The economics:

cost modelling for

selection

New approaches to Materials Education - a course authored by

Mike Ashby and David Cebon, Cambridge, UK, 2007
© MFA and DC 2007
 Outline: estimating process cost

• Assessing potential: cost and value

• Inputs to a cost model for selection

• The model and its implementation

• Cost drivers, batch size, assembly

• Exercises

More info:
• “Materials: engineering, science, processing and design”, Chapter 18
• “Materials Selection in Mechanical Design”, Chapters 7 and 8

© MFA and DC 2007

 Cost, price and value

 Cost = what it actually costs to make the part or product

 Price = the sum you sell it for
 Value = the worth the consumer puts on the product

The real requirement is

Cost < Price < Value To maximize profit, P - C
C < P < V we seek to minimize C

“Not worth the price” means P > V

“Good value for money”means P < V

The cost of producing a component of or product is made up of

 the material cost
 the cost of manufacture

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 The problem of material price

 Changing price of materials 2005 - 2007

$ per tonne

$ per tonne
Factor 0.6 Factor 0.4

0il

 The need: Cost modeling for material selection

40000
$ per tonne

$ per tonne 30000

Factor 3 Factor 4
20000

10000

© MFA and DC 2007

 Estimating cost

When alternative material-process combinations meet the constraints, it is

logical to rank them by cost
 Cost estimate for competitive bidding -- absolute cost is wanted, to  5%
 Cost estimate for ranking -- a relative cost is OK – but need generality

Generic inputs to any manufacturing process:

Materials

Energy
All of these Manufacturing
have an Capital Product
associated cost
process
Time

Information

© MFA and DC 2007

 Inputs to a generic cost estimator

Generic = can be applied to any process

Resource Symbol Unit

Materials including consumables Cm $/kg

Capital cost of equipment Cc $

cost of tooling Ct $

C
Time (including labor) overhead rate oh $/hr

Energy cost of energy Ce $/hr


C
Space, admin. a cost/hr s,a $/hr

C
Information R&D i $/hr Lump into
royalties, licenses overhead
rate C

oh

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 The cost per unit of output

Material costs Cm per kg, and a mass m is used per unit; m Cm

f is the scrap fraction (the fraction thrown away) 1 f

Tooling Ct is “dedicated” -- it is written off against the number Ct

of parts to be made, n n

Capital cost Cc of equipment is “non-dedicated”

1  Cc 
It is written off against time, giving an hourly rate.  
The write-off time is two . The rate of production is n units/hour. n  L . t wo 
The load factor (fraction of time the equipment is used) is L.
 
C
The gross overhead rate C oh
contributes a cost per unit of time oh
that, like capital, depends on production rate n n

Materials Tooling Capital, Labor, Information, Energy...

 m Cm    Ct   1   Cc  
C          Coh 

 1  f   n  n   L . t wo  
Batch size Rate of production

© MFA and DC 2007

 Features of a cost model

Casting alloy con-rod

Tooling
costs
dominate

Material and
labor costs
dominate

Sand LP Die
casting casting casting
 Identify most economic process
 Examine materials-cost sensitivity
 Explore alternative materials and processes
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Economic batch size

Desired batch size

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 Where do you get the input information?

 Material and process costs vary with time

and depend on the quantity you order

 CES has approximate cost for 2900 materials and 80 processes

 Web helps with commodity materials

 American Metal Market On-line, www.amm.com
 Iron & Steel Statistics Bureau, www.issb.co.uk
 Kitco Inc Gold & Precious Metal Prices, www.kitco.com/gold.live.html - ourtable
 London Metal Exchange, www.lme.co.uk
 Metal Bulletin, www.metalbulletin.plc.uk
 Mineral-Resource, minerals.usgs.gov/minerals
 The Precious Metal and Gem Connection, www.thebulliondesk.com/default.asp

 Ask suppliers: but how find them?

 Thomas Register of European Manufacturers, TREM

 Thomas Register of North American Manufacturers
 Kelly’s register

© MFA and DC 2007

 Cost modelling in CES

 m Cm   Ct  1  Cc 
C       Coh 

 1  f   n  n L . t wo 
Characteristics of the process

Cost of equipment Cc The database has

Cost of tooling Ct approximate value-
ranges for these
Production rate n


Site-specific, user defined parameters

Batch size n
Mass of component m These are entered
Capital write-off time two by the user via a
Load factor L
dialog box

C
Overhead rate oh

© MFA and DC 2007

 Cost model in CES Levels 2 and 3

Cost modelling
Relative cost index (per unit) 5 - 6 fx
Capital cost 2000 - 5000 GBP
Material utilisation factor 0.7 - 0.75
Production rate (units) 20 - 30 per hr.
Tooling cost 300 - 450 GBP
( p e r u n i t) ( G B P )

Tooling life 5000 - 10000 units

10 00 0
Graph Dialog box
o s t In d e xcost

1 000
Capital write-off time two = ….
C Relative

Component mass m = ….
10 0
Load factor L = ….
Material cost Cm =
10

1 10 0 10 000 1e +0 06 1e+008 Overhead rate C oh = ….

Batch Size
Batch size
Material Cos t=2GBP/kg, Com ponent

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Cost model in CES Levels 2 and 3

© MFA and DC 2007

 The main points

 To maximize profit: minimize cost C (economics of manufacture)

and maximize value V (technical performance and product image)

 Cost can be modeled at several levels -- depends on purpose

 To rank process options, approximate modeling is adequate

 A cost-model for this uses “generic” inputs: material, time, capital etc

 More precise analysis must be based on information from suppliers

or (if out-sourcing) contractors.

© MFA and DC 2007

 Exercise: using economic batch size

7.1 Metals can be cast in many different ways. A Browse Select Search
metal is to be cast to a simple shape. It is
expected that between 20,000 and 30,000 units 1. Selection data
will be needed. Use Level 3 of CES the software Edu
Edu Level
Level2:
2: Processes
Processes -- shaping
shaping
to identify the subset of casting processes that
2. Selection Stages
are economic at this batch size.
Graph Limit Tree

 Change the database to CES Edu Level 3

Eco batch size

Casting
 Use the Selection data tab to choose Joining Deform
Process Molding
Shape
Composite
ProcessUniverse: All Processes Surface Powder
Prototype

 Apply a Tree Stage to isolate Shaping \ Casting

 Make a Graph stage with Economic batch size
on the y-axis
 Use a Box selection to apply the limits

Results: Green sand casting, automated

Casting (die) High pressure die casting
Cosworth casting Low pressure die casting
Ferro die casting Shell casting
Gravity die casting Squeeze casting

© MFA and DC 2007

 Exercise: using the cost model
File Edit View Select Tools
7.2 A simple shape is to cast in aluminum alloy. It is
suggested that gravity die casting and ceramic Browse Select Search

mould casting might be good choices of process.

Plot the cost against batch size for these processes Table:
Table: ProcessUniverse
ProcessUniverse
using Level 2 of the database, assuming a material Subset:
Subset: Edu
Edu Level
Level 22
cost of $2 kg, and a compontent mass of 1 kg. The
overhead rate is $70/hour, the capital write-off time is ProcessUniverse Gravity die casting
Cost modeling
5 years, and the load factor is 0.5. Which process is + Joining
fx
Relative cost index
cheaper for a batch size of 1000? Assume that as + Shaping
+
the piston is simple in shape, it will fall near the Surface treatment

bottom of each cost-band.

Ceramic mold
casting
Result. Gravity die casting is the less expensive
process for a batch size of 1000.

Gravity die
casting

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