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What Is Manufacturing Cost Estimation?
Manufacturing cost estimation is the collection of methodologies and tools used to project the expected final cost of a manufactured product.
This analysis informs essential manufacturing decisions, such as which products will be profitable, which suppliers are offering a reasonable price, and which current product offerings need to be re-engineered to stay cost competitive.
The depth of this analysis can range from some back-of-the-envelope calculations to a comprehensive, simulation-driven cost management platform like aPriori. Manufacturing cost estimates provide an essential foundation for related analyses such as:
Why It Matters: The Cost Estimation Imperative for Manufacturers Today
As product development and quoting timelines become shorter, more and more manufacturers are leveraging enhanced cost estimation capabilities to pursue lean manufacturing and other cost-reduction strategies. Manufacturers that do not keep pace with these strategies will find themselves unable to compete successfully in the global marketplace.
This relentless drive toward cost optimization has been made possible by new technology supporting these novel cost-reduction methodologies. As these tools proliferate, this trend toward highly competitive manufacturing only appears set to accelerate.
To understand where manufacturing is headed—and why better product cost estimation techniques are driving a manufacturing revolution—it’s helpful to briefly consider how manufacturers have handled estimation in the past.
The Evolution of Manufacturing Cost Estimation Techniques
Any manufacturing process needs to use at least some basic cost estimation to try to ensure profitability. At the lowest level, this task might simply involve using recent market prices to tally up expected input costs, then adding a mark-up for packaging, shipping, and profit. If this estimate appears to be above current market prices, production isn’t viable.
Companies that take this particular approach have often relied on homegrown databases of historical information. In 1985, MS Excel was introduced and has become the most common tool used to support this costing strategy. This approach may work fine if you are a small supplier with just a few cost estimators all working in the same office. However, once you are faced with designing, manufacturing, and sourcing on a national or global scale, it simply becomes too complicated to try and manage the extreme number of cost variables in a spreadsheet.
Direct costs like wages and raw materials are not only tied to the efficiencies of underlying production processes but are themselves potential variables when estimating design alternatives.
Also, first released in the early-mid 1980s was the first commercially available, specialized manufacturing cost estimation software. Most of these software applications were designed to meet the needs of cost estimators and required significant training and expertise to utilize effectively. Furthermore, these early systems did not leverage modern database technology and often caused significant cost model consistency challenges for design and sourcing teams located in different geographic regions.
By the early 2000s, manufacturers were starting to look for manufacturing cost estimation systems that would allow designers and engineers to quickly and easily understand if their new design—represented by a 3D-solid CAD model—is over or under target cost early in the design process. Sourcing managers were also beginning to see the need for a “should cost” estimation with rich manufacturing detail to enable more fact-based negotiations with their suppliers. And, cost estimation teams—often severely understaffed—wanted more of an automated costing system that allowed for things like batch costing of hundreds of CAD models to identify cost outliers. Evolving job requirements like these are progressively moving manufacturers toward solutions that have a modern database architecture, are available through a role-based web browser, and have extensive libraries of material and machine data.
Lean Manufacturing: A More Holistic Conception of Cost, Waste, and Value
Another cost optimization strategy introduced in the mid-1980s was “lean manufacturing.” At the time, the U.S. business community experienced a wide-spread panic about what felt like the insurmountable efficiency of Japanese manufacturers. Business leaders around the globe became eager to study and emulate the methodologies driving Japanese successes. Japan’s industrial sector transformed from being completely devastated in World War II to becoming the world’s envy less than 40 years later. And the world’s manufacturers needed to understand how they had become so efficient.
Lean manufacturing became one of the foremost principles popularized by study of Japanese business practices. In short, these lean practices center on a comprehensive commitment to eliminating “waste,” or muda, within a manufacturing organization.
Here’s the key takeaway: waste isn’t just materials that go unused or product that goes unsold. In the lean manufacturing paradigm, waste is any cost that doesn’t directly contribute to a product’s final value. This waste can range from workers left idle while waiting for a shipment, to unnecessarily long shipping from a cross-country warehouse, to secondary products or scrap going unsold.
While the successes of Japanese manufacturers popularized the lean terminology, the expansive benefits of eliminating waste—and the danger of letting inefficiencies linger due to under-analyzed practices and design decisions—have always been on the mind of innovative manufacturers.
Better cost estimation has always been an essential enabler of more efficient production: to eliminate an inefficiency, you must first recognize it. In his autobiography, mass production pioneer Henry Ford opined:
“I believe that the average farmer puts to a really useful purpose only about 5% of the energy he expends … not only is everything done by hand, but seldom is a thought given to a logical arrangement. A farmer doing his chores will walk up and down a rickety ladder a dozen times. He will carry water for years instead of putting in a few lengths of pipe.”
For Ford’s farmer, better cost management is simply a matter of recognizing the potential for process improvement and capital investment.
But for today’s manufacturers, identifying cost is a much more complex analytical problem: virtually every aspect of a product’s cost structure is closely related to key characteristics like form, fit, and function—in addition to process requirements for manufacturing, sourcing, and distribution.
No amount of earnest study can provide rigorous estimation of this complex interplay of engineering and business variables without the right technology.
Costing Systems Technology: The Key Limit on Cost Estimation Speed and Quality
To try to capture at least a vague approximation of the complex variables aggregated in a product’s final cost, manufacturers have continued to make use of successive waves of technology tools. Better cost estimation techniques have always been tied to technological capability. For most of history, manufacturing cost estimation has been a matter of slow and steady experimentation.
Technologies from the personal computer to the enterprise spreadsheet made this experimentation more efficient and allowed for consideration of more calculation-intensive variables. But these traditional cost estimation procedures are always, at some level, vague and ad hoc. Complex variables are abstracted through practical (but ultimately imprecise) methods like comparing to similar past projects or assigning linear, per unit costs to employed materials.
A collection of Excel spreadsheets for tallying component and labor costs is certainly better than resorting to overly simplified cost-plus pricing. But spreadsheet software doesn’t really begin to tie estimates to design-level decisions. That capability has only become accessible to manufacturers with the growth of manufacturing costing technologies that integrate engineering-level analytics with broader cost management concerns like supply chain, manufacturability, and labor costs.
The Rise of Manufacturing Cost Estimation Software
The success of innovative cost-reduction strategies like lean manufacturing is inexorably tied to successful manufacturing cost estimation. To determine which costs ultimately drive value, a manufacturer needs a tool for tying them to the functional features of a product design.
That’s precisely what the most advanced manufacturing cost estimation software can provide: a simulation-driven analysis of every aspect of a product’s cost structure. This analysis is available in a matter of minutes or less, giving designers actionable data on the anatomy of the product cost. This comprehensive accounting needs to include details like the cost of raw materials, material utilization, scrap buy-back, purchased parts/components, cost of tooling, labor cost, machine depreciation, and a wide array of indirect facility-related costs.
A modern manufacturing cost estimation technology should include a role-based user experience that can be leveraged by all of the key stakeholders in the product development process, including:
Product Designers and Engineers
Procurement, Sourcing, and Supply Chain Managers
Manufacturing Cost Estimators
These complex analytical capabilities add up to a toolkit that doesn’t just make cost estimation of a product faster and more accurate (though the right software certainly accomplishes this) but allows designers to explore robustly costed alternatives while a product is still being designed. The ability to integrate dynamic, simulation-driven cost estimates with the design process itself allows manufacturers to transform the way they think about cost.
The right technology allows cost to be treated not as an ad hoc limit placed on product design but as an independent variable of the design process itself.
When simulation-driven estimation first became a technical possibility, it was only the domain of dedicated experts in computer-aided engineering. But the market has seen rapid democratization of simulation, with providers like aPriori offering advanced cost estimation software that can be used by product designers and costing experts alike.
As this design-driven approach to cost estimation continues to rapidly advance into the daily practices of manufacturers across the globe, strategies founded on this capability are beginning to proliferate. The most important is Design to Cost.
Design to Cost: Bringing Robust Estimation Procedures Into the Design Process
Design to Cost is an organizational methodology for integrating cost management with decision-making at the design stage. We review this essential concept in more detail in our article.
In short, Design to Cost moves beyond using arbitrary cost-cutting targets as the basis for cost management. Product managers work with designers and engineers to establish a specific cost target for a new product introduction (NPI) that is based on current market conditions and will allow the company to achieve maximum profitability. That cost target is established within the software and becomes accessible to designers on demand. Each time they add a new layer of detail to the model, they can quickly run a new manufacturing cost estimate to identify and eliminate cost drivers. This ultimately allows the product team to achieve target cost (and profitability) more consistently.
Understanding Product Cost Drivers
Treating cost as a true, fully quantified design variable is vital because around 80% of product cost is effectively locked in once a design is set. Costs locked in at the design stage extend far beyond the direct cost of specified materials.
While we divide these cost drivers into direct and secondary categories, the key to a robust cost estimation approach is recognizing and evaluating the complex interrelationships between all these cost drivers. In many cases, these lines can be very blurry: if a new part requires a more sophisticated machining process best sourced from a factory in another country with higher tariffs but lower labor costs, is this an intelligent business decision? Should the design be changed so the machining process is no longer required, and the part can be manufactured locally?
These are the sorts of questions that manufacturers are asking today. This level of sophistication simply cannot be answered by spreadsheet-type solutions.
Cost Driver Examples in Manufacturing
Raw materials add direct costs and have implications for almost every other cost driver in this list.
- Added weight can force more expensive packaging and shipping costs.
- Materials with steeper machining, cooling, or storage requirements can force changes to the manufacturing process.
Labor (Time and Cost)
A variety of factors can affect a product’s final labor cost. More complex designs can require more manual labor time. A need for hand wiring, welding, or other specialized skills can introduce the need to support a project with additional specialized workers at higher hourly rates.
- Equipment Investments: processes that can’t be supported with existing equipment will require investing in new tools or certification of a new supplier. ROI for new equipment hinges on high-level planning factors like anticipated total production volume, energy costs, depreciation costs, and required operator expertise (cost of labor).
- Energy: every manufacturing process has an accompanying energy cost that can vary by facility location.
Factors ranging from manufacturing process expertise to labor rates, to tariffs and transportation costs all go into determining where a product can be most efficiently manufactured.
The long-term financing costs of investments in equipment and facilities determine which design choices are cost optimal. The per product impact of capital costs can vary widely depending on total production volume.
Physical product attributes determine how a product needs to be packaged and stored.
Minimizing supplier costs may help cut costs even after a design is completed. But involving suppliers at the design stage is the best way to open options for mutually beneficial savings opportunities. Our in-depth article provides further insight into how data-driven product costing can help ensure a productive negotiation.
How to Estimate Product Cost
The first step to estimating product cost is to evaluate current production parts to identify opportunities for either negotiation or re-engineering for cost reduction.
This evaluation needs to generate benchmarks for what an efficient cost for a component should be. These benchmarks fall into two high-level categories:
Manufacturing costing systems generate estimates for what a component “should” cost if efficient manufacturing processes are followed. While not every supplier will be perfectly efficient, this analysis allows you to identify cases where the delta is significant between the cost you are currently paying and the should cost generated by your manufacturing cost estimation software. This delta
may be driven by an inefficient supplier or a design flaw driving unnecessary excess cost.
Once cost outliers have been identified, they can be reduced through re-design or re-negotiation. You can read about the wide variety of potential sources for savings in our article on manufacturing cost reduction.
We also offer a more detailed guide for conducting a spend analysis.
As a high-level technique for identifying design inefficiencies, this approach generates an expected cost given a similar mass, material specification, and manufacturing process. If a component dramatically diverges from this expectation, there’s a higher likelihood it employs unnecessary complex design choices.
Costing Systems Technology: The Key Limit on Cost Estimation Speed and Quality
To generate cost analyses during the design stage, your manufacturing cost estimation software must be extremely fast and very easy to use.
With aPriori, for instance, the analysis begins by importing a 3D CAD file. After specifying a few basic inputs such as production volume, manufacturing process, and manufacturing location, aPriori can generate a comprehensive manufacturing cost estimate in seconds.
As changes are made to the CAD design (or manufacturing/supply chain selection), new estimates can be generated within a few seconds to ensure the design team is adhering to established cost targets. The ability to conduct rapid analysis of alternative scenarios using simulation-driven costing is essential for informing the design process without bogging down engineers. To generate the most cost-effective option, estimation tools capable of analyzing every production process used in each potential routing are essential.
Product Cost Estimation Techniques: Comprehensive Tooling for Optimal Cost Estimation
To provide this analysis, tools like aPriori need to include a comprehensive library of out-of-the-box (OOTB) manufacturing cost models. Further, the software must include an extensive suite of Regional Data Libraries (including material libraries with both properties and cost) and machine libraries that represent all of the different types of machines employed by manufacturing centers around the world.
A short representative list of manufacturing cost models available from aPriori OOTB includes:
Download our datasheet for the full list of models employed by aPriori.
To realize the full value of the insights provided by your manufacturing cost estimation software, the final ingredient is a culture shift toward a cost-conscious product engineering culture. Engineers are trained to think about functionality and reliability first, and design-stage cost management represents an added analytical complexity.
A willingness to re-think a product from the ground up is an essential element for generating the most impactful estimate.
For a comprehensive overview of our Regional Data Libraries, download our datasheet.
Real-Life Examples of Product Cost Estimation
One aPriori customer, Spirit AeroSystems, used our software to uncover the fact that a few aesthetic choices by a young, new designer lead to a part costing 11% more than necessary.
Watch a video about this product cost estimation victory.
If a few unnecessary machining requirements can leave a product costing over 10% more, consider the potential for savings across a product’s full cost structure. We dive into a few more real-life examples of product cost estimation below.
Shortened Development Timelines for Improved Innovation
Traditional cost estimation practices are not only imprecise but time-consuming.
aPriori customer Soucy manufactures aftermarket parts for power sports equipment. The time it took to receive quotes from Chinese product manufacturers was delaying their ability to innovate in response to market opportunities.
Now Soucy uses aPriori to quote faster than ever before—a key competitive advantage.
Bulk Costing for Thousands of Parts
The more an engineer understands about the cost and manufacturability of their new designs, the better they can “design in” manufacturability.
AGCO is a global leader in the design, production and distribution of agriculture equipment. Due to their comprehensive product portfolio, AGCO turned to aPriori for a more automated, controlled means of assessing thousands of part costs. The company’s use of aPriori also resulted in better design decisions based on real-world manufacturing conditions around the globe.
Implementing a Should Costing Strategy for Business Growth
The elevator industry is presented with some unique challenges, including multiple variations of products, custom and low-volume products, global and regionalized safety codes, frequent design iterations, and repeatability for scaling. These challenges have made should costing difficult to scale.
KONE, a leader in elevator engineering, leverages aPriori to develop and implement a should costing strategy that can grow with their business. KONE’s success metrics include a 25% reduction in project lead time after the first year of adopting aPriori.
Next Steps: Toward a New Frontier in Manufacturing
The global manufacturing industry is only beginning to tap the full potential of modern cost estimation tools. The more these tools proliferate, the more we can expect market leaders who leverage these tools effectively to put added cost and pricing pressure on their competition. And, we can expect product manufacturing to remain extremely competitive for the foreseeable future: any forgone opportunity for cost optimization is a potential threat to market share.
To navigate this market and generate actionable cost estimates at the speed demanded by today’s customers, choosing the right manufacturing costing software is essential. For more insight into the features a cost management platform needs for maximum business impact, you can read our article on the key functionality to look for in cost estimation software.
aPriori Provides Actionable Insights for Better Manufacturing Cost Estimation
aPriori works with manufacturers to bring simulation-driven cost estimation into the design process, empowering organizations to treat cost as a truly independent variable in the design process.
Download the Guide to Manufacturing Cost Estimation
Table of Contents
- What Is Manufacturing Cost Estimation?
- Why It Matters: The Cost Estimation Imperative for Manufacturers Today
- The Evolution of Manufacturing Cost Estimation Techniques
- The Rise of Manufacturing Cost Estimation Software
- Design to Cost: Bringing Robust Estimation Procedures Into the Design Process
- Understanding Product Cost Drivers
- Cost Driver Examples in Manufacturing
- How to Estimate Product Cost
- Real Life Examples of Product Cost Estimation
- Next Steps: Toward a New Frontier in Manufacturing