In his 14 Points for Management Deming said, “End the practice of awarding business on the basis of price tag. Instead, minimize total cost.” Total cost of ownership (TCO) analysis provides a more accurate picture of product cost, whether for basic acquisition purposes or for those of product lifecycle analysis and planning.
In electronics manufacturing, there has been a trend of offshoring stemming from low labor rate countries and related purchase price reviews. The growing globalization of business and associated supply chain activities have expanded production location experience and provided supporting data allowing today’s OEMs to make more informed decisions with their sourcing destinations.
The factors comprising total cost of ownership may include:
COST OF GOODS SOLD
- The purchase price of the assembly
- Packaging, including individual packaging and applicable shipment packaging
- Fees, including Merchandise Processing Fee (MPF), Harbor Maintenance Fee (HMF), Insurance, brokerage and customs clearance
- Freight, including routine surface and/or air shipments
OTHER HARD COSTS
- Prototyping cost
- Tooling over the product’s lifecycle
- End-of-life inventories
- Travel for supplier selection and maintenance
- Carrying costs for prepaid items and shipments
- Warehousing, carrying costs
- Emergency freight charges (expedites, late shipments)
- Cost of quality, rework
- Intellectual property risk/loss
- Lost opportunity
- Supplier stability
- Political stability at the supplier location
- Innovation impact due to distance and communication
- Customer service capability due to distance and communication
- Terms of payment
- Exchange rates
- The annual impact of wage inflation
Considering these “bullets” provides a summary view of the numerous factors that can ultimately derive the total cost of a product. Doing so over the life cycle of the product gives even more vision to your business when considering new products and their contribution to your business’ success.
On the manufacturing front, we consider greater detail in order to provide efficiencies leading to effective and consistent cost basis while maintaining high levels of service flexibility. As an example, lean production identifies seven areas of waste that effectively contribute to an increase in the total cost of an item. These wastes include overproduction, waiting, transport, over processing, inventory, motion, and defects.
- Overproduction: The result of having to order large batch shipments to achieve unit price. Having more product than you require spills over into additional costs for transportation, handling, warehousing and the other areas of waste.
- Waiting: If goods are not being processed, the waste of waiting results. In addition, wait time occurs during uncertain delivery windows, port and customs transitions and during quality uncertainties. Another area of waiting cost occurs in the scheduling of shared “awake time” for supplier interactions.
- Transportation: Bulk shipments being moved over long distances have clear time and cost attributions, with no value add to the product. The size and weight of the product to be shipped versus the available shipment containers can add cost. Material handling increases, and risks to product quality rise.
- Over Processing: Increased packing and unpacking of product are common wastes when having to buy and ship in volume. The administrivia facilitating shipment, customs and transit supplier documentation exceeds that of more localized supply.
- Inventory: Product as WIP, in-transit and safety stocks combine to increase inventory liability while simultaneously decreasing the ability to check and accurately account for them. Product in transition cannot be readily sold ultimately increasing the cost of the item.
- Motion: Wastes in this area are often interrelated to other categories which lead to increase in human and product motion. Costs over time are adders to your product’s total lifecycle cost.
- Defects: The most readily identifiable and broadly impactful waste results from defects. Additional inspection, handling, scrap, rework and loss of downstream capacity are costly to your product’s bottom line. OEM’s often plan overproduction in order to compensate for high defect rates.
The costs associated with each of these waste areas are variable and cumulative. One additional cost that can result in these wastes is that of the end customer’s satisfaction. Regardless of the product’s price, unhappy customers can cost your business much more.