40 60 Compatibility with PCs 70 30 Background operation 50 Required: a. What is the overall target cost for the modem? What is the target for the manufactur- ing cost of the modem? b. What is the cost gap between allowable and current cost? What is the gap for the manufacturing cost? c. Calculate a value index for the components of the modem. d. For each component, indicate what action is implied by the value index. e. Explain how value engineering can help in closing the gap between allowable and achievable target costs for the modem. List some of the major ideas you would con- sider for cost reduction