Manufacturing Ramp Up Costs (and How to Manage Them)

Manufacturing Costs, Up to First Unit Sale

Cost Categories

Before you make your first unit sale, you’ll encounter several major cost areas. 

These manufacturing cost categories break down into:

• Manufacturing partner bring up

• Tooling (for custom parts in your BOM)

• Ex Factory cost of goods sold (COGS) 

• Pilot Build(s)

• Regulatory and Compliance

Manufacturing Partner Bringup

Bringing up a production line requires upfront investment. Fortunately many of these costs are an initial investment that may not be recurring once you are in production.

The following costs are typical:

• Non-Recurring Engineering (NRE): Costs for the manufacturing partner to get the line up and running
  Examples:

• Production line design - developing the process around assembling and testing the product

• Production line set-up - setting up the stations, getting all the equipment brought up and operational

• ERP integration - larger manufacturing partners will need to integrate your processes and BOM into their planning system

• Production Test Equipment: Equipment that supports mostly testing on the line

  Examples:

  • PCBA level functional tests - a functional test that confirms components are on the board, the right components are placed, and they are working properly

  • Final assembly automated tester - a functional test that confirms the system is operating correctly

• Production Fixtures and Jigs: Equipment that supports mostly assembly on the line

  Example:

  • Fixtures that assemble components or subsystems together faster / more reliability

• Travel Costs: Traveling to and from manufacturer

  Example:

  • Team members flying back and forth to help with design transfer and build issues. There will be issues when you start to bring up the line, and the issues are more efficiently managed when someone familiar with the product is onsite (relationship building, and background knowledge)

Tooling

Tooling enables scalable manufacturing by improving part consistency, yield, and unit cost - but requires significant upfront investment.

Invest in tooling to improve yield, unit cost and product reliability. Some examples include:

• Plastic injection molding

• Sheet metal tooling

• Casting

• Extrusions, gasket dies

There’s plenty of material outlining these tooling approaches online. Working directly with tooling suppliers and manufacturing experts is a great way to learn more about ways to build custom mechanical components as volume.

Ex Factory COGS

Ex Factory COGS refers to the cost of the product to you as it leaves the factory. These costs break into categories including:

• BOM material: Components that make up the product

• Labor: Cost of labor to procure and accept components, assemble, test and package

• Profit: Manufacturing partner’s profit add

• SG&A: Sales, General and Administrative - this is the cost of the manufacturer to do business, with a portion being passed to you, the customer.

Some of your BOM may have long lead components, which may need to be purchased ahead of your pilot and production builds.

Pilot Builds

The necessity of pilot builds are often surprising to founders. The units from these builds are often not sellable. These builds are important for the following reasons:

• Verify that the product meets all requirements - With the implemented production processes and production components, your team will need to test if you are still meeting all requirements.

• Verify supply chain and logistics flow - Components and subsystems will be purchased from different sources. The pilot builds help to frame how procurement will be managed (and how long it will take to get material) after you move to production.

• Operators learn how to build the product - The manufacturing partner will not build the product perfectly the first time, it takes a few tries to get right.

• Validate line for production - Line validation proves you can consistently produce quality products at scale.

Regulatory and Compliance

Your regulatory and compliance strategy will dictate the scope of testing and certification (e.g. FCC and UL).

Regulatory and compliance standards depend on the market you are entering (where), industry (who), and the product (what). To figure out your scope of testing, consider:

• Reviewing competitor products, to determine what standards the products were tested to

• Speak with experts in the industry, the market, and the product category

• Speak with compliance labs

Cost Modeling

Armed with an understanding of costs, you can build a cost model, showing cash spent month over month. 

We’ve developed a Hardware Cost Planner to make this easier. It’s a practical tool designed for startup teams to map manufacturing costs to understand pinch points, to guide your cost analysis. 

With your cost model in place, we can now evaluate different ways to manage costs for each of the categories reviewed above.

Cost Analysis: Managing Manufacturing Costs

Cost Analysis Drivers

With a better understanding of the costs outlined above, tradeoffs may be developed. The primary drivers of the cost analysis include:

• Cash on hand and fundraising plans

• Forecasted production volumes and sales pipeline

• Supply chain strategy

• Go to market (GTM) strategy 

• Design readiness for manufacturing

Let’s revisit each of the manufacturing cost areas, with tradeoffs to consider.

Manufacturing Partner Bringup

Let’s revisit each cost area -

Non-Recurring Engineering (NRE): Costs for the manufacturing partner to get the line up and running
Considerations:

• Type of manufacturing partner

• A contract manufacturer - slowest to get up and running, but scalable, higher NRE

• A PCBA / box build - fastest to get up and running, lower NRE

Production Test Equipment, Fixtures and Jigs: Equipment that supports mostly testing on the line
Considerations:

• Production volumes

• Lower volume production - scrappier equipment (dev kits, 3D printed parts, cheap off the shelf solutions)

• Higher volume production - higher end, off the shelf equipment, custom designs to handle higher throughput, often with the ability to collect more data

• Who designs and builds the equipment

• Manufacturing partner / outside design services - some partners may have design services available to develop equipment. Great to consider to push accountability to partner, but also important to clearly outline requirements to meet for the product on the line

• Inhouse design - most important is to be sure to involve someone that has experience with manufacturing on your team, and to involve the manufacturing partner in conversations with what you are building for the line (confirms it may be seamlessly integrated into their line)

• COGS and yield

• Test jig and equipment requirements are also connected to how expensive rework would be if you discover an issue. For example - if you are running a complex test on a part that costs $1, with a $100 costed BOM - it may be better to just scrap the $1 part as opposed to thoroughly testing it.

Travel Costs: Traveling to and from manufacturer
Considerations:

• Manufacturing partner location -

• If choosing a partner offshore / nearshore to the US, costs add up quickly during the design transfer and manufacturing ramp phases

• Consider partnering with a manufacturing liaison, who may have a boots on the ground team local to the manufacturing partner to better manage costs (and time)

Tooling

Tooling costs are often overlooked but could be significant in magnitude. Evaluating the cost / benefit of tooling is valuable to manage high costs.
Tradeoffs to consider:

• Custom Parts Tooled vs Not Tooled: Determine economies of scale - volume / yield at which cost of tooling begins to make sense.
  Example:

• Need Qty 5000 components for production

  • 3D Print → ($5/ea)(5000) / (80% yield) =  $31K

  • Tooled parts → ($0.25/ ea)(5000) / (98% yield) + $10K (tooling) = $11K

  • In this instance, tooled parts may make more sense (not including calendar time)

• Make vs Buy: Consider purchasing off the shelf vs making a custom solution component or sub system.
  Consider:

• If parts not yet designed, calculate cost to design and test parts, and compare this to the cost of buying components off the shelf

• Include calendar time in calculation, and supply chain risks for custom parts vs off the shelf

• Payment Terms: Paying for tooled parts breaks down into: payment for the tooling, and payments for the tooled parts. Typically costs can be broken into one or a combination of the following:

• Down payment to kickoff tooling, pay balance of tooling on approval (typically with an approved sample)

• Amortized costs into per piece (e.g. tooling costs gets divided into your initial tooled part orders)

Ex  Factory COGS

As you may have seen in the Cost Planner, you will likely need to pay a large portion of the below costs before your first unit sale. Some ways to manage these costs are outlined:

BOM material: Components that make up the product
Considerations: 

• Component lead times and minimum order quantities - you may need to pay for long lead time components from 30 days up to multiple quarters ahead of your pilot builds

• Payment terms - payments for long lead components may break into 100% upfront or some portion on PO placement and on delivery

• Price breaks at volumes - consider higher purchase quantities, if your sales pipeline is strong or if a critical component may become obsolete

Labor: Cost of labor to procure and accept components, assembly, test and package
Considerations:

• Spend time to implement design for assembly, test, quality, supply chain best practices, as early as possible in development. This will increase the efficiency of building and testing the product and reduce labor overhead

• Manufacturer location - different countries will have different loaded rates. The US could be 10x more in hourly labor than in Asia, consider the tradeoff being sure to include tariffs in your calculation.

Profit: Manufacturing partner’s profit add
Considerations:

• Contract negotiation lever, but highly influenced by interest of CM for business and forecasted volumes (e.g. what is the revenue opportunity for CM?)

SG&A: Sales, General and Administrative - cost of manufacturer to do business
Considerations:

• Review typical SG&A add for CM revenue level, confirm within range

Note: Depending on the manufacturer, data may not be broken down like this, or even shared. Building the relationship with the right partner tends to pay off way more than pushing too hard on costs in the beginning of the business relationship.

Pilot Build(s)

You can manage costs by defining the pilot build volumes needed ahead of production.
Consider bottoms up and top down models:

• Bottoms Up - Calculate the number of units needed for engineering verification test, line validation, regulatory and compliance, user testing, investor demos and confirm needs from the manufacturing partner for training operates

• Top Down - Think through your sales pipeline needs, and determine a statistically significant percent to build to weed out any potential yield issues

Building more often reduces risk because it stress tests the line more effectively, but it does come with a cost. Using your bottoms up and top down models and select a quantity in the range.

Regulatory and Compliance

Consider focusing on the simplest product, in the smallest market, in a specific industry when you launch to greatly reduce the complexity of your regulatory and compliance plan. International rollout is an esoteric, expensive and time consuming process, avoid it as long as you can when starting up.

Be sure to understand your regulatory and compliance strategy as early in your development process as possible. This allows the team to understand requirements to meet early on, to prevent many test iterations at a lab (adding significant cost and calendar time). Regulatory and compliance is often considered as an afterthought, and can lead to significant schedule delays in manufacturing ramp up if the product continues to fail at a contracted lab.

Conclusion

Hardware startups are often surprised by how expensive manufacturing can be before the first unit is sold. To remain ahead of  the high costs:

• Map out your manufacturing costs

• Build them into a cost model, like the Hardware Cost Planner

• Use a cost analysis framework to better manage costs

Questions about any of the above? Reach out below, always happy to help.

← Other Resources