Introduction to Manufacturing Costs for New Electronic Hardware Products

This is the second part of a series looking at the high-level development of a hypothetical tracking device that incorporates Bluetooth Low Energy (BLE), GPS, an accelerometer, and a USB rechargeable lithium battery.

In part one, we covered designing the system level block diagram, selecting all of the production components, and listing some of the product specifications determined.

In this part, you’ll learn how to estimate the landed manufacturing cost, determine the suggested retail price, and estimate your profit margin.

This is a shortened introductory version of an article originally published on PredictableDesigns.com. See the complete and most up-to-date version of this article here.

When deciding to develop a new hardware product you should always first look at the big picture. This is what successful hardware companies do, and so should you.

The best way to do this is by beginning with a preliminary production design of your product before you jump into the fine details of creating a custom design and prototype. This is what we are covering in this series.

Production Cost

Estimating your production cost is one of the primary reasons for doing a preliminary production design.

Ultimately, I consider the production cost (also called manufacturing cost or Cost of Goods Sold — COGS) one of the most important things that you need to understand as early as possible.

This is because the manufacturing cost is what’s going to determine if your product can be manufactured and sold at a profit. It will determine how much profit you’re going to make, and how much you can sell the product for.

For example, if you’re planning on selling your product for $99 and you go through the exercise of calculating your production cost and you find out it will cost you $75 to manufacture, then something’s going to have to change. You’re going to need to find ways to lower the cost or increase your suggested retail price.

Or you may determine that the product isn’t worth pursuing if it’s not going to ever make a sufficient profit. But, that’s okay too. If that is the case you need to know as soon as absolutely possible so you can pivot to a new product with higher profit potential.

Manufacturing Cost Breakdown

We’re now going to run through all the different pieces that make up the total production cost. I’m specifying the costs for volumes of 100, 1k, 10k and 100k units.

In general, for 100 and 1K units, domestic manufacturing is preferred. Then, for volumes of 10k or greater, manufacturing in China is usually the way to go.

Keep in mind that even with low volume production, you’re still better off sourcing any components that you can through Asia. Then assemble the product and do all your testing domestically.

This hybrid manufacturing strategy allows you more direct control over the assembly process, final testing, and ultimately the quality of the final product. Yet, it still provides significant cost reductions by buying components from China.

Electronic Component Costs

I’ve started off by listing all the electronic components that we’ve already selected in part one of this series, including the Bluetooth microcontroller module, the GPS, accelerometer, connectors, the battery.

Then, I specify their prices for 100, 1k, 10k and 100k units. These volumes are assuming the product is expected to be a high-volume consumer electronic product. For high-dollar niche products lower volumes are likely more appropriate.

As you increase your manufacturing volume you will get discounts for purchasing the components in higher quantities. The best way to determine your quantity discounts is by getting quotes from the suppliers.

However, if you’re just looking for a ballpark estimate, you can roughly assume that each time you jump up by a factor of 10X you’re going to get between a 10% and 25% discount.

Once you get into really high volumes of 100k units or more, you have more pricing flexibility because at those levels you can negotiate pricing with your suppliers.

Printed Circuit Board

After listing the costs for all of the various components the next cost is the fabrication of the empty Printed Circuit Board (PCB). The two main criteria that impact the empty PCB cost are the number of layers and the size of the board.

After the empty PCB is produced, the next cost is the to solder on all of the electronic components. This step is called PCB assembly.

PCB assembly costs are mostly impacted by the total number of component pins to be soldered and the number of leadless or fine-pitch components. PCB assembly will usually be cheaper if you stick entirely to using surface-mount components and avoid mixing in any through-hole components.

You will learn that the cost to assemble the PCB is going to be a lot higher than the cost to fabricate the empty PCB. As a rough estimate about 25–35% of your PCB cost will be for the empty board, with the remaining cost being for the PCB assembly. Of course, this is in addition to the cost of the actual components themselves.

If you go to the website of many PCB prototype shops, like Sunstone Circuits, Seeed Studio or Gold Phoenix, you will find that they have calculators you can use to estimate the cost of your PCB.

Mechanical Costs

For most products, including our BLE tracking product example, the mechanical costs will primarily be for a plastic enclosure. In this example design I’m assuming the simplest possible enclosure which is comprised of just two pieces of plastic that form the top side and bottom side.

The main drivers on the cost for your enclosure are going to be the dimensions of the part that you’re making, what type of plastic you choose, how much plastic each part requires, and the number cavities in your injection mold.

You’ll want to always start with a single cavity mold which means it can produce only one part at a time.

As you increase your manufacturing quantity then you will want to transition to multi-cavity molds which can produce multiple copies of the same part with each injection. Multi-cavity molds significantly decrease the manufacturing cost for custom plastic parts.

Read the rest of this article here.

P.S. Download your free cheat sheet 15 Steps to Develop Your New Electronic Hardware Product.