Cost Analysis of Electronic Systems

The following sections are included:

• Preface to the Second Edition
• Preface to the First Edition
• Contents

Why analyze costs? Cost is an integral part of planning and managing systems. Unlike other system properties, such as performance, functionality, size, and environmental footprint, cost is always important, always must be understood, and never becomes dated in the eyes of management. As pressure increases to bring products to market faster and to lower overall costs, the earlier an organization can understand the cost of manufacturing and support, the better. All too often, managers lack critical cost information with which to make informed decisions about whether to proceed with a product, how to support a product, or even how much to charge for a product…

Manufacturing processes can be modeled as a sequence of process steps that are executed in a specific order. The steps and their sequence are referred to as a process flow. Process-flow modeling emulates a real manufacturing process. This means that the process flow attempts to imitate the actual manufacturing process…

Minimizing the manufacturing cost of a product is not sufficient to ensure that a product can be produced cost-effectively. The likelihood that a manufacturing process itself might introduce defects into the product being manufactured, with an associated cost for finding and correcting those defects, must be considered as well. For example, suppose process A manufactures a product for $50 per unit and introduces no defects; alternatively, process B manufactures the same product for $27 per unit but half of the products produced by process B are defective and must be discarded. For process A, the effective cost per good unit is $50 per unit, while for process B the effective cost per good unit is $27/0.5 = $54 per unit. This example makes it obvious that we must also consider the defects introduced into the manufacturing process in order to gain an accurate view of the effective cost of manufacturing a product…

Conventionally, equipment and facility purchase decisions have been based on initial purchase and installation costs. However, purchase costs do not consider the effect of equipment reliability and utilization, and the defects that equipment may introduce into products. Over the life of the production process, these factors may have a greater impact on cost of ownership than the initial purchase costs do. Cost of ownership (COO) is defined as the “total lifetime cost associated with acquisition, installation and operation of fabrication equipment” [Ref. 4.1]. SEMI E35 defines COO as the full cost of embedding, operating, and decommissioning, in a factory and laboratory environment, a system needed to accommodate a required volume [Ref. 4.2]. Cost of ownership relates the cost of acquiring and using a tool to the number of units produced over the life of the tool. Although “tool” traditionally refers to a single piece of production equipment, we can generalize “tool” to mean a specific machine, process, process step or facility…

Overhead costs are the portion of the costs of a product that cannot be clearly associated with particular operations, products, or projects and must be prorated among all the products made by an organization. Overhead costs include labor costs for persons who are not directly involved with a specific manufacturing process, such as managers and office workers; non-recurring costs necessary to design, test, and support products; facilities costs, such as utilities and mortgage payments on buildings; non-cash benefits provided to employees, such as health insurance, retirement contributions, and unemployment insurance; and other costs of running the business, such as accounting, taxes, furnishings, insurance, sick leave, and paid vacations. In traditional cost accounting, indirect or overhead costs are allocated to products and process steps based on their direct cost content — for example, via a labor burden rate that is a multiplier on labor costs (see Section 1.4)…

By definition, a parametric is a measurable or quantifiable characteristic of a system. Parametric equations are sets of equations that express a set of quantities as explicit functions of a number of independent variables, known as parameters…

For many electronic systems, testing is an important driver that significantly affects the total cost of manufacturing. In some cases, more than 60% of a product’s recurring cost can be attributed to testing costs [Ref. 7.1]; for integrated circuits, testing costs approach 50% of the total product cost [Ref. 7.2]. When the products that result from a manufacturing process are imperfect, four costs are potentially involved:

• the cost of determining whether a given instance of the product is good or bad (testing);
• the cost of determining what defect caused the faulty product and where it is located (diagnosis);
• fixing the defect (rework); and
• eliminating the causes of the defect(s) (continuous improvement).

When a test or inspection activity is performed, a product that does not pass the test can be either scrapped (disposed of), salvaged (all or part of the product is recovered for reuse in the same or another product), recycled (broken down to its constituent materials), or reworked. The first activity that takes place after a product fails a test is to determine why it failed; this activity is called diagnosis. Once the diagnosis is completed, a decision can be made as to whether a particular unit should be reworked (repaired and sent back into the test) or scrapped. A simple view of diagnosis and rework is shown in Figure 8.1…

Uncertainty is defined as the state of having limited knowledge, which makes it impossible to exactly describe the existing state or the future outcome of a system. Accounting for uncertainties is very important in all types of modeling. Models of costs (or any other property estimated from a model) rarely predict exact answers. If your boss asks you to predict the recurring manufacturing cost of a new electronic system during its design process and your answer is $1345.54 per unit, there is one thing that your boss knows with a 100% certainty, and that is that you are wrong. Chances are excellent that prior to the actual manufacturing of any units, there are some unknowns, and not every unit is going to cost the same (e.g., some may need to be reworked to replace a faulty component, and some may not). After a population of the product you costed has been manufactured, the recurring manufacturing cost per unit is probably best represented by a distribution…

When forecasting or estimating production costs, engineers are always looking for relationships between production variables and the resulting product cost. One of the most widely applied cases is the relationship between cumulative production volume and the cost of production. Even before World War II, product manufacturers knew that production costs decrease with cumulative output…

Reliability is the most important attribute of many types of products and systems — more important than cost. Reliability is quality measured over time; it is the probability that a product or system will operate successfully for a specific period of time and under specified conditions when used in the manner and for the purpose intended. High reliability may be necessary in order for one to realize value from the product’s performance, functionality, or low cost…

One of the major elements of logistics is supply support. Supply support for systems includes the spare parts and associated inventories that are necessary to support scheduled and unscheduled maintenance of the system…

The total cost of warranties for computer and related high-technology US companies is now about $8B per year [Ref. 13.1]. For many companies, warranty costs approach what they spend on new product development and often rival their net profit margins; this is particularly true for commodity-type businesses making products like PCs or personal printers…

Burn-in is the process by which units are stressed prior to being placed in service (and often, prior to being completely assembled). The goal of burn-in is to identify particular units that would fail during the initial, high-failure rate infant mortality phase of the bathtub curve shown in Figure 11.2. The goal is to make the burn-in period sufficiently long (or stressful) that the unit can be assumed to be mostly free of further early failure risks after the burn-in…

Availability is the ability of a service or a system to be functional when it is requested for use or operation. The concept of availability accounts for both the frequency of failure (reliability) and the ability to restore the service or system to operation after a failure (maintainability). The maintenance ramifications generally translate into how quickly the system can be repaired upon failure and are usually driven by logistics management. Availability only applies to systems that are either externally maintained or self-maintained…

Technology obsolescence is defined as the loss or impending loss of original manufacturers of items or suppliers of items or raw materials [Ref. 16.1]. The type of obsolescence addressed in this chapter is referred to as DMSMS (diminishing manufacturing sources and material shortages), which is caused by the unavailability of technologies or parts that are needed to manufacture or sustain a product. DMSMS means that due to the length of the system’s manufacturing and support life and possible unforeseen life extensions to the support of the system, the necessary parts and other resources become unavailable (or at least unavailable from their original manufacturer) before the system’s demand for them is exhausted. Part unavailability from the original manufacturer means an end of support for that particular part and an end of production of new instances of that part (i.e., the part is obsolete)…

When managers consider spending money they usually want to formulate a business case that not only describes the process they wish to follow, but also the value that they expect to gain through the investment. For electronic systems manufacturing and life-cycle support, business cases could be required for spending money to modify a manufacturing line, refresh the design of a system, add or expand product or system management activities, or adopt a new technology. One common way to quantify the value is to compute a return on investment (ROI) for a given use of money…

Sustainable production and consumption have become increasingly important internationally, which has led to the transformation of market structures and competitive situations in the direction of servitization. To adapt to these changes, many manufacturers have had to move towards primarily providing a service (capability and availability) rather than a product with support as a subsidiary activity. This trend toward product service systems (PSS) focuses on creating value from an asset throughout the life cycle. For example, Rolls Royce estimates the value of their aftersales service market at $280 billion, while their engine sales are worth only $170 billion [Ref. 18.1]. This means that the supply of services offers important business opportunities; however, one of the challenges industry faces is how to estimate the cost of providing this service…

Software is the most expensive component in many types of electronic systems. Software costs are comprised of development, which includes specifying, designing, and developing software, and maintenance, which is the process of optimizing and enhancing deployed software (software release), as well as remedying defects (fixing bugs)…

From a customer’s viewpoint, understanding the total cost of owning a product is the most important aspect of the product’s cost. In many cases, the cost of purchasing a product may be insignificant compared to the cost of operating and maintaining it. Figure II.2 in the Part II introduction summarizes the elements that are included in a total cost of ownership analysis…

Analyzing costs is usually only a portion of the challenge when one needs to make critical decisions. Another important part of the decision process is the value of the benefit gained or the risk reduced. The evaluation of the benefit and risk is often less straightforward than cost…

Cash flow analysis is the analysis of cash inflows and outflows over time representing a particular investment or project, such as the life-cycle cost of supporting a system. Conventionally in engineering economics, cash flow analysis is performed using discounted cash flow analysis (DCF). DCF captures the time value of money and the uncertainties in the cash flow, but it does not reflect the flexibility that projects may have to change their actions during their life. By flexibility we mean the ability of decision makers to change what they do or how they do it as a result of things that have happened in the time that has passed since the start of the project. For example, a system development project that takes several years might be cancelled due to a change in the price of oil or a change in world economics…

The following sections are included:

• Appendix A. Notation
• Appendix B. Weighted Average Cost of Capital (WACC)
  • The Weighted Average Cost of Capital (WACC)
    • Cost of Equity
    • Cost of Debt
    • Calculating the WACC
  • Forecasting Future WACC
  • Comments
    • Trade-off Theory
    • Social Opportunity Cost of Capital (SOC)
  • References
  • Problems
• Appendix C. Discrete-Event Simulation (DES)
  • Events
  • DES Examples
    • A Trivial DES Example
    • A Not So Trivial DES Example
  • Discussion
  • References
  • Bibliography
  • Problems

The objective of manufacturing cost models is to predict the manufacturing cost of a product or system. The manufacturing cost estimate is a function of application-specific details (e.g., the size of the product), technology/material details (e.g., the technology and materials required to meet thermal and electrical performance requirements), processing details (e.g., the manufacturing facilities available to fabricate and assemble the product), and accounting realities (e.g., applicable labor and overhead rates). Manufacturing costs include three basic activities: fabrication and/or assembly, recurring functional test/inspection, and diagnosis and rework (when relevant)…

The manufacturing cost of a product only represents a portion of the actual costs associated with a product. While most traditional cost analyses focus on manufacturing costs, which are extremely important for inexpensive high-volume products, other costs, for example, operation costs and sustainment costs, can dominate for other types of systems…

The following section is included:

• Index