DRAGON INNOVATION, INC.

DESIGN FOR MANUFACTURINGCOURSE 12: COSTING

COGS, BILL OF MATERIALS, PAYMENT TERMS, & CASH FLOW

DECEMBER 10, 2014

WILLIAM DRISLANE | VP ENGINEERING & MANUFACTURING | @DRAGONINNOVATE | WWW.DRAGONINNOVATION.COM

Project Management Triangle

Quality

Cost

Schedule

Cost of Goods Sold (COGS)

• Direct costs for goods produced.

• Actual price depends on where a company takes ownership:

– Ex-Factory (XF)

– FOB (add overland transport to XF)

– Landed (add shipping to FOB)

– Inventory (add warehousing)

• Price will vary by date depending on running changes, transportation costs, currency exchange, commodity costs, etc.

Very Simple Retail Costing Model

Retailer  Gross  Profit

Company  Gross  Profit

COGS

$

Sell-­‐Through  Price  (Retail  Price)

Sell-­‐In  Price  (Wholesale  Price)

COGS

Not  shown  here  but  very  important  -­‐  cost  to  support  customer  returns,  warranty,  and  customer  support.    This  can  easily  reach  10-­‐15%  of  sales  and  is  about  the  same  magnitude  as  the  typical  profit  level  of  a  well-­‐run  manufacturing    company.  

COGS Drivers• Your Design

– Material and Component Selection– Fabrication Method– Manufacturing Efficiency (First Time Yield, machine

tonnage, assembly labor, number of operations, etc.)– Quality Requirements (driven by requirements / Voice of

Customer)– Packout (replaceable vs. rechargeable batteries;

packaging; spares, etc.)• Manufacturing Partner

– BOM Transparency– Profit Margin– Labor Rate– Currency– Geographic Location (shipping, tariffs, etc.)– Capability (in-house vs. outsourced)– Supply Chain (Purchasing Power, volume (piggy back),

Consigned vs Purchased, etc).

How to Plastic Calculate Costs

• Does it matter that it is a gear???

• Components (3)

1. Material Cost = Part Weight * Resin Cost

2. Machine Overhead:

= Hourly Cost * Cycle Time (sec) / (3,600 sec / hr)

3. Factory Mark-up, Scrap and Overhead (%)

• Total Part Cost:

= (Material Cost + Overhead Cost) * (1+Factory M/U)

Costed Bill of Materials (BOM): Two Basic Principals

2. No Mystery Meat1. COGS = Sum of the parts

Anatomy of a BOM (Excel File)

• Plastic• Other Manufactured Components• Mechanical Purchased Parts• Electrical Components• Consigned Components• Deco• Packaging• Assembly Labor• CM Profit, Overhead and Scrap• Overland Transportation

Typical PRC CM Margins

• PCBA: 6 – 8%

• Toys: 12%

• Consumer Electronics: 15%

• Medical Devices: 20 – 40%

China Resin Prices (USD/Ton) - Updated 11/2014(add 20% for markup and distribution)

Reference: http://www.nhh.com.hk/eng/trading/price_trend.asp

PRC Molding Rates - Updated 11/2014

Item Cost (USD)

80 Ton / hr $9.78

100 Ton / hr $9.78

128 Ton / hr $10.67

268 Ton / hr $19.85

368 Ton / hr $27.56

How to Calculate EE Costs

• Cost = Component * Usage

• Separate high cost components over a certain threshold. Apply a lower mark-up.

• Apply Factory M/U

Cash Flow & Payment Terms

• What is Cashflow and Payment Terms?– $$$ In and Out. Agreement when the cash changes hands.

• Why does it matter?– Time difference between paying for the product and

receiving revenue.• What Drives Payments Schedule?

– Component Lead-times (MA) and contracts.• Why do lead-times matter …

$  =  ?

Typical Schedule

Component  Lead-­‐Time

Build  Goods QC  &  XF

1716120  Weeks

Ship Inventory Sell Payment

22 26 28 32

“It's a long time between the idea and the pay check“ -Jim Lynch, CEO Robot-Add-Ons

Typical PRC CM Payment Terms

• Product: 40-70% at Material Authorization (MA), remainder at XF.

• Tooling: 50% at Tool Start, and 50% at Engineering Pilot 1(EP1).

• NRE - After signing contract, before tooling

• Fixtures - By EP1 - varies

• Retail: Varies. Net 30 – Net 120 days.

dragon@dragoninnovation.com