Understanding Manufacturing Costs for Electronic Hardware Products

Published on by John Teel

In this video (with a transcript if you prefer reading) you’ll learn about all of the costs that make up the manufacturing cost for a new electronic hardware product. It’s critical that you understand your product’s manufacturing cost as soon as possible – well before you fully develop it.

This short video is actually part of an in-depth training course available exclusively for members of the Hardware Academy.

Download the PDF transcript of this video. [/EmailSubscriber]

Video Transcript

Now we’re going to break down the manufacturing costs for a typical electronic hardware product. Let’s start with the obvious one, the cost of the electronic components themselves.

This is the cost of all the microchips, the sensors, every resistor, capacitor, transistor, diode, switch, plug, all the different components that are going to– Most of them are going to be soldered onto your printed circuit board.

That’s going to be one of the big costs for your product depending on the complexity of your product.

Obviously if your product is really simple, then you may find your electronic component cost are a small percentage of the total product cost but for most products, this is going to be one of the main areas that’s going to impact the manufacturing cost and there are going to be areas where you’re going to eventually look at reducing the cost, so you can increase your profit margins.

However, don’t focus too much on profit margins when you’re starting out. The first few units of your sale you’re not going to typically make any profit, in fact, you may sell them at a loss.

That’s okay because you’re just looking for information. Don’t expect that you need to make a profit on your first units and definitely don’t order more units than what you really know that you can sell just because you’re wanting to get a lower price, so you can make more profit. That’s not the way to go about it.

You can do that later once you’ve got everything running, the product is a success, then you can work on optimizing and reducing your manufacturing costs to increase your margins.

In the beginning, always focus on minimizing your financial risk. Don’t ever put more money up front in order to save cost per unit. That’s just not a good strategy and that’s just an overconfidence in the idea.

Remember, you always have to be in a state of testing, so wait until you’ve tested the product on the market before you start spending all this extra money trying to get the cost down.

The component costs will be one major aspect of the product costs that you’ll eventually work on, getting the cost down obviously, as you purchase greater quantity of those components and those costs go down as well.

Next is the printed circuit board itself which there are two costs associated with the printed circuit board, two costs in addition to the components themselves but the first cost is the cost of the printed circuit board itself. Just the blank PCB that’s got all the necessary layers, all the routing, all the landing pads.

That’s one cost and in general that tends to be quite low. That’s a really small cost for most products. It’s pretty much dependent on the size of the printed circuit board and the number of layers.

If you have a printed circuit board that’s one foot by one foot and has 12 layers on it, then that’s going to be really expensive, but for most products, it’s only a small piece of the total cost of the product.

The next step to the printed circuit board and the one that is typically a lot more cost is the assembly. This is not to be confused with the assembly of the final product, but this is the assembly of the printed circuit board.

This just means soldering all the components on the board. That’s an easier way of saying that than assembly or less confusing is that they solder all the components.

As I explained earlier, this is done, typically unless you’re doing it yourself, but this is typically done using automated machines that will do this assembly process.

That’s the other big cost and typically the assembly cost or the soldering cost is going to be several times more expensive than the board cost. Some of the things that will impact the cost of the printed circuit board assembly are how many pins are there, the total pin count of every component on there.

Are there leadless packages? Like a QFN package or a BGA package, those are packages where the leads of the chip are hidden underneath the package, so you cannot physically access them once that component is placed down on the board. They save you space on the board.

Leadless packages are a good option if space is really critical but they do add, especially for the first couple that you have on a board, they add considerable cost to the assembly process.

If you, let’s say, you have a design and you only have two leadless packages and space isn’t really that critical, you just happen to pick two leadless packages, then I would work on trying to find an alternative solution that would not be leadless. Even if the component costs is a little bit higher, it’s likely going to save you a couple of dollars on your printed circuit board assembly cost.

That can be a good way to try to lower that assembly cost is to– You typically can’t reduce the number of pins too much. Most of the pins are determined by the functionality and the performance that you need.

You can’t really control the number of pins but you can pick a leaded package over a leadless package as one case. We’ve talked about the electronic components, the blank printed circuit board and the printed circuit board assembly or the soldering of the components onto the board. That’s most of the cost of the electronics portion of the product itself.

Then you’re going to have any mechanical components and for most products, this is going to be the enclosure. This is going to scale mostly directly with the size of the product.

If you have a small product then the enclosure is typically going to be, a really small product that enclosure at higher volume may just be pennies but typically even a larger product, you’re still typically talking only a couple dollars for the enclosure once you get the decent volumes. It’s significant but it tends to not be a dominating cost for most products.

If you happen to have a more mechanically complex product that has lots of moving parts, then this cost is going to be significantly more than just what it would be for a really simple enclosure. Definitely keep that in mind if you have a mechanically complex product but for most products, it’s typically going to be the enclosure is going to be most of the mechanical portion of the design.

Another cost is the product assembly. We’ve talked about the board assembly, but this step is the actual assembly of the entire product.

This is putting the printed circuit board inside of your package, sealing your enclosure, sealing that, then eventually even putting the product in the retail package and then sealing that, boxing it up and getting it ready to ship to your warehouse or to your customer. That’s the assembly cost.

This is pretty much a labor cost, so obviously if you’re doing this in the US or a western country, it’s going to be much higher just because labor costs are much higher than it would be if you’re having this done in China.

It’s pretty much a labor, it just depends on the rate of manufacturing laborers is what’s going to determine this along with the time that it takes. If your product takes 10 minutes to assemble, that’s obviously going to be more expensive than a product that only takes a minute or two. This is an area where you can really optimize a lot by experimenting, by testing, by assembling your product.

For my own product I went through so much effort of trying to– I would assemble the product and each time, I would do that, I’d be looking for ways to optimize that assembling process.

Little design tweaks that would make it just that simpler and that quicker to assemble, so that I could reduce the assembly time. That can be really beneficial. It’s not a huge cost if you’re having this done in China with a low labor rate, but it’s still an area where you can definitely optimize your manufacturing process to reduce your cost and to increase your manufacturing rate.

How fast you can pump out units once you get to a point that becomes more critical for you. Once the product is assembled, then there’s the testing costs.

They have to obviously test the product, the electronics and make sure that everything is working as intended. That’s going to be built into the manufacturing costs. Once again this is mostly a labor cost that depends on how long it’s going to take to test your product.

You’ll likely have some various test fixtures you may need for this process of testing out your product that would be part of the assembly process, but those would be upfront costs, they would be part of the scaling cost and not the manufacturing cost.

Another cost that a lot of people forget is the manufacturer’s profit. When you’re doing all this, the component costs and the PCB costs, the odds are your manufacturer is not getting any profit off of those, you’re getting a third party to potentially manufacture your printed circuit board or you’re ordering your components from a third party, so they’re getting a profit but not your manufacturer who’s the one that’s really putting all the pieces together and shipping it to your customer.

They’re going to have some type– You need to include their profit in your estimates, and that can be 10 to 15% is probably a good starting percentage to use for that. Then also, there’s going to be the scrap and returns, this is another area I find a lot of people forget to include, scrap rate. Scrap rate is, first of all, no manufacturing process is perfect, and there’s always going to be scrap.

There’s always going to be units that either got dropped on the floor, broke, or were put together wrong. You have to include that cost because those units are going to be scrapped, and that cost gets added to the other units that weren’t scrapped.

Typically the scrap rate’s going to start off really high. Maybe 10 or 15% when you’re making hundreds of units, but by the time you’re making hundreds of thousands, then ideally, you’ll get that down to maybe 1 to 2% scrap rate.

You’ll never get it perfect, there’s always going to be some units that will be scrapped, dropped or whatever, damaged during the manufacturing process, but just make sure you include the scrap rate in your manufacturing cost estimate and the same is true with returns, like how many people return your product that will happen.

No matter how great your product is, there’ll be some that either reach people that, hopefully, this is a very low number if you have good quality standards, but hopefully, a low number of faulty units reach customers. Those would obviously be returned, but you also get returns from just people that decide they don’t want the product for whatever reason, so make sure you include those in your manufacturing costs.

You could include returns as another cost after your manufacturing costs. Some people find that a little weird to include returns as part of their unit costs, but it’s just a good way of looking at it, so that you make sure that you don’t neglect the cost of returns and scrap rate as well.

Then finally, you’re going to have duties and logistics. Duties basically import taxes that a country may charge you or tariffs that they may charge you to import your product, and these are going to be dependent on where you’re importing the product.

For the US, most consumer electronic products that are under a couple of hundred dollars don’t have any duty rate, it’s just a 0% duty rate, but other product categories may have 5-10% duty. Then there’s also tariffs that are being discussed in the US on goods imported from China. You have to be sure that you include all of these in your final manufacturing cost.

Then finally, is logistics. That’s the shipment, getting it from your manufacturer to your warehouse, from your warehouse to your customer, and warehousing it in that interim, you’ve got to include that. Those are all the logistics fees and that needs to be included in your manufacturing cost estimate.

What you’ll come up with at the end of all this exercise is what’s called a landed manufacturing unit cost. It’s the cost of your product to manufacture it and have it landed in your warehouse and ready to sell.

If you read only one article about product development make it this one: Ultimate Guide – How to Develop a New Electronic Hardware Product in 2020.  

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why do a few leadless parts increase the assembly cost?


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