estimation handbook

Cost Estimating

Procedures and Support

Cost Estimating


_________________________________________________________________________Version 3.0 September-1-2002 Copyright Ford Motor Company Ltd

Cost Estimating


CHAPTER 1.01.1 1.2 1.3 1.4 1.5

SECTION INTRODUCTIONBusiness Background CAPE GRIMM Activity Based Costing Statement of Intent

2.02.1

BASIC ESTIMATE STRUCTURECost Elements - "Where is What"

3.0

MARKUPS3.1 End Item Scrap 3.2 SG&A 3.3 Profit 3.4 ED&T 3.5 Contingencies 3.5.1 Influence on Labour, Burden & Material Cost 3.5.2 Influence on Labour Cost Only 3.5.3 Influence on Burden Cost Only 3.5.4 Influence on Material Cost Only

4.04.1 4.2 4.3

RAW MATERIAL COSTSRaw Material Standard Parts Bought Out Parts

5.05.1 5.2 5.3 5.4

LABOUR COSTSOverview Direct Labour Indirect Labour Fringe

6.06.1

MANUFACTURING BURDEN (OVERHEAD) COSTSMachine Report Field Descriptions

7.0 8.0 9.0 10.0

ESTIMATING ASSUMPTIONS DISCUSSION PAPERS & POLICIES DISCUSSION PAPERS & POLICIES DISCUSSION PAPERS & POLICIES NA & EU NA EU

Bill Ewin - Coordinator FAO Cost Estimating 8-718-2264, CDS-ID: bewin e-mail: [email protected]________________________________________________________________________Version 3.0 September-1-2002 Copyright Ford Motor Company Ltd

Cost Estimating


1.0 Introduction1.1 Business Background The majority of parts that make a Ford vehicle are actually manufactured by external suppliers. To effectively manage this substantial vehicle cost, Cost Estimators in North America and Europe define the processes, materials and standard components necessary for the manufacture of vehicle parts. Cost estimates are used at different stages in the life of a vehicle program. They can be used to support the financially derived affordable cost targets; through the design/development of a vehicle they can help engineers achieve these targets; finally they can be used to support purchasing/supplier negotiations. In support of these requirements, estimates include a high level of technical detail. This detail includes physical specifications of the machine used to produce a part, quantity and cost specifications of raw materials, standard part requirements, labour and overhead burdens CAPE (Computer Aided Parts Estimating) goals. To facilitate the generation of best-in-class estimates CAPE was developed with the following goals: Provide estimates of part and tooling costs based on Best-in-World Processes. Reduce the time it takes to produce estimates. Provide accurate and consistent estimates through the pooling of corporate manufacturing knowledge otherwise localized. More accurately model manufacturing costs and effectively contain them through improved design and price negotiation. The system is made up of two major parts: 1.Expert CAPE Modules that provide specific knowledge process definition. 2.The Global Rate and Information for Machines and Materials (GRIMM) database which provides a central repository for cost and technical data for machines, materials and standard parts. This is a global DB2 mainframe database.

The CAPE System received the EAO Technology Award in March 1994. The CAPE System received the Process Leadership Award for Systems Excellence in 1996

________________________________________________________________________Version 3.0 September-1-2002 Copyright Ford Motor Company Ltd

Cost Estimating


1.2

CAPE

CAPE, Computer Aided Parts Estimating, is an advanced knowledge based global system designed to evaluate best processes and optimal costs for the manufacture of outside purchased parts worldwide. Currently, there are expert modules for Metal Stamping, Welding, Assembly, Injection Moulding, Rubber Moulding, Pressure Die Casting, Tube Manipulation and Wiring processes. Additionally, "Clean Sheet" provides the capability to create estimated for parts not covered by an expert module. In full production, CAPE will support expert functionality for all the major manufacturing processes. To optimize performance, distributed Oracle databases provide local copies of GRIMM data and retain local estimate detail. Latest release status and general information is available through the Ford Intranet at Web site address http://cew027.pd9.ford.com. Web site access will require password authorisation. Contact GRIMM Coordinator. (Web site data are confidential and is made only to authorized activities.) 1.3 GRIMM

GRIMM, Global Rates Information Machines and Materials, the global DB2 mainframe system used to store material prices and labour; is updated annually to reflect changes in economic levels and budgeted overhead rates and burden values. It is available as hard copy manual or through the Ford Intranet at web site address http//www.cs.ford.com/nes0/html/grimhme.html. Web site access will require password authorisation. Contact GRIMM Coordinator. (Data contained in the manual or Web site is confidential and distribution is made only to authorized activities.) 1.4 Activity Based Costing

An activity based cost allocation system requires identification of the drivers or activities that are creating a need for these overhead costs. For example floor space creates the need to heat an area and spend overhead burden on lighting and other utilities. To allocate cost to a product it is necessary to define what activities are needed in its manufacture. In the previous example heating and utility costs may be allocated to a product based on the total amount of floor space its production line employs together with related aisle-ways, safety clearances and stock storage areas.


Cost Estimating


The current system is a model of an activity based cost system that was originally developed in Europe in 1980. In 1996 the GRIMM global database was developed to support North America and Europe. In estimating the cost of a part the estimator defines the manufacturing processes used by the most efficient supplier to produce the part. Each process step is defined in terms of the machine employed. Each machine in the process has been studied with respect to the amount of burden it creates and the total burden of the product is the sum of all the individual machine burdens. The new global system allows estimators to develop estimates for products sourced from different countries. Presently over 1200 machines have been studied for each country with standard labour and burden cost rates per minute of machine operation included in the global database for use by the estimator. New machines and material are being studied and added to the database constantly. Annually the entire database is reviewed and updated for economic movements. To reflect the changing world business arena the emerging market countries are under review. 1.5 Statement of Intent

This document is intended for cost estimators. The information contained identifies the various cost elements that are used in a cost estimate. Non-estimators should understand that this document is provided to support the Cost Estimator in creating an estimate based on their individual extensive detailed manufacturing knowledge. All values referred to throughout this document are based on benchmarking data and actual data obtained from Ford suppliers. Note: - This is a live document and therefore subject to change and improvement.


Cost Estimating


2.0 Basic Estimate StructureDirect Labour

Indirect Labour LabourIncluding Contingencies

Fringe MRO Labour Standard Parts

Clean & Special Handling Machine Maintenance Tool Maintenance

Labour Labour Labour

Total Piece Cost

Manufacturing Cost

MaterialIncluding Contingencies

Raw Material Purchased Parts Depreciation Operating Supplies Interest Clean & Special Handling Capital Floor space Operating Supplies

End Item Scrap SG&A Profit ED&T BurdenIncluding Contingencies

MRO Indirect Materials

Machine Maintenance Capital Operating Supplies

Insu rance Utilities

Tool Maintenance Capital

__________________________________________________________________________________________________________________________________ Version 3.0 September-1-2002 Copyright Ford Motor Company Ltd

Cost Estimating


2.1 Cost Elements - "Where Is What"LabourDirect Labor Cost Indirect Labor CostPure Labour o Tariff Wage o Shift Premium o Efficiency Premium o o o o o o o o o o o o o o o o o o o o o o o Plant Supervision Plant Administration Plant Engineering Quality Control Production Control Laboratory (Plant) Health Department Plant Safety Plant Security Fire Protection Canteen & Kitchen Printing Office Internal Mail Energy Department Maintenance Internal Transport Cleaner Driver Setter Material Handlers Inspectors Office Cleaners Apprentices o o o o o

BurdensFringe BenefitsTo Employee Annual Leave Annual Bonus Public Holiday Sick Leave Other: - Time Off - Social - Union - Time Banked Hours - Community Service

Markups

Manufacturing BurdenPure Burden o Machine Cost: - Mach. Depreciation - Mach. Maintenance - Mach. Insurance - Mach. Capital Interest loss - Mach. Utilities: - Electricity, Gas, Water o Floor Cost: - Depreciation of Building and surroundings - Grounds - Parking lot - Fire protection - Building Maintenance - Materials - Power Plant - Energy Management - Environ Management - General Stores - Building Utilities: Electricity, gas, water - Services: Medical Services Security Waste Disposal Toilet Services Canteen Services - Supplies (Dir & Ind labour): Clothes, gloves, paper - Office Equipment (Indirect labour) - Mail - Telecommunications Bottom Line o SG&A Staff Salaries for: - Purchase - Sales - Marketing - Manuf Eng - Accounting - Systems - Human Resources Office Equip Deprn Office Supplies - Postage, paper Office Utilities: - Electricity, Gas, water Warranty Costs Public Relation Costs Travel & Entertainment Telecommunications Amortisation of Patents Basic R&D Corporate Overhead o End Item Scrap o Engineering, Design & Testing (ED&T) o Profit

Not To Employee o o o o o o Company Pension Retirement Supplement Social Security Health Insurance Other Statutory Payments Other: - Training - Sports Grounds - Library

Manufacturing Burden Maintenance, Repair & Other- Related Labour o o o o o o o o o Floor Office Equipment Office Cleaning Office Material Toilet Transport Equipment Laboratory Equipment Medical Equipment All Other: - Outside Activities - Exhibitions o o o o o Maintenance, Repair & Other - Related Burden Building Maintenance Tool Maintenance Mach. Maintenance Cleaning Special Handling

Not To Bottom Line o Contingencies: - Material - Labour - Burden


Cost Estimating


3.0 MarkupsMarkups are applied to the bottom line total of the estimate that includes material, labour and burden. Their effect is compound (13.02%) not additive (Europe only).

3.1

End Item Scrap.

To achieve Ford Q1 status suppliers need to apply Statistical Process Control (SPC) to ensure that 99.73% (3Sigma) of parts are good with the resulting 0.27% scrap. The estimating allowance of 0.7% accepts that set up losses / material purging etc. will be additionally encountered. For more details on Scrap levels please reference chapter 8.0.

3.2

Sales General and Administration (SG&A).

SG&A is applied as a percentage 7.50% maximum in Europe and North America (12% in Mexico and Maquiladoras). The commonality was identified during the most recent study of SG&A when the accounts of several publicly owned automotive parts producers were studied. SG&A seeks to recover the administration and commercial costs incurred by the following company activities: - Sales expenses - Security Costs - Bad Debts - Depreciation on office equipment - Warranty Costs - Inventory carrying costs - Office supplies, postage, utilities - Amortization of patents - Charitable Contributions - Corporate overhead allocations - Legal, license fees, royalties - Public Relations Costs - Misc. taxes (not income or property) - Basic Research & Development -Travel & Entertainment - Office Staff Salaries and Benefits (Purchasing, Human Resources for salary employees, Corporate Officers Finance & Accounting, Systems & Data Processing, Sales & Marketing, Staff Manufacturing Engineering not at plant)

3.2.1 Financing Raw and Semi Finished Materials Typical company carries 5.5 days supply of raw material and in process inventory equaling 2.4% of turnover. Interest charged at 9% results in

0.2%

3.2.2 Terms of Payment Typical period for terms of payment is 45 days on 50% of turnover (excluding manufacturing). [45days/228 avg. working days]/2 @ 9% results in 0.9% 3.2.3 Administration & Commercial Costs Typical combined value identified from studies results in For more details on SG&A levels please reference chapter 8.0. 6.33%

3.3

Profit.

Profit is applied as a percentage (4.4% in Europe and 4% to 8% in North America) and is a return for investment risk. The rationale for variability is that the vertically integrated manufacturer has assumed more business risk than the supplier who is merely an assembler and should therefore be compensated for this risk. For more details on profit levels please reference chapter 8.0.Purchased parts cost as a percentage of end item manufacturing cost 0% to 40% Over 40% to 50% Over 50% to 65% Over 65% to 75% Over 75% to 85% N.A. profit markup 8.0% 7.0% 6.0% 5.0% 4.5% 4.0% E.U. profit markup 4.4% 4.4% 4.4% 4.4% 4.4% 4.4%

Over 85%


Cost Estimating


3.4 Engineering, Design & Testing (ED&T) - Europe ED&T (previously known as Research, Development and Engineering, RD&E) is applied as a percentage (1% to 5% variable) when it is incurred. Care must be taken to ensure that any ED&T cost applied is specific to Ford and over and above the levels that the supplier would incur in their normal course of business. The ED&T markup is to reimburse suppliers for FSS and black box expenditures. This markup covers costs that were incurred due to the Engineering, Designing & Testing of parts that are unique to Ford. ED&T expenses for normal business new products and manufacturing methods are not directly recoverable from Ford and are part of SG&A. When a supplier is known to provide a significant ED&T contribution the following percentages are suggested values for guidance.Manufacturing Category Forging & Foundry Metal Stampings Fabrications Machined Metal Trim Materials Plastic Components Mechanical Assemblies Rubber Products Electrical & Electronics ED&T Percentage (Europe Only) 1.5% 1.5% 1.5% 1.5% 3.0% 3.0% 3.5% 4.0% 5.0%

The following descriptions are not definitive and are only guide to the above. Forging & Foundry General Forging Aluminium Sand Casting Aluminium Die Casting Grey Iron Casting Powdered Metal Parts Mechanical Assemblies Steering Gear Latches Drive Shafts Differentials Shock Absorbers Rubber Products Drive Belts Hoses / Seals Rubber-Metal Bonding Suspension Bushes Weather-strips Metal Stampings Aluminium Stamping Small/Med/Large Stamping Deep Drawn Stamping Cold Forming Plastic Components Ashtrays Climate Control Ducts Bumpers Wheel Covers Interior/Exterior Mouldings Electrical & Electronic Batteries / Motors Clocks / Instruments Lamps / Wirings Radio & Accessories Sensors / Modules Fabrications Sun Roofs Cross Members Jacks / Wheels Exhausts Seats Trim Materials Carpet Headliners Sun Visors Trim Panels Machined Metal Engine Valves Piston Rings Machined Parts Engine Mounts

For more details on ED&T levels please reference chapter 8.0.


Cost Estimating


Engineering Design and Testing (ED&T) - North AmericaEngineering Design and Testing (ED&T) funding is based on the value added activities associated with meeting all FPDS (Ford Product Development System) requirements during the product development process. ED&T is for work directly related to a vehicle program. It consists of one time costs based on the scope of work and magnitude of change for the application. The PMT and the Full Service Supplier should work together to establish the overall program design scope and document the associated ED&T activities. ED&T Guidelines (worksheets) have been established to provide a common approach to formulating these costs. Completion of the ED&T worksheets will promote a factbased discussion, allowing the FSS Supplier and the PMT to co-manage the program engineering costs. ED&T Worksheets provide a format for: engineering hours, studio hours, design hours and test costs. The billable hours of value added FSS activities are product engineering activities, CAD activities and design leader activities. ED&T costs are included in the Affordable Target established for the overall component / system.

For more details on ED&T levels please reference chapter 8.0.


Cost Estimating


3.5

Contingencies

There are other contingencies that may have to be added to basic process minute cycle times to allow for predictable or non-predictable interruptions to the production and will influence the final cost in different ways: 3.5.1 3.5.1.1 Influence on Labour, Burden and Material Cost Allowance

Allowance percentage is for normal or predictable equipment downtime such as tool or material changes and operator relief allowance such as: Personal Toilet Refreshment breaks Lunch breaks Wash up time Fatigue Operator recovery Delays Tool change Material change Allowance is the percentage (5% to 10%) of allowed time averaged over the shift that the operation is stopped under normal operating conditions with no production. Allowance increases the Process minutes per piece and decreases the Yield pieces per minute. 3.5.1.2 Off Standard

Off Standard percentage (0% to 10%) is for the provision for non-predictable downtime for problems such as broken tools, material handling delays, untrained operator etc. that interrupt the production. Off Standard increases the Process minutes per piece and decreases the Yield pieces per minute. 3.5.1.3 In-Process Scrap

In-Process Scrap is the non-reclaimable production losses of parts in the manufacturing progress that is normal for unique manufacturing operations such as runner system losses for plastic mouldings, dross losses for aluminium die castings, foaming, blow-out for soft panels and runs or dirt ingress in painting operations. In-Process scrap is applied to the manufacturing cost (including material, Labour and burden costs) of the specific operation within the estimate build-up.


Cost Estimating


3.5.2 3.5.2.1

Influence on Labour Cost Only Relief

Relief is the percentage of manpower given to accommodate operator to provide continuous equipment operation during work breaks. This is referred to as 'tag' relief where spare operators are on hand to take over machine operation whilst the regular operator needs to take a break. This is different to 'block' relief where the production line stops for a fixed period of time (e.g. refreshment breaks or lunch breaks). The percentage is applied to the manning level to give Adjusted manpower.

3.5.3 3.5.3.1

Influence on Burden Cost Only Uptime

Uptime percentage (85% to 95%) is for the time a machine is available for production allowing foe predictable maintenance. This is preset within GRIMM based on experience reflecting the industry and cannot be adjusted by the estimator

3.5.4 3.5.4.1

Influence on Material Cost Only Reclaimable Scrap

Reclaimable Scrap is the reclaimable production losses of parts and material offal in the manufacturing progress that is normal for unique manufacturing operations such as sheet metal stampings, forging flash, metal residue from machining operations, plastic moulding flash. All this scrap can be either reground in the case of plastic mouldings and immediately introduced back into the manufacturing process or sold for re-melting and subsequent use in new raw material. The effect of reclaimable scrap is to reduce the overall cost of the raw material used in the production process.


Cost Estimating


4.0 Material Cost4.1 Raw Material Material price data is collected by estimators and the GRIMM materials administrator. The data is checked for validity and added to GRIMM. If additional technical data relating to the material is required to support estimating processes the materials administrator will, in conjunction with the estimators, research and define the necessary information. Only one price per material will be included in the database, based on a realistic price for a typical volume for the specific material. In most cases this price is obtained from the raw material producers. This approach is designed to ensure the data is well maintained and of good quality. Further volume sensitivity adjustments are left to the estimator e.g. where product design releases a low usage material for high volume purposes. Where a supplier purchases from a stockist due to his low usage and incurs additional the cost should be investigated for best business practice.

4.2 Standard Parts. Standard parts are stored in GRIMM. At present the majority of standard parts are those required by the wiring harness estimating module. There is, in addition some standard hardware (nuts and bolts etc.).

4.3 User Defined Bought Out Parts. Estimators can define non-standard bought out purchased parts and these are stored in the estimates. These can be recovered for use in new estimates if required. The originator of the User defined bought out part is the owner and the only person that can modify the part.


Cost Estimating


5.0 Labour costs5.1 OverviewThe combined labour calculation Cost estimating uses a combined labour cost within an estimate; this is to recover the cost of direct labour, supporting (indirect) labour and fringe costs. The calculation; ((Direct labour + (DL x Fringe %)) + ((Indirect Labour + (IL x Fringe %)) Direct Labour is defined as labour that directly adds value in the manufacturing process. The cost is expressed as a rate per hour and represents the basic wage of a direct labour worker before taxes i.e. a machine operator or an assembly worker. Indirect Labour is defined as labour not associated with adding value in the manufacturing process of a specific product. It is labour that is required to support the direct labour worker and includes supervision, quality and internal transport etc. Indirect labour is expressed as a percentage (%) of direct labour. Fringe is the cost of employing labour and includes shift premium, insurances, vacation & holiday pay, company pensions etc. and government mandated benefits i.e. social security, unemployment benefit and is expressed as a percentage (%) applied to both Direct and Indirect Labour. MRO (Maintenance Repair & Other) Labour is defined as labour not associated with adding value in the manufacturing process of a specific product. It includes the skilled labour including machine repair, electricians, millwrights, tool & die repair etc. It constitutes part of the total labour cost but is not included in combined labour. 5.2 Direct labour Costs are developed for eight countries (six in Europe and three in America), Britain, Germany, Spain, France, Portugal, Italy, North America and Mexico & Maquiladoras. Direct labour costs are studied in each country and are developed from source country government statistics, Ford pay rates, supplier information and include shift premiums. 12 industries are covered each having 4 skill levels costed. The industries are: (A) General manufacturing (E) Rubber and plastic (H) General Labour & Wiring (P) Aluminium Foundry (C) Forging/ Foundry (F) Glass (K) Body in White (S) Robots (D) Chemical and Electronic (G) Textile (M) Automotive stamping (T) Tool room

Each group has a skill level associated with 'A' being unskilled, 'B' semi skilled 'C' skilled and 'S' specialised. A skilled textile worker would be categorised as 'GC'. It is possible that a specific supplier may pay workers more than our averages but unless there is an extremely strong case our standard data should be applied. In North American, any adjustments to labour negotiated by purchasing should be an off-line adjustment to the estimate. Labour detail (including all costs) is stored in GRIMM and is updated annually using government statistical data.


Cost Estimating


5.3 Indirect Labour The labour that is required to support the direct labour. It is recovered as a percentage allocation against direct labour. The levels vary depending on the industry type and are developed using three 'tool kits'. The first is Industrial and government survey data that gives some guidance. The second is the result of an FAO indirect labour study involving national statistics departments, Ford plant data and representative international suppliers. The third is analysis carried out on best in world companies by Arthur Anderson and the Boston Consulting Group. For example within a general manufacturing environment the rate manual data indicates that for every direct worker the indirect worker cost would be 55% while in a body in white environment it would be 105%. The percentages can vary from the rate manual levels dependent on automation levels and supporting activities as higher levels of automation tend to reduce direct but increase indirect labour levels. The following list is a guide to the categories that are classified as indirect labour.

Plant supervision Production control Plant security Internal Mail Cleaners Materials handling

Plant administration Laboratory Fire protection Energy dept. staff Drivers Inspectors

Plant engineering Health department Canteen staff Maintenance Setters Office cleaning

Quality control Plant Safety Printing office Internal transport Oilers Apprentices

Indirect Labour % of Direct Labour - 2001 Economics

IndustryGeneral Manufacture Foundry & Forging Chemical & Electrical Rubber & Plastics Glass Textile General Labour & Wiring Body in White Automotive Stamping Aluminum Foundry Robots Tool Room

Indirect Uplift %55 50 75 70 75 55 75 105 75 40 60 30


Cost Estimating


5.4 Fringe The cost of employing direct and indirect workers. It comprises of governmentmandated costs such as national insurance and pensions etc. and company costs such as vacation and social clubs etc. For most countries the government mandated fringes are well defined and can be expressed accurately as a percentage of earnings. Company fringes can however, vary significantly and often the larger suppliers have very high quality sports facilities etc. that increase fringes on a per head basis. The fringes that are used are weighted towards larger companies, as multinational companies are Fords preferred partners. The following table is an indication of the fringe breakdown and the values are subject to annual change.Fringe Benefits - 2001 Economics

Employee Fringe Benefits Company MandatedAnnual Leave (including holiday bonus) Annual Leave (including holiday bonus = 14th month) Annual Leave (including holiday bonus of a day's pay for each day of leave) Year end and other bonus payments (13th month plus other non variable payments) Company (occupational) pensions and life insurance Retirement, Savings supplement Other (time-off community and union facilities) Other (time-off, training, community and works council facilities) Other (time banked hours, cancelled holidays, community and union facilities) Other (non-specified)

Britain

Germany Spain

France Portugal Italy

USA

12%

18.6% 20.6%

11.6% 20%

10.3% 10%

1% 8% 1% 2%

8.4% 7.6% 1.1% 7.8%

10.2% 2%

10.2% 1%

8.3%

18.1% 14% 5%

7.3% 24% 43.5% 3% 35.8% 2% 24.8% 4% 32.3% 9% 35.7% 38%

Company Total Government MandatedEmployer's social security contributions Public holiday pay Sick leave and payment Health Insurance Other statutory payments

11% 4% 5%

29.3% 5% 3.6% 0.4% 38.3%

16% 6% 4.6%

54% 5.1% 4.7% 1.5% 65.3%

29% 6.5% 5.6%

51% 5.8% 4.8%

8%

5% 20% 26.6% 41.1% 61.6% 13%

Government Total Final Total

44%

81.8%

62.4%

90.1%

73.4%

97.3% 51%

Fringe Rate Source: Actual Industry Collective Agreements and Department of Social Security


Cost EstimatingCOST DATA SUMMARY BRITAIN 2001 (GBP/HOUR)Labour Category GENERAL MANUFACTURE Lab Direct Fringe Direct Indirect Indirect Fringe Indirect C/bined Labour Category Group Rate % Total % Rate % Total Total AA 6.52 44 9.39 55 3.59 44 5.16 14.55 AUTOMOTIVE AB 7.69 44 11.07 55 4.23 44 6.09 17.16 STAMPING AC 8.79 44 12.66 55 4.83 44 6.96 19.62 AS 9.04 44 13.02 55 4.97 44 7.16 20.18 CA 6.69 44 9.63 50 3.35 44 4.82 14.45 ALUMINIUM CB 7.69 44 11.07 50 3.85 44 5.54 16.61 FOUNDRY CC 8.39 44 12.08 50 4.20 44 6.04 18.12 CS 8.63 44 12.43 50 4.32 44 6.21 18.64 DA 6.68 44 9.62 75 5.01 44 7.21 16.83 ROBOTS DB 7.26 44 10.45 75 5.45 44 7.84 18.30 TOOLROOM DC 9.65 44 13.90 75 7.24 44 10.42 24.32 DS 9.93 44 14.30 75 7.45 44 10.72 25.02 EA 6.67 44 9.60 70 4.67 44 6.72 16.33 EB 8.42 44 12.12 70 5.89 44 8.49 20.61 EC 9.88 44 14.23 70 6.92 44 9.96 24.19 ES 10.17 44 14.64 70 7.12 44 10.25 24.90 FA 5.58 44 8.04 75 4.19 44 6.03 14.06 FB 5.77 44 8.31 75 4.33 44 6.23 14.54 GA 4.94 44 7.11 55 2.72 44 3.91 11.03 GB 5.52 44 7.95 55 3.04 44 4.37 12.32 GC 6.46 44 9.30 55 3.55 44 5.12 14.42 GS 6.65 44 9.58 55 3.66 44 5.27 14.84 HA 6.92 44 9.96 75 5.19 44 7.47 17.44 HB 7.29 44 10.50 75 5.47 44 7.87 18.37 HC 9.25 44 13.32 75 6.94 44 9.99 23.31 HS 9.51 44 13.69 75 7.13 44 10.27 23.97 KA 6.43 44 9.26 105 6.75 44 9.72 18.98 KB 7.98 44 11.49 105 8.38 44 12.07 23.56 KC 8.97 44 12.92 105 9.42 44 13.56 26.48 KS 9.23 44 13.29 105 9.69 44 13.96 27.25


FORGING & FOUNDRY

CHEMICAL & ELECTRICAL

RUBBER & PLASTICS

Lab Direct Fringe Direct Indirect Indirect Fringe Indirect C/bined Group Rate % Total % Rate % Total Total MA 6.43 44 9.26 75 4.82 44 6.94 16.20 MB 7.98 44 11.49 75 5.99 44 8.62 20.11 MC 8.97 44 12.92 75 6.73 44 9.69 22.60 MS 9.23 44 13.29 75 6.92 44 9.97 23.26 PA 6.44 44 9.27 40 2.58 44 3.71 12.98 PB 8.20 44 11.81 40 3.28 44 4.72 16.53 PC 9.91 44 14.27 40 3.96 44 5.71 19.98 PS 10.19 44 14.67 40 4.08 44 5.87 20.54 RA 5.63 44 8.11 60 3.38 44 4.86 12.97 TA 7.27 44 10.47 30 2.18 44 3.14 13.61 TB 9.03 44 13.00 30 2.71 44 3.90 16.90 TC 9.74 44 14.03 30 2.92 44 4.21 18.23 TS 10.01 44 14.41 30 3.00 44 4.32 18.74 COUNTRY COSTS (GBP) AIR, COMPRESSED ELECTRICITY GAS, NATURAL STEAM WATER, FRESH WATER, PROCESSED FLOOR OPERATING SUPPLY FLOOR CAPITAL FLOOR LABOUR FLOOR TOTAL INTEREST RATE WORK DAYS SHIFTS HOURS PER SHIFT TOTAL HOURS Cost 0.023 0.041 0.061 11.750 0.481 0.160 14.91 79.83 8.01 102.75 5.6 233 2 10 4660 Unit M3 KWATT M3 M3 M3 M3 M2/YR M2/YR M2/YR M2/YR %

GLASS TEXTILE

GENERAL LABOUR & WIRING BODY IN WHITE

Direct Rate Source: Incomes Data Services + Company Averaged Data Including Industry Agreements Fringe Rate Source: Incomes Data Services + National Association of Pension Funds + Department of Social Security Indirect Rate Source: FMC Analysis

___________________________________________________________________________________________________________________________________Version 3.0 September-1-2002 Copyright Ford Motor Company Ltd

Cost Estimating


6.0 Manufacturing Burden CostsREPORTID 3 GRIMM MACHINE RATE DETAIL REPORT REPORT DATE 2001-01-05 Machine No.: 1400350 POUNDS STERLING Machine No.: 1400350 Shift: 2 GREAT BRITAIN Economic Date: 2001-01-01 Machine Type: 712 PLASTIC INJECTION MOULDING Process: PF ______________________________________________________________________________________ Date Capital Installat'n Freight Residual Replacement Initial 1994-01-01 50403 5000 0 5000 50403 Current 1996-01-01 47883 4750 0 4750 47883 Adjust 0 0 0 0 Lifetime Equipment: Years SIC Code PPI-I PPI-C INJECTION MOLD 450 X 450 PLATEN 10 1 100.00 100.0 Manufacturer: ARBURG Technical Data: ARBURG 270 C 500-250 ALLROUNDER JUBILEE PLATEN SIZE: 450 X 450MM (17.6 X 17.6") MOLD DIAMETER 270MM (10.7") CLAMPING FORCE 50 TONNES (55 TONS) SCREW DIAMETER 35MM (1.38") Uptime 0.95 Manning Type 1 Restricted = Width 2.0 Floor Cost 102.7522 Floor space Area (m2) 34.20

Restricted + Length 3.7

Restricted Work Days Standard Height per year Mins/hour 0.0 233 60 _ Labour __________________________________________________________________________ No. Group Dir Lab/Hr Fringe/Hr Ind Lab/Hr MRO Lab/Hr Total Lab/H 1 EB 8.4180 6.3000 5.8920 0.8220 21.4320 _ Factors _________________________________________________________________________ O.S Labour Capital O.S. Labour Capital Capital Maint: 0.0240 0.0307 0.0039 Clean: 0.0000 0.0000 0.0000 Insur: 0.0200 Tool: 0.0174 0.0334 0.0055 SpHdlg: 0.0000 0.0000 0.0000 __________________________________________________________________________________ O.S Capital = Burden + MRO Labour = Total/Hr Total/Min Depr: N/A 1.0816 1.0816 N/A 1.0816 0.0180 Inter: N/A 0.3329 0.3329 N/A 0.3329 0.0055 Maint: 0.2853 0.0464 0.3317 0.3650 0.6967 0.0116 Flspc: 0.1152 0.6167 0.7319 0.0619 0.7938 0.0132 Tool: 0.2069 0.0654 0.2723 0.3971 0.6694 0.0112 Clean: 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 SpHdlg: 0.0000 0.0000 0.0000 N/A 0.0000 0.0000 Ind.Mt: 0.0000 N/A 0.0000 N/A 0.0000 0.0000 Insur: N/A 0.2163 0.2163 N/A 0.2163 0.0036 Utils: 0.5238 N/A 0.5238 N/A 0.5238 0.0087 Total: 1.1312 2.3593 3.4905 0.8240 4.3145 0.0718 _ Per Minute Costs ________________________________________________________________ Dir Lab 0.1403 Fringe 0.1050 Ind Lab 0.0982 Comb Lab 0.3435 MRO Lab 0.0137 Total Lab 0.3572 TOTAL / MIN 0.4152

Deprec Utilities Floorspace Ind Mtls Insurance Oth Burden Total Burden 0.0180 0.0087 0.0121 0.0000 0.0036 0.0156 0.0580 __________________________________________________________________________________ Code Utilities Description Usage/hour Unit of Measure Cost/Hr ELEC ELECTRICITY (DUTY) 19.5000 KWATT (power 0.5238


Cost Estimating


6.1

Machine Report Field Descriptions

The report shows a typical breakdown of operating cost of a machine tool. The following pages describe the breakdown field by field. Initial, Current and Adjustment These fields relate to the capital cost (purchase price) of the machine. Initial. Is the data used when the machine was added to the GRIMM database. Initial data comprises of: The date when the machine was first entered. The capital cost of the machine. The Installation cost that is set aside for preparing the factory site, preparing electricity, air, water etc. supplies and commissioning the machine in readiness for production. This value is typically 10% of the capital cost. Freight cost that is in addition to the capital cost. This is not normally incurred in Europe but the field has been entered to support North American practice and in preparation for developing databases for emerging markets. Residual cost is the perceived value of the machine at the end of its lifetime period. This can vary considerably but is typically 5% of the capital cost. Replacement cost is the current cost required to replace the machine. It is calculated; Capital cost + installation cost + freight - residual = Replacement. Current. Is the current value of the above data. Adjustment. Is used for corrections or amendments. Equipment. A description of the machine normally indicating its type and capacity. Manufacturer. The maker of the machine. Technical data. Relevant description showing the capacity of the machine. Lifetime Years. The Financial life (the time over which the machine is depreciated) of the machine. The number of years is established by the GRIMM team and is based on information from the machine supplier, users of similar machines and accounting practices. Lifetime will normally range between 5 and 12 years. SIC code. This is the Standard Industry Category and it is used to categorise the GRIMM machines into groups. This enables selective updating if one group of machines has a greater or smaller economic shift than others.


Cost Estimating


REPORTID 3 GRIMM MACHINE RATE DETAIL REPORT REPORT DATE 2001-01-05 Machine No.: 1400350 POUNDS STERLING Machine No.: 1400350 Shift: 2 GREAT BRITAIN Economic Date: 2001-01-01 Machine Type: 712 PLASTIC INJECTION MOULDING Process: PF ______________________________________________________________________________________ Date Capital Installat'n Freight Residual Replacement Initial 1994-01-01 50403 5000 0 5000 50403 Current 1996-01-01 47883 4750 0 4750 47883 Adjust 0 0 0 0 Lifetime Equipment: Years SIC Code PPI-I PPI-C INJECTION MOLD 450 X 450 PLATEN 10 1 100.00 100.0 Manufacturer: ARBURG Technical Data: ARBURG 270 C 500-250 ALLROUNDER JUBILEE PLATEN SIZE: 450 X 450MM (17.6 X 17.6") MOLD DIAMETER 270MM (10.7") CLAMPING FORCE 50 TONNES (55 TONS) SCREW DIAMETER 35MM (1.38") Uptime 0.95 Manning Type 1 Restricted = Width 2.0 Floor Cost 102.7522 Floor space Area (m2) 34.20





Cost Estimating


PPI-I/ C. Producer Price Index - Initial and Current. The producer price index is an economic indicator and is used in relationship with the SIC code. The PPI shows the economic movement of the category. GRIMM uses two PPI's, one is the index that prevails when the machine is added to GRIMM thus the 'Initial' and the other is the one that prevails currently thus 'current'. Uptime. The time that a machine tool is available for production. This allows for maintenance. Was known as utilisation or technical availability. Manning type. GRIMM has three manning types. Type 1 The most common and allocates full indirect & fringe costs per direct head. Type 2 Allows indirect and fringe to be allocated even if no direct head is allocated. A typical application is a robot. Type 3 This has no associated direct, indirect or fringe labour costs. Floor cost. This is the cost of 1 square metre of floor space per year. It is made up from the three major categories listed below. For more details on floor cost please reference 8.0 Floor Operational Supply. This is effectively the cost of running the building, i.e. lighting, heating, general running, kitchen facilities etc. Floor Capital. This is the cost of buying the building (excluding any government grants) and is depreciated over 50 years. Floor Labour. This is labour that is required to run the building but is independent of production. Restricted length. The length of the machine in metres. Restricted width. The width of the machine in metres. Floorspace area The area of floor space allocated to the machine. The calculation is the length + 2 metre x the width + 2 metre plus 50%. The additional 2 metres are for gangways and the additional 50% is for storing raw material, finished parts and work in progress. Restricted height. Not currently used but is a provision to use if the GRIMM team encounters machines that are particularly tall needing special facilities. Work days per year. The number of working days per year for the country. Calculated as 365 - (weekends + public holidays + company vacations)


Cost Estimating







Cost Estimating


Standard Minutes / Hour. Provision, not used. Labour group. (Reference chapter 5.0 Labour) Direct labour per hour. (Reference chapter 5.0 Labour) Fringe labour benefit per hour. (Reference chapter 5.0 Labour) Indirect labour per hour. (Reference chapter 5.0 Labour) MRO. Maintenance, Repair, and Other is a burden related cost based on a percentage of the capital cost of the machine. MRO covers four categories, Machine maintenance, Tool maintenance, Cleaning and Special handling. Notenot every machine will use all four categories. Each of these four categories has three sub categories, Operational supplies (consumables' etc.) Labour (machine fitters) and Capital (spare parts, toolroom and maintenance machines). OS Hydraulic Oil Lubrication Oil Cleaning Fluid Packaging Labour M/C Fitter M/C Fitter M/C Fitter M/C Fitter Capital Oil Seals for Lead Screw Surface Grinding Machine Vibrator for Cleaner Bearings for Crane

M/C Maintenance Tool Maintenance Cleaning Special Handling

The purpose of MRO is to recover labour and overhead costs of maintaining the machine and the FORD owned tool used by the machine. In addition carrying out any specialised cleaning and special transportation handling. The MRO percentages vary over different machine types but the guide below gives typical values. Specific values can be seen on the GRIMM machine detail report. OS 2.31% 1.68% 0.62% 0.62% Labour 3.46% 2.50% 3.12% 2.50% Capital 0.39% 0.51% 1.00% 1.00%

M/C Maintenance Tool Maintenance Cleaning Special Handling

(OS = Operational supplies) These percentages are applied to capital cost per the equation shown below. Category percentage x (Capital cost + Installation cost) (Annual days x Hours x Shifts) x Uptime


Cost Estimating







Cost Estimating


Insurance. Insurance is based on a percentage of the machine's replacement cost. It is typically 1% to 2% of capital and on average approx. 1.15% Depreciation. The cost per hour of depreciation. Calculated as follows. Replacement cost___________ (Annual days x Hours x Shifts x Lifetime years) x Uptime Interest. The notional interest that could have been obtained if the prime and installation costs had been invested in commercial bank deposits. Applied to 50% of the cost as a lifetime average. Calculated as follow (Capital cost + Installation cost) x 50% x Interest rate (Annual days x Hours x Shifts) x Uptime Maintenance. As described under MRO (maintenance). Floor space cost. As described under floor space item. Tool. As described under MRO (Tool). Cleaning. As described under MRO (Cleaning). Special handling. As described under MRO (Special Handling). Indirect materials. These are operational supply items and would typically be welding wire or chemicals for plating facilities etc. Insurance. As described under insurance above. Calculated as follows. Replacement cost x Insurance rate__ (Annual days x Hours x Shifts) x Uptime Utilities. These are operational supply items such as Electricity, Gas, Compressed air, water etc. required to run the particular machine. Calculated as follows. (Utility usage x utility rate) NB: the exception to this rule is electricity (duty) where the usage is reduced to 66% to represent peak and low power requirements e.g. during indexing time when there is no material cut being performed or when a machine retracts to eject a component and no holding pressure is required.


Cost Estimating


7.0 Basic Assumptions used in the Rate ManualHours per year. All of the calculations used in the development of overhead cost for a machine are reliant on the number of hours in a working year. The rational for that is explained below. 100-hour working week basis for the rate manual. A 100-hour working week is used in the rate manual. International studies indicate that world class companies work a minimum 2 shift pattern with overtime (40 + 40 = 80hours + overtime = roughly 100 hours), many work a reduced hour 3 shift (30+30+30) = 90hrs). The working week is assumed to cover 5 days. Working days per year. Days per year vary by country because statutory holidays, bank holidays etc. differ. Different companies may also allow additional holidays but this is of course at their own discretion. Typically days per year are calculated as: 365 - 104 (Weekends) = 261 - 10 (Bank holidays. This varies by country) = 251 - 10 days shut down (Ford driven) = 241 - 10 days shut down (Christmas) = 231. The final days per year figure will vary by country.Working Days 2001 Economics

Company mandated Annual Shutdown Plant Vacation Christmas Vacation Company Total Government mandated Weekends Public Holidays Christmas Holidays Government Total

Britain 15 0 5 20 104 6 2 112

Germany 20 2 4 26 104 8 2 114 140 225

Spain 20 0 4 24 104 13 1 118 142 223

France 15 0 2 17 104 11 1 116 133 232

Portugal 20 0 2 22 104 11 1 116 138 227

Italy 20 0 2 22 104 11 2 117 139 226

USA 10 0 2 12 104 11 1 116 128 237

Final Total Non Work Days 132 Working Days Available 233

Equipment Investment. Capital is funded directly from the supplier company profits and not from a commercial bank loan. (As described under Interest section 6.1)


Cost Estimating


8.0 Discussion Papers and Policies NA & EUThe following pages include some guidance on particular aspects of the cost estimating business that estimators and suppliers may use as reference during discussions on estimated costs/ prices. The pages have been prepared by the Special Studies teams in North America and Europe and are common to both. 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 8.11 8.12 8.13 8.14 8.15 8.16 8.17 8.18 8.19 8.20 8.21 8.22 Complexity costs Profit markups Interest Depreciation methods Scrap Inventory carrying costs Floor space costs Overtime costs Sales General and Administration (SG&A) markups Quality Testing Profit and loss scenario Tricks Component Markups Freight Best-In-Class / Best-In-Country Licensing Fees Exchange Rates Disclosure Policy Real Profit Return on Sales & Return on Assets Machine Policy Relief Factors


Cost Estimating


8.1 Subject: Complexity CostsBackground"Complexity cost" is defined as the cost of the marginal work incurred (or avoided) when the number of part variations produced in a facility changes. Items such as (1) changes in scheduling department overtime (2) changes in die set/shipping patterns (3) changes in plant material flow would be considered complexity costs. Estimates should not normally consider complexity cost items. For exceptional cases in which estimators feel complexity costs should be included in an estimate the Special Studies group should be consulted.

DiscussionWhen volume in a facility remains constant but the number of part variations rises (i.e. a plant's 1,000,000 parts/year changes from being 500,000/year of 2 parts to 250,000/year of 4 parts) it may be suggested that additional fixed costs ("complexity costs") are being incurred and that this justifies the re-pricing of parts. Cost Estimating uses "average" markups for Indirect Labor and SG&A which represent an "average" level of complexity for all parts. On any particular part, the actual marginal Indirect Labor and SG&A costs may be somewhat different than the estimate. We use averages (1) because complexity costs are a small part of total part cost which should not materially affect total costs and (2) because of the impossibility of accurately estimating the exact marginal change in per-piece cost incurred for every change in volume or part count which occurs. Changes involving the addition or deletion of significant amounts of material, labor or machine times are not considered changes in "complexity" and should be fully costed in estimates. These changes might involve such things as: Additional machine time, material and labor to purge a plastics system with the addition of a new color. Additional direct labor to perform an added operation

ConclusionDepartmental policy is that complexity costs are not to be added to part estimates. However, additional manufacturing costs caused by design changes should always be included in estimates. It is also departmental policy that no complexity costs are to be added in situations where existing parts volumes are split into two part numbers. An example of the latter might be: A part was common to two vehicle lines. An extra hole was added to the part for one vehicle line, making it different but not adding process time or significant changeover time, and giving it a different part number. If the estimator had originally estimated the production as two parts, they would not have added complexity cost to either of the two parts. Therefore, the estimator should not go back after the volume was revised and add additional cost for complexity.


Cost Estimating


8.2 Subject: Profit MarkupsBackgroundReturn on investment provided by Ford's Cost Estimating methodology has two components: Profit and Interest. Profit is intended to compensate suppliers for the business risk they incur on Ford's behalf. (Reference chapter 6.1 Machine Field Descriptions).

DiscussionOur profit markup scale is based upon the results of studies conducted by the Special Studies group. Our estimating policy applies a profit markup to (Manufacturing Cost + SG&A + Scrap). Markup scales differ in North America and Europe. Studies have demonstrated different profitability norms in these regions. Efforts to integrate regional profit markups are in progress. North American profit markups change with the level of Tier I integration, using the rationale that vertically integrated manufacturers have assumed more business risk than the supplier who merely assembles and should be compensated for this. Europe uses a fixed profit markup. Our policy is to allow profit markups as follows: Purchased Parts Cost as a % of End Item Mfg. Cost ================== 0% to 40% Over 40% to 50% Over 50% to 65% Over 65% to 75% Over 75% to 85% Over 85% N.A. Profit Markup ======== 8.0% 7.0% 6.0% 5.0% 4.5% 4.0% E.U. Profit Markup ======== 4.4% 4.4% 4.4% 4.4% 4.4% 4.4%

Buyers and estimators may be requested by suppliers to add additional markups to piece prices, which ensure that the supplier achieves a certain Return on Assets, Return on Equity, Return on Sales, etc. These requests should be denied. Adequate returns on suppliers' investments are provided in the interest and profit markups included in the estimate. Improved Return on Assets, Equity, etc. at the supplier level should be achieved through improved manufacturing efficiency, parts handling, scheduling, procurement, etc. Ford has historically supported these efforts by sending Kaizen teams to suppliers now replaced by Lean Manufacturing workshops.


Cost Estimating


8.3 Subject: InterestBackgroundReturn on investment provided by Ford's Cost Estimating methodology has two components: Profit and Interest. Interest is intended to compensate suppliers for the opportunity cost incurred in owning assets used to produce parts for Ford. (Profit is discussed on Page 3) Interest on invested capital (plant and equipment) is included in all GRIMM machine rates.

DiscussionThe return on any given investment has two components - (1) Opportunity Cost - the return which could have been earned by putting one's funds into a low risk investment (such as government bonds) and (2) the additional ("premium") returns which go along with assuming additional risk. "Interest" is intended as compensation for opportunity cost incurred and should approximate the return on invested capital for a low risk investment. "Profit" is additional return to a supplier for incurring business risk. (See Page 3 for profit markup policy.) The interest rate used in machine rates is recalculated annually. This rate is deemed appropriate for all suppliers. Cost estimating policy is to NEVER allow a higher interest rate than that provided by the Special Studies group. Companies may have high interest costs (1) when they deliberately borrow money because the tax advantages of debt outweigh the additional interest cost (2) because they borrow from a parent company at a high rate (3) because they use short term financing. Suppliers may suggest that Ford should raise the amount in its interest calculation to compensate them for this high cost of capital. Ford does not claim to be compensating suppliers for their company-specific cost of capital. Ford assumes all suppliers have capital structures, which are sound and typical for the automotive supply industry.

ConclusionOur markups are sufficient to ensure that suppliers with efficient capital structures will earn adequate returns. Suppliers must procure investment capital efficiently, much like they must procure the other means of production efficiently. The interest rate provided by the Special Studies group should not be exceeded in estimates.


Cost Estimating


8.4 Subject: Depreciation MethodsBackgroundThe purpose of this paper is to consider various methods of depreciation and establish straight-line depreciation over a machines useful life as the Ford Standard.

DiscussionStraight-line depreciation over the entire useful life of a machine devalues equipment by a constant amount per piece and assumes the machine will be sold for scrap afterwards. This is considered the fairest and most equitable method. Example: - Plastic Injection Moulding machine purchased by supplier with company money. Capital cost = GBP 47883 + Installation cost = GBP 4750 - Residual cost = GBP 4750 = Replacement Cost For Britain: - Working days = 233 lifetime = 10 years Shifts = 2 Hours/shift = 10 Machine uptime = 95%

Depreciation Cost = Replacement Cost GBP 47883/(10*233*2*10*95%) = GBP 1.0816/hour This example excludes any contribution for loss of notional interest, which should be regarded as increased profit in addition to the Profit Markup and therefore liable for tax. As opposed to investment depreciation which is a manufacturing cost.

Accelerated depreciation methods (1) depreciate machines over periods shorter than their expected useful lives (2) depreciate machines more in the early years of their lives and less in the later years or (3) use some combination of (1) and (2) above. Ford should not pay for the cost of a machine over the life of a program unless there is no possibility of the machine being reused. The reasons for this are: (1) Ford pays suppliers SG&A expense partly to support a sales force whose job is to keep their facility full. As our business partners, suppliers are responsible for utilising their capital efficiently. (2) A partly used machine can usually be used for other purposes or resold for a significant portion of its purchase price. Many entities use accelerated depreciation for tax purposes. Governments deliberately distort depreciation methods to encourage various fiscal and social policy objectives. Tax accounting depreciation rules are not necessarily an equitable way to determine a fair price for a given product. When a machine is unusable in producing any part except the one it was (specially) built for, the machine may be depreciated (straight line) over the life of the program. (Obviously the estimator should first ensure that the machine was not paid for by Ford as a tool). In this case, the estimator should pay special attention to the salvage value this machine has; if the machine is not worn out, it may have a salvage value considerably higher than its scrap value at the end of the program; this should be factored into the calculation. Once the facts are available the estimator can use Ratemaker or request the GRIMM team for help in calculating a rate, Estimators should also recognise when a supplier is using older machines to produce Ford parts, as it is probable that they are fully depreciated. While these machines may require higher maintenance costs the estimator may identify that depreciation and interest cost allocations should not be included in a suppliers price.


Cost Estimating


8.5 Subject: ScrapBackgroundThis paper is intended to define various types of scrap and provide guidance for treating scrap in estimates.

DiscussionProduction Scrap has two origins, designed offal and process scrap Designed offal is material intentionally removed from a component, typically through machining, abrasion, or trimming. Process scrap is processed material that fails to meet established production quality standards.

Designed Offal and Process Scrap combine to create the three types of production scrap: unreclaimable scrap, reclaimable scrap, and re-workable scrap. Un-reclaimable scrap is production scrap that cannot be reused, such as impurities from melted metal. Un-reclaimable scrap also includes material that disappears during a process, such as casting melt loss. The estimate should account for this. Reclaimable scrap is production scrap containing reusable material. Examples of this are: remeltable metals, plastic that can be shredded and used in another product and large stamping cutouts that can be used as blanks for smaller parts. Estimates should contain enough material to allow for designed offal and process scrap and offset these allowances with the revenues or savings that should be received from the sale or use of reclaimable scrap. Reworkable scrap is process scrap that can be reworked into usable parts. Examples of this are: mis-assembled components that can be re-assembled into acceptable parts or out of tolerance machined parts that can be re-machined into other parts. Suppliers should not be compensated for this scrap. End item scrap is mostly acceptably manufactured components that somehow become unacceptable before use by the customer. (Ford Q101 guidelines require that process scrap should never exceed 0.006%). End item scrap is mainly created by such things as shipping damage, destructive testing, and accidental damage at the end users plant. The allowable mark-up percentage for end item scrap is up to 0.7%

ConclusionEstimates should account for all scrap-related costs and revenues. Suppliers should be expected to use continuous process improvement to reduce scrap. Scrap rates will be high during launch and will fall as experience is gained. A lifetime average scrap rate should be allowed in estimates, not a launch scrap rate.


Cost Estimating


8.6 Subject: Inventory Carrying CostBackgroundThis paper is intended to clarify how GRIMM machine rates account for inventory carrying costs. Inventory carrying costs are defined as all costs incurred by a manufacturing facility to store raw materials, work-in-process and finished goods that are not presently being processed.

DiscussionAll normal inventory-carrying costs are accounted for in GRIMM machine rates. The floor space calculation is performed by (1) starting with the restricted footprint of a machine (2) adding 2 meters to the length and width to account for machine access (3) multiplying this increased length and width by 1.5. The additional 50% represents a markup factor which includes the cost of many building items not actually used for production. Included in this markup factor is the cost of inplant storage areas for raw materials, work-in-process and finished goods. The capital cost (depreciation, interest, taxes) of the storage areas, the operating supplies to run the storage areas (heat, water, lighting, paint, etc.) and the labour to maintain the storage areas are all included. The indirect labour markup contains an allowance (not specifically broken out) for the material handling involved in storing/moving inventories required for normal production levels. The SG&A markup contains an allowance (not specifically broken out) to pay for interest on working capital tied up in inventory, insurance on inventories and the cost of normal inventory shrinkage.

ConclusionAll normal inventory-carrying costs are accounted for in GRIMM machine rates.


Cost Estimating


8.7 Subject: Floor space CostsBackgroundThis paper is intended to explain the floor space cost calculation in the GRIMM database.

DiscussionMachine floor space costs are calculated as a function of the building and the amount of space occupied by a machine. Floor space costs are calculated as follows: 1 2 3 4 Determine the length and width of the machine Add 2 metres to the length and width Use above dimensions to determine area and multiply by 1.5 Apply the area established in (3) to the cost per square metre for factory floor.

Building Capital Costs include depreciation over a 50-year period, opportunity cost (foregone interest) and insurance. The breakdown of these three factors within floor space capital is typically about 57% opportunity cost, 42% depreciation and 1% insurance. MRO Floor space Labour (a subcategory of MRO Labour in the machine detail book) is an allowance for skilled trades labour (Cleaners, Pipe fitters, Electricians, Painters, etc.) to maintain the facility and grounds. MRO Floor space Labour cost is calculated as a function of building capital cost. MRO Operating Supplies are: building utility costs (light, heat, water), cleaning/maintenance materials, vendor services (snow plowing, waste removal, etc.) and taxes. MRO Operating Supplies cost is calculated as a function of building capital cost. Two thirds of the calculated cost - 1 of the 1.5 in step (3) above - represents the cost of capital and maintenance for the portion of the building that the machine occupies. The other one third of the cost represents the cost of capital and maintenance for that portion of the building not used for production. This includes office space for administration, offices for production people, restroom and cafeteria facilities, parking lots, warehousing space, dock facilities, etc.

ConclusionGRIMM machine rates contain adequate provision for all building capital and maintenance costs.


Cost Estimating


8.8 Subject: Overtime Production SituationsBackgroundTo establish the effect of overtime working on the overall cost per minute of work done at a supplier.

DiscussionThe following is a comparison of typical straight time and overtime costs.

Normal working hoursDirect Lab Indirect Lab Fringes $0.31/ min Variable MRO Lab Fixed MRO Lab TOTAL LAB Building Costs Utility Costs TOTAL COSTS $0.24/ min $0.18/ min Fringes $0.06/ min $0.06/ min $0.85/ min $0.10/ min $0.03/ min $0.98/ min

OvertimeDirect Lab $0.36/ min (time and a half) Indirect Lab $0.27/ min (time and a half) $0.01/ min (mainly fixed) V/ MRO Lab $0.09/ min (time and a half) Fixed MRO Lab $0.00/ min TOTAL LAB $0.73/ min Building Costs Utility Costs TOTAL COSTS $0.00/ min $0.02/ min $0.75/ min

Fringe Benefits are usually structured in such a way that the cost of benefits received (such as medical, vacation) annually is almost entirely fixed regardless of the number of hours employees work. Fixed MRO Labour is mostly building maintenance, tasks more related to the passage of time than to production. Some examples are: floor cleaning (usually once/day), painting, roof repair. Some machine maintenance is fixed - tasks such as oiling are usually performed weekly or monthly regardless of use patterns. Building Capital Costs (interest, depreciation and taxes) are included in the price of every part; suppliers receive incremental revenue for these items upon the sale of every part. The supplier does not actually incur additional interest, depreciation or taxes as a result of overtime work. Utility Costs during off-peak periods (particularly electricity) are far cheaper than the average electricity cost (based on normal operating patterns) included in piece prices, so the piece price incurred for parts produced on overtime represents supplier revenue significantly above the cost incurred for utilities.

ConclusionThe need for disproportionate levels of indirect support or additional MRO in some situations may cause anomalies, but generally the marginal per-piece costs to a supplier are less on overtime than on straight time.


Cost Estimating


8.9 Subject: SG&A MarkupBackgroundThis paper is intended to discuss the SG&A markup and provide guidelines for its use in cost estimates

DiscussionThe SG&A markup is based upon data compiled from several companies. The purposes of the studies (conducted in North America and Europe) were (1) to determine if rates should vary within certain parameters (i.e., company size, degree of integration, industry type) (2) to recommend an appropriate markup and (3) to recommend a process for determining adjustments to the markup for special circumstances. Below is a list encompassing many (but not all) of the costs included in SG&A

-Sales expenses - Security Costs - Bad Debts -Depreciation on office equipment - Warranty Costs - Inventory carrying costs -Office supplies, postage, utilities - Amortization of patents - Charitable Contributions -Corporate overhead allocations - Legal, license fees, royalties - Public Relations Costs -Misc. taxes (not income or property) - Basic Research & Development-Travel & Entertainment Office Staff Salaries and Benefits (Purchasing, Human Resources for salary employees, Corporate Officers Finance & Accounting, Systems & Data Processing, Sales & Marketing, Staff Manufacturing Engineering not at plant)

The North American study examined companies whose customer base was automotive only, as well as conglomerates. The study supports SG&A costs at 7.5% of Cost of Goods Sold. Companies that incurred SG&A costs significantly in excess of this average were mainly conglomerates whose customer base included a range of commercial, industrial or technical products. These companies tend to carry higher marketing, research and support costs for their revenue base. The European study reported similar results. The rate for Mexico Domestic and Maquiladoras has been determined to be 12%. The amount of revenue the supplier generates with the SGA mark-up should be calculated when assessing major systems or modules, using the following equation: (SG&A Markup%) X (Manufacturing Cost) X (Annual Volume) = Annual Cost of SG&A Revenue Generated Where systems, modules or assemblies contain a high value of purchased components, lower SG&A markups should be negotiated based on the amount of dollar SG&A revenues generated from the mark-up.

ConclusionIf the estimator has good reason to believe a supplier will incur less SG&A cost on a particular commodity or system than the cost estimating standard markup allows, they should reduce the markup accordingly. Where published financial statements indicate a supplier has a lower SG&A expense than the standard markup, this lower percentage should be used. The SG&A markup should NOT be raised above the guideline of 7.5% for North America and Europe, or 12% (MX/M1) without consulting the Special Studies group. If lower mark-ups are negotiated for major commodities or systems, these markups should become the standards for future estimates.


Cost Estimating


8.10 Subject: Cost of Part Quality TestingBackgroundThis paper is intended to clarify the Cost Estimating position on quality testing costs.

DiscussionCosts related to quality testing are contained within the various allowances and markups currently used. Quality personnel and any requisite material handling are contained within the indirect labour markup. Facilities and machinery for testing are included in burden. Scrap costs for destructive testing are contained within the end-item scrap markup. Costs for the design of testing are contained within SG&A. It is possible that some safety critical items may require special treatment but these instances are rare and should be discussed with the special studies/ GRIMM team before taking any action.

ConclusionAdditional markups should not normally be given to suppliers for quality testing.


Cost Estimating


8.11 Subject: Profit Loss Scenarios Based on Factory AverageCompared to Machine Specific CostA supplier makes a large plastic toy car. They also make a drain cleaning plunger. The factory comprises of two injection-moulding machines, two stamping presses and two assembly lines. Machine size and type Machine Machine specific Average Cost rate /min rate 400T Inj moulding machine costing $300,000 $0.50 $0.40 20T inj moulding machine costing $ 51,000 $0.07 $0.40 80T power press costing $450,000 $0.57 $0.40 800T power press costing $1,100,000 $1.15 $0.40 3 metre assy line costing $6,000 $0.02 $0.40 30 metre assy line costing $20,000 $0.10 $0.40 Costing details showing machine specific rates and the suppliers average rates.

Car CostingManufacturing Cycle Specific Average Specific Average Process Time M/c rate rate M/c cost cost Mould body 3 min $0.50 0.40 $1.50 $1.20 Stamp pedals 1.5 min $1.15 0.40 $1.73 $0.60 Assemble car 3.0 min $0.07 0.40 $0.21 $1.20 Total $3.44 $3.00 Profit @ 13% $0.39 Selling price $3.39 The selling price of $3.39 has been arrived at by using an average factory cost with a 13% profit mark-up showing a $0.39 profit per car. Using correctly calculated machine specific costs the selling price of $3.39 would, in reality, incur a loss of $0.05.

Drain Cleaner CostingManufacturing Cycle Specific Average Specific Average Process Time M/c rate rate M/c cost cost Mould plunger 0.5 min $0.07 0.40 $0.04 $0.20 Stamp handle 0.2 min $0.57 0.40 $0.11 $0.08 Assemble cleaner 0.5 min $0.02 0.40 $0.01 $0.20 Total $0.16 $0.48 Profit @ 13% $0.06 Selling price $0.54 The suppliers selling price of $0.54 has been calculated in the same way as the car showing a $0.06 profit per cleaner. Using correctly calculated machine specific costs the selling price of $0.54 would, in reality, give a profit of $0.38. The supplier sells 1000 cars and only 500 drain cleaners each day and believe it is making $0.39 profit on each car ($390 per day) and $0.06 on each drain cleaner ($30 per day). In reality the company is incurring a loss of $50 per day on the car and a profit of $190 on the drain cleaner: Product line Cars Drain cleaner Daily production 1000 500 Supplier daily profit $390 $ 30 Actual daily profit/ (loss) ($50) $190

ConclusionBased on its own average rates, the supplier may stop making the drain cleaner, buy more plant and build more cars. The outcome of this decision would be disastrous for the supplier so whenever possible always use specific machine rates and not factory averages provided by the supplier.


Cost Estimating


8.12 Subject: For a Supplier Negotiation you Need to Prepare YourselvesBUT THERE ARE OTHER THINGS TO WATCH OUT FOR:Show Time After being shown a blow moulding machine producing Ford parts in order to prove various points the supplier made in the negotiation, the estimator starts to get worried about the high manning level and the slow speed of the machine. Under a false pretense, he requests another quick look and finds the machine idle. They had put up a show for him Machine Spotting We may have substantial on cost because we do not have the special purpose machine we need for this job, says the supplier. After the estimator points out that they should use the machine in the corner of the shop floor (which was incidentally covered up with a canvas) the problem was solved. The Hidden Volume Looking at the cars in the car park an estimator noticed that most cars had aluminium wheels. Aluminium wheels are standard on up-series only and can be ordered as an option. He got a bit curious and requested a negotiation. It was found that the supplier worked a 7-day week to cover not only for main production but also for high option content and for Rapid Spec vehicles. The negotiation ensured the fixed cost for the production parts was reduced because it is now spread over a 7-day week instead of a 5-day week with an annual saving of $ 1.6 million Common Sense If you want us to produce this tool in just 2 months, we request on top of the quoted tool cost of $ 900.000 another $ 500.000 compression cost. .the estimator had no time for a proper tool cost calculation. He argued as follows: You must be working like ants, please explain to me how you do this, having 12 people for 24 hours per day, for 7 days a week, for 8 weeks working on this tool. They must be stepping on each other's feet. Please re-calculate. The saving was substantial. (The calculation he did quickly was $ 1.4 million equals about 14.000 hours at $ 100 per avg. tool shop hour. 14.000 divided by about 50 days is 280 hours per day, which equals 12 people around the clock. the material cost was neglected in this calculation). Sudden Efficiency The machine was shown to the estimator and the work each worker did was explained in detail. There were 6 workers very busy plus a foreman. After the negotiation, and on his way out of the workshop, the estimators had another quick look at the machine. There were now only 3 people there and the work went smoothly. He adjusted his estimate and included the sudden efficiency for a re-negotiation. Where is the Scrap? We have a scrap content of over 10%, and we need to discuss a price increase, says the supplier. After a long day of negotiations at the supplier, the estimator remarks that based on a daily production of 2400 mirrors there should be by now about 240 pieces in the scrap container. After some debate he is allowed to look at the scrap container and finds 15 pieces Debate is closed - scrap percentage confirmed at 0.7%


Cost Estimating


8.13 Subject: Component MarkupsBackgroundMany automotive suppliers have multiple manufacturing facilities, necessitating a policy on appropriate markups for goods transferred between their facilities. Cost Estimating policy is that only one markup for (Scrap, SG+A, Profit) is applied to component goods a Tier I manufacturer would normally be expected to produce. Ford expects to be provided with components at prices commensurate with an optimized, fully integrated supply chain. When suppliers integrate to an optimal level, the total cost of component procurement is minimized. Note: Prices shown for Raw Materials and Standard Bought Out Components (SBOCs) in the GRIMM database include SG+A and Profit markups because Tier I suppliers are not expected to be completely vertically integrated.

DiscussionEntrepreneurs continue to improve efficiency by moving to optimal levels of vertical integration through mergers and acquisitions. Vertical integration has decreased our ability to use market prices to determine value added by each process step, making the appropriate inter-divisional transfer prices and markups difficult to determine. Ford expects suppliers to practice best-in-class sourcing, including appropriate vertical integration. Our markups are based on studies of actual firms presumed to be optimally integrated. When sourcing patterns are not optimally integrated they create extra cost in the supply chain. This extra cost cannot be subsidized with additional markups. Estimators should decide what "best-in-industry" component sourcing is and construct their estimates accordingly. There are four potential scenarios:

The industry standard is to manufacture a component completely in-house. The Tier I supplier does so. Give no "stand alone" markup on the component; give a full markup on the 'bottom line' of the estimate. The industry standard is to manufacture a component completely in-house.The Tier I supplier purchases the component. Give no markup on the component; give a full markup on the 'bottom line' of the estimate. The industry standard is to purchase a component on the outside. The Tier I supplier does so. Give a full Tier II markup on the component, and a 'bottom line' markup appropriate to the Tier I supplier integration level. The industry standard is to purchase a component on the outside. The Tier I supplier manufactures the component in-house. Give a markup commensurate with the Tier I supplier integration level.

ConclusionTier II markups are not applied to components for which the industry standard is 'in-house' production. Construct the estimate using the industry standard for component sourcing. The industry standard may change with time. Where systems, modules or assemblies contain a high value of purchased components, lower markups should be negotiated based on the amount of dollar revenues generated from the markup


Cost Estimating


8.14 Subject: FreightBackgroundThis paper addresses two freight categories and their treatment in cost estimates.

DiscussionThere are two categories of freight cost to consider in constructing an estimate: (a) the cost of shipping finished goods from a Tier 1 to a Ford facility, and (b) 'inbound' freight cost to a Tier 1 for raw material, SBOC's (Standard Bought Out Components) and Tier II components. The cost of shipping goods from a Tier 1 supplier to a Ford facility should never be included in an estimate. Ford Purchasing negotiates, tracks and pays for this

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