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DRAGON INNOVATION, INC. 
DESIGN FOR MANUFACTURING 
COURSE 12: COSTING 
COGS, BILL OF MATERIALS, PAYMENT TERMS, & CASH 
FLO...
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: ...
Very Simple Retail Costing Model 
Retailer 
Gross 
Profit 
Company 
Gross 
Profit 
COGS 
$ 
Sell-­‐Through 
Price 
(Retail...
COGS Drivers 
• Your Design 
– Material and Component Selection 
– Fabrication Method 
– Manufacturing Efficiency (First T...
How to Plastic Calculate Costs 
• Does it matter that it is a gear??? 
• Components (3) 
1. Material Cost = Part Weight * ...
Costed Bill of Materials (BOM): Two Basic Principals 
1. COGS = Sum of the parts 2. No Mystery Meat
Anatomy of a BOM (Excel File) 
• Plastic 
• Other Manufactured Components 
• Mechanical Purchased Parts 
• Electrical Comp...
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/en...
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 ...
How to Calculate EE Costs 
• Cost = Component * Usage 
• Separate high cost components over a certain threshold. Apply 
a ...
Cash Flow & Payment Terms 
$ 
= 
? 
• What is Cashflow and Payment Terms? 
– $$$ In and Out. Agreement when the cash chang...
Typical Schedule 
Component 
Lead-­‐Time Build 
Goods QC 
& 
XF 
0 
Weeks 12 16 17 
Ship Inventory Sell Payment 
22 26 28 ...
Typical PRC CM Payment Terms 
• Product: 40-70% at Material Authorization (MA), remainder at 
XF. 
• Tooling: 50% at Tool ...
dragon@dragoninnovation.com
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Design for Manufacturing Course - Class 12 - Costing

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The next Design for Manufacturing course will be about COGS, BOM, and cash flow, which is the sort of the very boring but absolutely vital part of a functioning business.

We deal with a lot of start-ups here at Dragon Innovation: a lot of new entrepreneurs who are very smart, technical people, but this is one of the areas where they can really run aground. They are completely shocked when they finally get a product to the point where it can be manufactured and discover that one of the things that will kill them faster than anything is if a retailer says, “they’ll buy 100,000 of them and get them to us in 10 weeks.” If they request 100,000 units and the COGS is $30, then that’s $3 million right there that you need upfront. If it ships 12 weeks later, then it takes five weeks to get across the Pacific, and the retailer does not pay for 90 days, it’s now been fives months and you’ve had to carry that $3,000,000. If it’s a big success and you have more orders, you have now got to come up with millions of dollars just to carry your inventory.

A consumer’s product company that makes 10% before taxes is a really well run company by 10% is not enough to grow your business just for the cost of growing inventory. The reality of your business is that this is the time where you’re hiring sales people, buying bigger office space, and hiring more engineers and customer support. It’s all about the cash flow.

Read more about this course: http://blog.dragoninnovation.com/2014/12/16/dfm-course-12-costing/

Watch this course on YouTube: https://www.youtube.com/watch?v=K8xrtOk7aDo

Learn more about Design for Manufacturing: http://blog.dragoninnovation.com/category/design-for-manufacturing-course/

About Dragon Innovation

Dragon Innovation works with entrepreneurs to launch hardware products and scale companies. Founded by a team of hardware experts, Dragon provides a clear path from prototype through production with unmatched manufacturing expertise and trusted connections. Dragon's client roster includes Coin, MakerBot, LIFX, Scout, Romotive, Sifteo, Orbotix, FormLabs and over 100 more companies paving the road for how new technology gets made.

Connect with Dragon Innovation

Website: http://www.dragoninnovation.com
Blog: http://blog.dragoninnovation.com
Twitter: http://twitter.com/dragoninnovate
Slideshare: http://www.slideshare.net/dragoninnovation

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Design for Manufacturing Course - Class 12 - Costing

  1. 1. DRAGON INNOVATION, INC. DESIGN FOR MANUFACTURING COURSE 12: COSTING COGS, BILL OF MATERIALS, PAYMENT TERMS, & CASH FLOW DECEMBER 10, 2014 WILLIAM DRISLANE | VP ENGINEERING & MANUFACTURING | @DRAGONINNOVATE | WWW.DRAGONINNOVATION.COM
  2. 2. Project Management Triangle Quality Cost Schedule
  3. 3. 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.
  4. 4. 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.
  5. 5. 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).
  6. 6. 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)
  7. 7. Costed Bill of Materials (BOM): Two Basic Principals 1. COGS = Sum of the parts 2. No Mystery Meat
  8. 8. 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
  9. 9. Typical PRC CM Margins • PCBA: 6 – 8% • Toys: 12% • Consumer Electronics: 15% • Medical Devices: 20 – 40%
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. 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 …
  14. 14. Typical Schedule Component Lead-­‐Time Build Goods QC & XF 0 Weeks 12 16 17 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
  15. 15. 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.
  16. 16. dragon@dragoninnovation.com

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