IV. Advanced method: manufacturing cost analysis

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Understanding the cost structure designed into a product is important for deciding what portion of a design is more appropriate for detailed cost-reducing design activity and for comparing different design concepts. To do this, basic product cost accounting will be covered, followed by cost models for the various portions of the cost model, including part costs and assembly costs.

The design for manufacture and assembly philosophy underneath cost analysis is to determine how the product delivery major costs compare with the competition. Major cost drains can arise from material procurement, part production, assembly, or finished product delivery.

The design for manufacture and assembly cost-based redesign activity itself should be thought of in terms of an 80-20 rule: 80% of the cost reduction can occur in the top 20% of the relative high cost drains within a product. One can attain 80% of the possible cost reductions through the design-for-assembly simplification of a few key systems, design- for-manufacture redesign of a few expensive components, and adequate bidding on expensive purchased original equipment manufacturer (OEM) components.

Cost Driver Modeling

Manufacturing cost is the sum of all expenditures to purchase inputs and dispose of outputs to the manufacturing system. This includes raw materials, purchased components, employee's efforts, energy, equipment, maintenance materials, and plant disposal costs. A metric of cost commonly used is a unit manufacturing cost, which is the total manufacturing expenses over a period divided by the number of units produced during that period.

Several system modeling issues complicate this approach:

• What are the boundaries of the "manufacturing system"? Do we include product development costs, for example?

• How do we charge a product for equipment that is only partially used for this product?

• How do we charge a product for equipment inherited from past products?

Nonetheless, one can consider an average situation and develop a reasonable model for comparing product design alternatives.

Manufacturing Cost Accounting

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Typical managerial cost modeling separates an activity's cost into fixed costs and variable costs. Fixed costs are those that do not change in direct proportion to production volume, such as the cost of equipment. A mold for a plastic injection molding machine is a fixed cost; it is needed whether a thousand or a hundred thousand are produced. Variable costs are those that grow in direct proportion to production volume. Material cost is a variable cost. This fixed/variable cost breakdown

is fuzzy. Sometimes labor is considered fixed: You must hire a person to do the work. Sometimes labor is considered variable: You can hire a number of persons proportional to your production.

For product development purposes, a more effective breakdown is to consider costs according to physical manufacturing processes. Each of these can then be costed and different processes considered. As shown in Figure 14.14, we will form a contributing manufacturing cost breakdown

consisting of:

• Piece part costs. This covers the costs of both parts made and bought from suppliers.

• Assembly costs. This covers the costs of assembling the parts into the product.

• Overhead rate. This covers the costs of supporting direct production of parts and assembly.

A product typically contains many subassemblies that are purchased as custom assemblies, or OEM parts. In our costing approach, we model these as individual component costs, much like a material cost.

Note that this includes only the costs of producing the units. Beyond these manufacturing costs, there are remaining costs that complete the retail price. The product must be put in a box for shipping. It must be shipped. These costs might need to be considered, for example, if different labor markets in different geographic locations are used. They will have different levels of production expertise, and that impacts the product design. The design of a product fabricated in the United States is typically far different from the design of a product where labor rates are much cheaper.

Cost Modeling

The basic approach we will take to cost modeling different manufacturing processes is to consider cost drivers. A cost driver is a configuration or process variable that largely determines the cost of the process. A cost model as a performance metric can be constructed in terms of the cost drivers. This will be true no matter the level of analysis completed and no matter which processes are examined.

For example, consider piece part production costs. If the piece parts are OEM parts, the unit price the manufacturer pays is the obvious cost. This can be determined by obtaining quotes from vendors. A crude model is to look up the retail price in a catalog and apply a discount factor for volume purchase. Note also that often OEM parts can be checked for reasonable quoted prices through cost analysis, an important activity for many companies to ensure fair pricing.

On the other hand, parts fabricated by the manufacturer require a better model. We will consider part costs in three categories: material cost, tooling cost, and production costs. Material costs are the costs of the raw materials for the part, generally expressed in price per pound. For plastic parts, this is the cost of the plastic pellets. A basic formula for material costs is

Tooling costs are the fixed costs to buy the equipment to convert the

material into the finished part. As an example, for injection-molded parts, this is typically the cost of the molds and their replacement. Other examples are dies and fixtures. The cost includes the cost to design and fabricate the tooling. A basic formula for tooling cost is

Tooling costs are fixed costs. Note that the costs of capital equipment are usually included in the overhead. Capital equipment is the large equipment that is used over many products, such as the factory floor, the machinery that molds or dies are fitted in, and so forth.

Set-up costs are the costs to set the machine up to begin a batch of production. The mold must be attached to the injection-molding machine, the runner system must be purged, and so forth. Set-up costs are fixed costs.

Processing costs are the labor and maintenance costs to keep the equipment running. The maintenance component is often estimated by either increasing the labor rate or by incorporating it into the final overhead. A basic formula for processing cost is

Piece part costs can be reduced if features that require difficult tooling can be eliminated. If such changes do not affect the product performance, the economic success of the product can be increased by such design changes.

Next, consider assembly costs. Mechanical assembly is almost always done manually for quantities of less than several hundred thousand. A basic formula for manual assembly cost is

Mechanized assembly is similar, with the addition of the fixed tooling costs. For manual assembly, assembly costs are often dominant. Further, with manual assembly, quality is in large part determined by the assembly of the piece parts, not by the individual piece part quality. For these two reasons, designing a product to minimize assembly difficulty has become an important factor for design teams.

All of these costs can be readily measured and accounted for. These costs are therefore often called direct costs; they can be directly identified. All other expenses a manufacturer has are indirect costs, or overhead. These include costs such as administration, insurance, very large equipment, and so on. The means to determine overhead costs are fuzzy; by definition, overhead is used to cover the quantities that assigning a direct cost to is too difficult to bother with.