How do you determine electronic design & component costs before the product is even designed?

Author : Jonathan Hawkins, Director at Newbury Innovation

20 September 2018

Rather like the question, ‘how long is a piece of string?’, this classic chicken and egg question does not have a clear answer. However, it is a conundrum that designers, and the companies they engage with to produce their next great idea, have wrestled with for many years. This piece offers an alternative approach.

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If a new product is going to cost too much to manufacture and deliver to market, then you are not going to have a business. This stark reality rings true whether you are selling thousands of light bulbs, at a relatively low unit price – or the highest spec jet engine, where sales may be in single figures per annum, but the value of each is hundreds of thousands of pounds. But, maybe now is the time for both product designers and electronic design companies to take a fresh look at this age-old problem.

There are alternative approaches – and if handled properly, an enlightened approach can bring benefits to both parties.

Every designer knows that, however good his or her design is, if it is not a viable business proposition, they will need to think again. The first two questions that nearly every electronic design service will hear in the initial meeting are:

• Can you design/produce this product?

Followed closely by,

• How much is it going to cost to manufacture?

This is when the alarm bells begin to sound: you might know you can design the product – after all, the only real limit to design is imagination and the laws of science! What you can’t tell, and what causes problems, is the overall cost of the finished product. Over the years, the compromise has been to design to so-called target costs. These target costs are typically roughly one third of the desired market price.

With such an approach, there should be enough opportunity for markup for each of the various stages to market to take their cut, but the final price also makes the finished goods a viable purchase for the ultimate customer. The main limitation of this method is that no one knows until it is in the design process what the final manufacturing costs are going to be and, more often than not, that one third limit is exceeded. This leads to disruption in the project and further decision making that usually results in one of the following:

• A re-design of the product

• The entire project being shelved

• Acceptance of a smaller return

• An increase in the final market price

Communication about manufacturing costs sometimes boils down to a statement of expectation at the onset of a project, to which all the parties agree. The problems occur when there is little or no interaction regarding costs until everyone is gathered around the table for the delivery of the first prototype – at which time there may be a shock because the cost isn’t in line with the expectation that was put in place in that initial meeting.

The monitoring and sharing of cost information must be as integral to the product as technical reviews of function and performance, and should be reviewed and acknowledged throughout the development process. It is this approach that encapsulates the idea of ‘pseudo costing’.

Pseudo costing: a fresh approach

Costing must begin during the specification phase, albeit based on the engineer’s estimates of what will be needed, and then continue through design, manufacture and testing. In the case of a hypothetical new smart biro, the pseudo costing would include the spring, the plastic casing, the ink, as well as the electronic components to connect it to the IoT, plus assembly costs.

Once this has been collated, you are able to present the client with a pseudo bill of materials (BOM), to which other elements may be added as the process progresses. If this is done well, the final figure should be within +/-10% of the actual cost, which should allow the customer to go back and answer the second half of their original question regarding manufacturing costs – and then decide whether further investment of time and money is viable.

The benefit to the customer is that it allows for far more robust business planning from the earliest stages of the process. They may save themselves from far greater financial loss by investing a relatively smaller amount earlier on, than if they were to forge ahead to a later stage in the process before realising the error of their ways.

Another way of describing this pseudo cost is as a ‘living cost’, which is applied and measured as the design and development process evolves. If you decide to use a recycled paper shaft rather than a 3D printed casing for the biro, then the pseudo cost will be impacted and the repercussions of this can be clearly visible.

Pseudo costing should be regarded as the financial guiding light for any project. When sight of cost is lost, there can be unexpected hits for both the client and the designer, but when its value is recognised, it becomes a valuable framework for the future commercial development. There will then come a point in time when the pseudo costing becomes the genuine cost.

The benefits to the customer are clear, but how does this approach aid the electronic designer? A financial benefit may be hard to discern, although the service to generate this bill of materials would incur a fee. The other benefits are harder to measure, but it builds a far stronger relationship with the customer, who can see you are invested in their interests, and professional and committed to the delivery of a successful project.

It is estimated that nearly 80% of all new projects would benefit from taking this fresh approach. But improving the quoting process and the transition to manufacturing doesn’t need to stop here. With better integration of tech design and CAD software with proven budgetary management software packages, other problems that are frequently encountered along the route to market could be improved, if not completely resolved.


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