Definition: Recurring cost is the total cost of a lot of items, divided by the number of items. This includes warranty, and may or may not include support as a direct cost item, depending upon your accounting system. This doesn't mean it isn't there, it just depends upon whether support is a direct cost to the product line, or is contained in the overhead loading applied to the recurring cost of each product.
Recurring cost is a design task, which could be handled by any of the four methods in the design article on this website. Budgeting is the one I have used most, and works best in Parallel design efforts.
If recurring cost is important, and many designers need to be coordinated, then rules are required. Get these established at the start. Click here to see a sample of rules, scrubbed, from an actual project. This was a value engineering step. The functionality of the product had been established, and the design effort was solely to take cost out of it.
Design to cost can affect Requirements and Performance quite a bit, especially on a new product. It is natural to want the product to do more and cost less. Be wary of Options and variations, they can bring a cost reduction effort to a halt due to the number of permutations. Get this worked out early. It won't be perfect, but without addressing it, you are sunk.
Many design to cost activities do not go forward until their cost bogies are met, so Schedule is usually a dependent variable. Why introduce a product that won't sell/make money? Most design to cost activities have very free use of resources. If you do not, you may have a hard time actually making improvements in cost. Process is probably important, in that the cost contribution of Process may be improved if it is on the table. In general, Non Recurring Costs can be applied to directly reduce Recurring Costs, until you reach the point of diminishing returns. Watch for dithering during this process. The overall business plan has to account for Non Recurring costs, typically this is a not to exceed. I have been on a few that allocated a fixed number of man-hours total for cost reduction, and you did the best you could and presented each step as below for approval.
The calculation for investing Non Recurring to reduce Recurring is classical: Most times, a 2:1 payback is required for any engineering effort. This is to cover the risk of the effort. Most people forget that this metric must include an assumption of total sales. If total sales are not assumed, then the total allowable amount of engineering is not calculable.
A very visible example of this is going to automated testing. Lets say the recurring cost for a bed of nails fixture can cut your recurring test time in half. Does this reduce overall product costs? Depends on how many units you are planning to deliver. Do the math.
Sometimes this is called value engineering. In this case, the product spec and needed performance is established, and the sole task is to redesign the unit to remove cost.
Except for that pesky sales guy that wants you to add two more Ethernets for that opportunity in Belorussia.
For this, I bring together the designers to go over cost reduction ideas that they will work on. Each idea is assigned a potential cost reduction , an individual, a risk level, and a suspense date (go/no go). Doing this as a team is essential, in that some of the ideas to reduce cost in one area, may increase cost in others.
Budgeting is used. There is a total cost reduction being shot for, you cannot go to the next step until you can show that the product cost can be reduced by enough to justify the manufacturing change over. So if a $50 material cost reduction is required, then your list has to total at least $50. Some of them may not work out, and conventional budgeting techniques are used for tracking, reserves, etc.
Each of the ideas is verified, starting with the least risky, and moving to items that have more risk. This can be by analysis, breadboarding, vendor research, test, whatever. Remember, when you replacing an existing product, there is almost certainly functional performance that users depend upon that is not specified. The farther you deviate from the previous design, the more likely you are to encounter unspecified expectations.
Using this method you can present the cost reductions, and the risk, in a complete manner. And these days, when I say present, I mean you can make a website to allow all users to contribute and comment at any time. So status availability is continuous.
Your final test unit may look a little different, but it is important to verify that the changes do not impact the functionality of the unit. Plan to put mechanical samples into test also. Usually these contain standard electronics to facilitate the mechanical testing.
Usually, a trade is done at the top level to find the most likely candidate to be the lowest cost approach. Then budgeting is used to breakout a total roll up, based on an apportionment of the total cost. Don't forget to include things like shipping (especially between subcontractors), test and programming time, labeling and package inserts.
Each section gets an allocation - Packaging, Electrical Design, Operations (construction), CAD (PWB cost), Production Test. A rolling buildup of the costs are calculated as the design progresses.
Attaching a spreadsheet for you to use would not be of much help, you will need to build one to reflect how your organization captures and distributes cost. But they are easy to do. I suggest a worksheet for each function, and a summary sheet. Add sheets to include backup. There are many web methods to support this.
See Finance about how the summary sheet should be presented to be meaningful to those reviewing it. They will know what buckets to place the numbers in. The purpose of this effort is to demonstrate that the cost/risk has been reduced enough to allow the design to go forward. You must speak the right language for this to happen.
There are usually three major cycles of cost reduction. Each of these may go through several recursions if the final product is discovered to not meet its target, or have risks that must be worked off.
In this cycle, the engineer puts all the costs in. She may get them from previous parts list costing, the active costs from the ERP system, from vendor quotes, or from budgets they assign based on their knowledge of the industry. When this is all rolled up and meets your targets, you can then present the results for a go ahead. Operations and procurement can be involved in working up prices, but they are providing inputs to the engineer. Operations in general is not keeping up on the design approaches, although a manufacturing or test engineer may be working in this mode. The engineers use their best judgement for DFM. The results are summed and presented by engineering.
This may have a recursion cycle, based on the amount of risk and the results of the reduction. If you don't have formal reviews, at least plan for specific go/no go dates.
In this cycle, a full bill is turned over to operations and procurement for a complete price out. This will uncover any other issues, such as availability, licences, unacceptable conditions included in previous pricing, and CM process selection. Operations and procurement know that the design may change at this point, in fact, they may demand changes to make their design to cost targets. This includes DFM feedback from the manufacturers. At this point, the design may be modified to be more compatible with the selected CM processes as a final cost reduction step. The results are summed and presented by operations, usually with requests for corrective action (12 machining operations? Please!).
This may have a recursion cycle, based on the amount of risk and the results of the reduction. Also, prototypes will probably be built in parallel with this stage, and more changes will go in as a result of the findings.
A full package is let and all production concepts are tested. A pilot run is performed, with all factors as they would be during production. The results are analyzed, and usually further improvements are made to test, PWB layout, monitoring capability, and process control. A final review is presented by the product manager or finance of the costs and pricing of the product in full scale production.
Repair, sparing and servicing and support is part of any product plan. Repair ends up being its own product, with its own metrics and methods. I mention this here, because repairability is a performance aspect that often affects recurring cost. A unit is made repairable to reduce the overall cost of ownership. You may want to consider whether making the unit a throwaway would allow additional cost reductions.