presents

Manufacturing Cost Estimates
for Inventions

Introduction

"How much will this cost to manufacture?" – That is among the first questions asked about a new product or invention. Answering it is a never ending exercise because production estimates are not one time events. Even long after they are in business, companies continue to find new ways to refine their production methods and reduce costs.

You will learn:

1. How to roughly estimate manufacturing cost
2. How to calculate a major component of start-up cost
3. What information to provide to get a detailed estimate
4. What a typical estimate includes
5. Why a Product Development Strategy is critical
6. How patents and manufacturing are related
7. How to get your idea ready for a manufacturing estimate

Very Rough Estimates

You can get some idea of the cost to manufacture a product by comparing it to other products that are similar to yours. This does not mean similar in function. It means similar in the way they are produced. The manufacturing cost will be similar if they use similar production methods, are produced in similar quantities, and are of similar size, complexity, and quality. You can approximate the manufacturing cost if you know the retail price and the mark up of the distribution chain for such products. An overall mark up of about three to four times the manufacturing cost is a reasonable starting point for typical consumer products.

You will need to learn about the typical mark up in the distribution chain for products like yours. Each person in the chain will need to make the kind of profit they usually get or they won't be interested in handling your product.

Getting Started - What does it cost?

The cost determined by the above method is useful, but deceptive. It ignores the investment needed before you can begin production. There are many start-up costs in manufacturing. Things like development, design, and tooling costs all need to be considered. However, the commitment you must make to your suppliers for your initial order is often one of the largest components of start-up cost. The manufacturing cost times the typical minimum order for each item needed will give a rough estimate of what kind of investment will be necessary.

You must still add all the other costs of starting a business -- like offices, advertising, sales, adminsitration, etc. Not many people are willing to risk such an investment without credible proof that the product has a reasonable chance for success. Minimizing that risk is the purpose of the many intermediate steps and short-run production that is needed before going into full production.

Beginners have to work extra hard at making their case because they have no track record with new product introductions. Investors will be very interested seeing proof that you know what you're doing.

You will need a more detailed estimate if you believe you can get funding for project of the magnitude estimated so far.

Components of a Detailed Estimate

Manufacturing cost estimates can usually be organized as shown below.

1. Up Front Costs
   
   
   1. Development "Guestimate" - usually only be an order of magnitude opinion of how difficult it might be to develop a "production ready" technology.
      
      
   2. Product Design - the work needed to specify a component in such a way that it can be produced. This differs from development in that there is no unproven product or production technology involved. There is usually iteration between the product designer, tool designer and production people to optimize the design.
      
      
   3. Tooling Design and Fabrication - This is usually done by the tool maker. Production levels and peak capacity have the biggest impact. Tool life must also be considered.
      
      
2. Production Setup - the cost to set up for a production run which usually includes some amount for the waste generated while tuning and testing the process. It is often impractical to set up for less than ten or twenty thousand units with mass production techniques.
   
   
3. Production costs
   
   
   1. Component Production Cost - the incremental cost to produce "one more item" after it is in production. This usually includes raw material, machine time cost, machine operator cost, supplies & post production finishing.
      
      
   2. Assembly Setup & Assembly Cost - similar to the corresponding items for "Component production"
      
      
   3. Quality Control - addresses what sample testing might be needed to assure the units work as intended.

Other items to consider are assembly tools and fixtures, assembly set up costs, waste, and freight. Of course, advertising, administrative overhead, etc. are not included in a manufacturing estimate.

The Development Guestimate involves the greatest uncertainty and everything else depends on it. When unproven technology is involved it isn't wise to invest much time fine tuning other components of the estimate. If the idea doesn't work, it doesn't matter exactly how much it would cost to make.

A separate estimate is needed for each production level to be considered. You might start by estimating the costs for full production since that is the most expensive level. However, it is very likely that you won't know what full production is until you test the market in limited areas. It's also likely that you won't know exactly what you want to make until you get enough feedback from users.

This is where your development strategy comes into play. In other words, "How will you use your resources to reach your goals?" This always involves taking small steps to learn about your product and the market before betting everything on an unknown. Strategy will be discussed later. First you should understand what must go into a detailed estimate so you will understand what you can out of it.

Information Needed for a Detailed Estimate

More complete manufacturing cost estimates require more complete information. New product ideas usually need some basic engineering research and market studies before enough is known to do an accurate estimate. Your manufacturing consultant will have questions about basic information that may seem overwhelming.

Beginners sometimes go directly to a manufacturer to get a price before consulting an expert in production methodology and strategy. This is a mistake. First because it ignores the intermediate steps needed to justify investing in the project. Second because there's a good chance you are approaching a manufacturer that is mismatched to the job you have in mind. And, third because you may be considering the wrong production process. You could waste a lot of time and money getting tooling quotes for a part that an expert could tell you would be better suited to another method that uses less costly tooling.

Basic Information for estimates

1. A Parts List (often called a "Bill of Materials") with the quantities of each component needed for every unit produced. Group this by the product styles and variations you want studied. Don't forget to consider packaging and containers. (Sometimes the box is the most expensive single component.) Group the component parts as follows:
   
   
   • Off-the-shelf - provide as much detail as you now know – i.e. make & model. Even if you don't know the manufacturer, list the retailers you know.
   • Custom designed and/or manufactured - provide a sketch and describe as much as you can about the part including how you think it might be made and from what materials.
   • Concepts (anything not completely tested and proven) - describe and sketch how you envision the component or assembly might work. Elaborate regarding any tests that have been done to verify that it will work that way.
     
     
2. Production levels ("units per year") to consider for each style. Indicate where common parts may be used between styles and variations. This will increase the production volume for those parts which will decrease their cost. Describe the intended use for the items made at each level – i.e. - non-working models, engineering tests, in-house product tests, market tests, initial sales, and low-level, mid-range, or full production.
   
   
3. Peak capacity ("units per day") desired. Will your production be steady and predictable? Or, like some seasonal products, will a large number of units need to be produced in a short time?
   
   
4. Reaction Time to Changes in Demand - How quickly should production increase if demand is greater than capacity? This may be closely related to peak capacity, but there are other considerations. Would you invest more in tooling that can be quickly modified to produce more parts? Or, do you want to gamble that you can obtain new, higher capacity tooling in time to meet demand and avoid losing market share? Tool delivery time can often be many months.
   
   
5. Labor Cost - Tools that produce parts which are nearly ready for use cost more than tools which produce parts that need some hand finishing. Also, automated equipment can reduce handling and packing labor. Your consultant will need to know what labor cost to consider to recommend tool cost vs. labor trade-offs.

All of this information will help your expert recommend tooling and production options. It will be hard for any inventor to know the answers with much certainty at the start. However, just knowing that you need to think about these questions will help.

Other factors to consider are the budget and how much should be bet on your market predictions. Do you want the optimum tools and the most expensive options so that you will save money in the long run if you are right about exactly what the market will want? Or do you want to take a less risky approach with conservative options in case you learn that some changes would increase sales and profits?

If you don't have all of this information figured out, and most people don't, you will need some help getting started and finding an appropriate strategy. After some discussion a consultant can provide a range of typical costs for each tool. This will allow you to consider what the budget might allow and form a strategy.

Cost depends on strategy. Strategy depends on cost

As you can see, developing a product takes a lot of thought and planning. Inventors often ask, "What do I need to do to bring a product to market?" That's like a coach asking, "What do I need to do to win?" There is no simple step-by-step "sure fire" way to do it. There are many ways to win and many more ways to fail. Experts can give you advice, but you must make your own decisions. Success comes from good strategy.

Strategy is your plan -- and your method of planning -- for reaching a goal with the resources available. In other words, the "ways" to use the "means" to reach the "ends". Strategy also involves how you adapt as you learn and encounter the unexpected. Cost estimates change because strategy changes when dealing with the unknowns of inventing. Strategy starts out based on perception and adapts to reality. Monthly, and even weekly, changes are common with inventing.

For many novice inventors, the strategy seems simple: 1) get a patent, 2) build a prototype, and 3) license the patent to a manufacturer. That plan never works. Beginners believe that all patents are valuable and that manufacturers want them. That illusion should vanish when perception collides with reality. Those who can come to grips with the real world before losing all their money will have a radically different strategy if they continue.

When some of those beginners realize that step "3" isn't working and that licensing isn't easy, they try a new plan that's almost as bad. They decide to produce something, hope it will work and be legal, and then try to sell it nationwide through wholesalers and retailers they've never met. This is not a plan for a sane investor. An even worse strategy is hoping that someone else will do all of that for you.

Your production strategy must be interwoven with your overall business strategy including all the financing and patenting considerations. And, much of that strategy must be directed at getting more resources unless you have lots of money to risk.

A good plan must not only address final production methods, but also the less costly, short-run production techniques needed when testing the product and the market – something that investors will require before approving a product launch. An expert can help you decide where to begin as you study the basics.

The method of production changes as you make the transition from prototypes into early production models and so on. Some general stages in this process are:

• In-house testing - Used by employees who are closely controled, monitored and studied.
• Consumer testing - Used by consumers who are invited to try the product while being closely monitored and studied.
• Demonstration or sample units - Used to promote the product and get the first orders. These should look and work like what you intend to sell.
• Initial Sales - Sold through a few outlets in a small geographical area. The idea is not to make money. Rather it is mainly to prove that enough people are willing to purchase the product at the planned sales price.
• Low, mid, and high-level production - Sold through more channels in more and more outlets in increasingly larger geographical areas. You should start to see a profit at this level.

Each production level has it's own considerations and production techniques which require a separate study and estimate. You can see an example of this in "Typical cost to produce a one piece plastic toy". That example applies to most projects even though it is intended for injection molded plastic parts and the molds needed to make them. Producing any component progresses through methods having increasingly higher up front costs for tooling and incrementally lower production costs for parts. The incremental cost per item decreases rapidly as you move from one low production technique to the next. The change is smaller as you refine high production techniques, but the overall savings can be large because the volume of parts is high.

Finding someone to license your invention usually isn't very likely until you begin selling some of the product on your own. However, the more you advance through the prototype and the production stages, the more likely it is that others will see the project as a safe investment. How lucrative it will seem depends on how your projections hold up.

Make sure that anyone who gives you a manufacturing estimate understands your strategy and the accuracy you need. Otherwise you won't know whether they've calculated the cost to make a crude engineering prototype, a sophisticated production prototype, some of the very early production models, or if they've assumed you're only interested in mass production.

Estimates for each stage of this process start with a guess and a vague, blurry vision of what you'd like to do. They repeat with clearer and clearer views of the big picture until reasonable strategies appear. Zooming in and focussing on the best strategies requires a great deal of expertise and judgment. Assumptions must be tested and verified if you don't want to get lost while chasing a mirage.

Estimating Demand

Production will be eventually be determined by demand and how quickly you can capture market share. Beginners often make the mistake of estimating what the total market might be and taking a guess at what percentage might buy their product. Since this predicted demand hasn't been tested or proven, manufacturers and investors won't take it seriously. Besides, the size of the total market is much less important than what portion can be reached though the distribution channels available to you. Predictions of demand based on market tests after the technology has been proven and distribution analyzed are much more credible.

General Considerations

The work needed to prepare manufacturing estimates depends on the number of scenarios to be analyzed and how detailed and finely focused each estimate must be. This always involves an interactive and ongoing discussion. One approach is to give an expert a budget to work within and ask them to provide as much refinement and detail as the budget allows along with an opinion of what additional work should be considered.

O'Connor Technical Systems can get started on a manufacturing estimate when you can define the production scenarios and provide the basic information needed. You should consider a Preliminary Technical Evaluation of the project if you are unsure which strategies may be workable.

Getting Started

A feasibility study is usually done for new ideas. A manufacturing estimate won't be of much use unless the product will work. This doesn't mean whether you can get a one of a kind prototype to function. It means that the concept is technically sound and reasonably safe and that a product can be developed, designed, manufactured, used, serviced, and recycled with technology that exists or can be developed within time and budget limitations.

Products should also be reviewed from a "design for manufacture" perspective. Even if you have a generally workable design, an expert will often spot several aspects that are much less costly to make using a different configuration. Doing this review before getting a detailed estimate can save time and money.

Of course, it is essential to prove that the product can be sold at a price and in sufficient quantities to justify the investment in time and money. Many items aren't in the marketplace simply because they can't be economically mass produced. Working models for such products may have been around for years.

To start a feasibility study you should consider the Preliminary Technical Evaluation described on the O'CTS Inventor Services page. This includes an overview of technical feasibility and manufacturing issues. Such a study can provide an idea of how much more work is needed to prepare you for manufacturing or for negotiations with manufacturers and investors. You will need to understand and appreciate all the issues they will be evaluating. After you have done this, you may be ready for the more detailed manufacturing estimate.

Summary

Key points:

1. Comparing a product to others can give a rough idea of manufacturing cost when you know the mark up.
2. The minimum order price is often the biggest start up cost.
3. A sensible strategy helps manage risk. Cost depends on the strategy you choose.
4. If you cannot describe your strategy, an estimate will be a waste of time and money.
5. Estimates usually include up-front, set up, and incremental production costs.
6. Patents that are prepared before manufacturing issues are analyzed may be of little value.
7. A Preliminary Technical Evaluation can get you pointed in the right direction when you need to develop a strategy.

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