Developing the Background Information Cost Estimating for Electronic Products

An accurate cost estimate for electronic products is dependent on many factors:

• Development schedule realization. The cost estimate should improve as a new product moves closer to production. In addition, the timing of the product introduction might influence the sales forecast, especially if there is new technology incorporated in the design. The cost estimate plans should include provisions for aggressive (50%) as well as standard new product introduction schedules (90% probability of realization).

• The sales forecast should be as accurate as possible. The marketing department should include up and down sales potential, competitive analysis, and price performance curve strategies. These help in selecting the optimum manufacturing strategy in equipment and tooling and hence determine the appropriate cost structure of the product.

• Nonrecoverable expenses (NRE) should be quantified, including tooling and capital equipment costs. A determination should be made whether some of those costs could be shared with other products or resources in the form of a cost center that allocates an overhead or burden rate to other products that use the NRE tools and equipment. A depreciation schedule and methodology, whether straight line (SL) or sum of the years digits (SOYD) should be agreed upon. Typically, 3-5 years and SL are used.

• The bill of materials (BOM) should be as complete and up-to-date as possible. It should include provisions for options, raw materials, and identified suppliers. Nonidentified suppliers should be investigated and estimates of material costs as well as reliability studies initiated. In addition, there should be a material cost reduction program for developing lower-cost material alternatives to the current BOM. These materials may be substituted when newer technology is available or when lower-specification materials might offer COD1* parable performance in the product. A good target for such a program is 3—5% cost reduction per quarter after release to manufacturing. Material volume discount schedules should be available and readily incorporated with the forecast into the cost structure.

• The product routing scheme should be reasonably developed. The routing includes all of the manufacturing operations or steps necessary to fabricate, assemble, inspect and test the product. A determination should be made whether intermediate steps in the product assembly should be treated as line fabrication items with no inventory control points or as subassemblies. It is always desirable to have the minimum level of assembly to reduce assembly time and cost as well as lower inventory requirements.

• The direct labor needed to produce, assemble, inspect, and test the product should be accumulated for each manufacturing step. The amount of labor needed is dependent on other factors such as outsourcing, which turns in-house labor into purchased materials, the use of tooling, level of automation, and production volume based on the marketing forecast.

• The overhead rate for the product and whether it is different than the typical overhead rates for the product family should be determined. The overhead should include provisions for equipment and workspace allocations, special requirements due to energy and environmental considerations, and special skills needed to manufacture and technically support the product. As materials might con- tribute significantly to product cost, and because of the increasing trend toward outsourcing, several overhead rates can be applied, including one for material and another for labor. Material overhead should include costs for material warehousing, obsolescence, purchasing, and inventory control.

• The quality plan for the product, including the quality goals (six sigma or a certain level of Cpk), costs of expected yield, rework, scrap, inspection, and testing. The defects imparted by the raw materials suppliers should be added to the defects inherent in the design as well as those incurred in production. A test strategy is then developed for the optimum removal of these defects.

• General and administrative costs, including royalties paid to corporate R&D investments, profit margins, and provisions for taxes and reinvestment.

• Startup costs. These should include costs for design revisions, equipment and tooling debug, and support costs for additional technical and material support during the prototype and beta production phases of the product.

• A typical cost distribution of an electronic product is given in Figure 6.2. The cost estimates are regularly updated during the different phases of product development, due to increased clarity about the selection of components and manufacturing processes, and the resulting fallout in the costs of material, labor, overhead, depreciation, administration, and yield of the new product. The cost information collected during these stages can help in understanding the impact of design decisions made. This effort might be spearheaded by a representative from the financial part of the organization temporarily assigned to the design team.