Step 1 Prepare a Reverse Income Statement

The income statement establishes the basic viability of the business. It is reverse because one starts with the required profit from the product. This is a foundation principle of discovery-driven planning. It requires that product strategists have such a goal in mind as they authorize products for development. Planners, using the profit objective, work backward to the required costs and revenues. In doing this, they arrive at supply chain cost limits for manufacfuring, materials, and distribution. 

In our view, an important decision in this process is whether the product is functional or irmovative. Functional products require different supply chains from innovative ones. We discussed the difference in Chapter 6. If the product is irmovative, the planning approach needs to estimate the market mediation costs. These are the costs that arise from mismatches between supply and demand. For example, shortages cause loss of contribution from sales — one type of market mediation cost. Overstocking can lead to product markdowns — another such cost. 

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