Secrets of Product Cost Estimation (Prior to Design)! Part 2

Part 2 – Bits and Pieces, and Why 

Bits and pieces

The last portion of the cost can be attributed to medium-ish parts, and the mundane; fasteners, assembly, labeling, packaging, etc.  While this category represents about 20% of the cost of a product, it is also about 80% of the quantity (# of parts) of the product.  The lesson here is don’t waste your time trying to count or estimate it all line by line; estimate in bulk as much as possible.

I’ve done a lot of cost estimating on products “similar” to lawn and garden tractors.  For the last 20%, I typically focus on estimating items likely to cost between $.75-$1 and the 80% items from Part 1.  This last cost threshold will vary by product and industry.  But make a pass through your design focusing on items like adapters, connectors, springs, handles, bezels, smaller custom parts, etc. - what I like to call “in-between” parts.

At this point you have the 80% from part 1 and about another 10% from above.  This is where the single item awareness ends and you go for bulk.  In theory, you should have about 90% accounted for, so, you guessed it; add again the 10% from the “in-between” items to account for the fasteners, washers, adhesives, decals, etc. 

Since this is not an exact science, it is a good idea to add another 5-10% contingency, especially if the new product is pushing some boundaries for you - as in if it is your first time estimating or for a new business segment.  Mid-term, you can probably work this last 5-10% back out with some cost reduction efforts, so it may be reasonable to use your estimate sans contingency as a year-2 cost estimate.

Ask why

Don’t just stop once you have received a quote for custom or off-the-shelf items.  Ask questions!  What kind of questions?  Well, you want to find out not just how much, but why the cost is what it is.  You want to know what are known as cost drivers.  By having a discussion with your vendors, you can ask them things that can inform your design team as to where they might be able to impact the product cost.  Here are some old standbys:

-  “What tolerances, or specifications could I change that would reduce your cost?”

-  “Am I asking for anything that is not standard for you?”

-  “Do you have any similar parts that cost less?”

 You should already have a non-disclosure agreement (NDA) with your vendor so share with them where and how the part is used.  They will gain a better understanding of the components’ use and may be able to offer suggestions on incorporating other parts or features that could save money elsewhere.

Confidence Level

I tell customers at this point I have a product cost estimate with an 80% confidence level.  There is no substitute for real data, which you will have eventually, but the knowledge at this point is great for making some early decisions; how much does version A cost vs. version B.  Or is this going to cost twice what the business model will support.

Ask questions or let me know if you need help with your early stage cost estimating!