Risk Reduction via Prototyping in Customized Product Development

Abstract

Risks are inherent in customized product development for both customers and manufacturers due to their inability to accurately articulate requirements and estimate costs, respectively. The presence of risks creates transactional barriers when decision makers are risk averse. Prototyping, commonly used for customer requirements elicitation and manufacturing cost estimation, is interpreted in this paper as a means of risk reduction and modelled via a Bayesian estimation process. A quantitative risk model is subsequently developed to investigate the investment decision upon prototyping, taking into consideration the fidelity and cost of the prototype. This paper provides a decision framework for practitioners to understand and manage transaction risks in customized product development.