Estimation Handbook

Cost Estimating
Procedures and Support
Cost Estimating
_________________________________________________________________________Version 3.0 September-1-2002 Copyright Ford Motor Company Ltd
Cost Estimating
CHAPTER 1.0
1.1 1.2 1.3 1.4 1.5
SECTION INTRODUCTION
Business Background CAPE GRIMM Activity Based Costing Statement of Intent
2.0
2.1
BASIC ESTIMATE STRUCTURE

Cost Elements - "Where is What"
3.0
MARKUPS
3.1 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
4.0
4.1 4.2 4.3
RAW MATERIAL COSTS

Raw Material Standard Parts Bought Out Parts
5.0
5.1 5.2 5.3 5.4
LABOUR COSTS
Overview Direct Labour Indirect Labour Fringe
6.0
6.1
MANUFACTURING BURDEN (OVERHEAD) COSTS

Machine 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: bewin@ford.com
________________________________________________________________________Version 3.0 September-1-2002 Copyright Ford Motor Company Ltd
Cost Estimating
1.0 Introduction
1.1 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
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 Structure

Direct Labour
Indirect Labour Labour

Including Contingencies
Fringe MRO Labour Standard Parts
Clean & Special Handling Machine Maintenance Tool Maintenance
Labour Labour Labour
Total Piece Cost
Manufacturing Cost
Material
Raw Material Purchased Parts Depreciation Operating Supplies Interest Clean & Special Handling Capital Floor space Operating Supplies
End Item Scrap SG&A Profit ED&T Burden

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"

Labour
Direct Labor Cost Indirect Labor Cost
Pure 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
Burdens
Fringe Benefits
To Employee Annual Leave Annual Bonus Public Holiday Sick Leave Other: - Time Off - Social - Union - Time Banked Hours - Community Service
Markups
Manufacturing Burden
Pure 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 Markups
Markups 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 America

Engineering 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 Cost

4.1 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 costs

5.1 Overview
The 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
Industry
General 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 Mandated

Annual 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 Mandated

Employer'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 Estimating
COST 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 Costs

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
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
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 Manual

Hours 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 & EU

The 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 Costs

Background
"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.
Discussion
When 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
Conclusion
Departmental 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 Markups

Background
Return 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).
Discussion
Our 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: Interest

Background
Return 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.
Discussion
The 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.
Conclusion
Our 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 Methods

Background
The 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.
Discussion
Straight-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: Scrap

Background
This paper is intended to define various types of scrap and provide guidance for treating scrap in estimates.
Discussion
Production 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%
Conclusion
Estimates 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 Cost

Background
This 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.
Discussion
All 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.
Conclusion
All normal inventory-carrying costs are accounted for in GRIMM machine rates.
Cost Estimating
8.7 Subject: Floor space Costs

Background
This paper is intended to explain the floor space cost calculation in the GRIMM database.
Discussion
Machine 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.
Conclusion
GRIMM machine rates contain adequate provision for all building capital and maintenance costs.
Cost Estimating
8.8 Subject: Overtime Production Situations

Background
To establish the effect of overtime working on the overall cost per minute of work done at a supplier.
Discussion
The following is a comparison of typical straight time and overtime costs.
Normal working hours

Direct 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
Overtime
Direct 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.
Conclusion
The 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 Markup

Background
This paper is intended to discuss the SG&A markup and provide guidelines for its use in cost estimates
Discussion
The 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.
Conclusion
If 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 Testing

Background
This paper is intended to clarify the Cost Estimating position on quality testing costs.
Discussion
Costs 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.
Conclusion
Additional markups should not normally be given to suppliers for quality testing.
Cost Estimating
8.11 Subject: Profit Loss Scenarios Based on Factory Average

Compared to Machine Specific Cost
A 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 Costing
Manufacturing 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 Costing

Manufacturing 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
Conclusion
Based 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 Yourselves

BUT 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 Markups

Background
Many 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.
Discussion
Entrepreneurs 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.
Conclusion
Tier 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: Freight

Background
This paper addresses two freight categories and their treatment in cost estimates.
Discussion
There 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 'inbound freight' separately. In addition, the cost of shipping empty racks or other dunnage materials back to a supplier should not be included in an estimate. Many suppliers have their own delivery trucks and retrieve dunnage on return trips from a Ford facility at no extra cost for transportation. In some instances, dunnage may be returned via commercial carrier with the freight bill typically negotiated and paid by Ford. Estimates may reflect vendor cost of handling; normal maintenance and replenishment for wear and tear of dunnage materials. Department policy assumes that Raw Materials and SBOCs have the cost of delivery to the supplier built into their cost as reported annually to the GRIMM materials administrator, and, in fact the majority of raw material prices in the GRIMM database do include freight cost as 'FOB' (freight-on-board) destination. If it is suspected that a particular raw material or SBOC cost does not include 'inbound freight' the estimator should adjust the unit value accordingly to reflect the expense in cost-of-goods sold and notify the GRIMM material administrator to validate and correct the database. Tier 11 inbound freight costs for components shipped to Tier 1 suppliers should typically be represented in manufacturing cost or in some instances in the Tier I's SG&A depending upon vendor specific accounting procedures, in any case it is to be included in end-item piece cost. Inbound freight up to 2% of the selling cost of a component is considered reasonable, amounts in excess of this guideline would be suspect and subject to documentation.
Conclusion
Freight should not, under any circumstance, be added to estimates for shipments between Tier 1 suppliers and Ford facilities. Inbound freight costs for Raw Material, SBOC's and Tier 11 components are typically considered to be included in the estimated end-item piece price. In situations where exceptions to these guidelines arise, please consult the Special Studies Group before making special freight allowances in an estimate
Cost Estimating
8.15 Subject: Best-In-Class / Best-In-Country

Background
In the GRIMM database, a given country's data represents the cost at which a firm can reasonably be expected to obtain labour, machines and materials. An estimate done using GRIMM data, and best-in-country standards for machine utilization line rate is expected to represent a best-in-country piece price.
Discussion
Emerging markets often have unit labour costs far below that of developed nations. Processes that are labour intensive will be considerably less expensive when done in emerging nations. The estimator may wish to suggest a sourcing pattern that will deliver the optimal capital/labour mix. Part processing will most likely differ by country to take full advantage of capital/labour tradeoffs. Estimates may initially need to be done multiple times depending upon possible sourcing options so that optimal sourcing may be determined. In addition, life cycle tooling and freight costs should be considered as offsets before arriving at a sourcing recommendation. If a target has been established based upon US pricing/production and the supplier then decides to resource to a different country, can the target negotiation be reopened? A general "rule-of-thumb" is; if the target was set by finance/estimating and accepted without negotiation by a supplier, Ford can ask for the target to be renegotiated on grounds of fairness, but we are not in a position to mandate renegotiation. If the target was set in conjunction with a supplier, given certain assumptions re: processes and manufacturing locations, the supplier resourcing a part may be grounds for reopening the target discussion. Ford and suppliers should share any potential savings generated from these initiatives.
Conclusion
Cost estimators presently establish best processes. As estimators move further upstream in the target process, this may extend to estimators being asked for input on sourcing. Sourcing using the most cost effective available combination of capital, labour, freight and tooling which can meet Ford quality and volume requirements should be considered in developing estimates and setting targets. If this requires the addition of machines to the database, the Special Studies group should be notified of the specific machine (manufacturer, model, etc.) to establish an accurate machine rate for use in supporting Best-in-Class / Best-in-Country estimates.
Cost Estimating
8.16 Subject: Licensing Fees

Background
The Special Studies / GRIMM group has been asked to discuss the proper treatment of Licensing Fees in estimates.
Discussion
Licensing fees (also referred to as 'patent fees" or "royalty fees' are defined as payments that must be made by a firm to the owner of a patent to produce a product. These may be fees for the use of' a patented process machine or files to produce a patented product. Licensing fees are not the fees and expenses involved in securing a patent, which would be part of a firm's SG&A cost. Licensing fees should typically not be paid to firms which own the patent -i.e. we will not give firms a. fee to pay to themselves. This prohibition includes fees paid to wholly or partially owned subsidiaries, parent companies, other companies owned by the same parent corporation, etc. The intent of this guideline is that estimators should not pay patent fees for proprietary processes, which have viable and cost effective alternatives. This guideline is intended to apply to Tier 1 suppliers and to any components they may purchase.
The exception to the above is when a firm holds a patent for the only commercially viable method of producing a given product and either sells the product widely or licenses the patent widely. In this case, the estimator should include the "going rate" for use of this particular patent in their estimate. Licensing fees should be treated as a "below-the-line" expense; not marked up for scrap, SG&A, or profit. (One might argue that they should be marked up for scrap, however licensing fees should be paid on units sold, not on units produced.)
Conclusion
Licensing fees meeting the conditions outlined above should be treated as a "below-the-line" expense. Before adding licensing fees to an estimate, proof of payment at the "going market rate" should be obtained from the party claiming the expense.
Cost Estimating
8.17 Subject: Exchange Rates

Background
Converting the total cost given by an estimate into a different currency may be useful for "scorekeeping" exercises (such as comparing the cost of parts made in Europe to affordable targets, which are set in dollars). Currency translation may also be useful for purposes of comparing unique estimates from different countries to decide the supplier a part should be purchased from. As conditions (labour costs, material costs, utility costs, etc.) can vary greatly between countries, it is wrong to assume that a part's cost to manufacture can be translated from country to country through currency conversion alone.
Discussion
A part whose German DM cost to manufacture translates into $65 (U.S.) might not be manufacturable in the US for $65. The U.S. cost to manufacture might be higher or lower depending on how the costs of labour, material, utilities, etc. vary between the two countries. Changing the currency in which the estimate was done does not fully translate the cost to manufacture. The estimator should copy the estimate and substitute US conditions and rates for the German ones to arrive at a US cost to manufacture. Estimates should be updated to current economic levels before doing any currency conversions. Currency conversion should use exchange rates corresponding to the economics level the estimate is at. For example, an estimate done at (or updated to) 1-1-97 economics should be converted with exchange ratesineffectatl-1-97. ExchangeratescanbeobtainedfromthecorporatePF-4reportorfromthe GRIMM 1 Special Studies group. To access the PF-4 report, type "BB PFEA" at the command line in PROFS, select the most recent "Prime Rate and Foreign Exchange" report. Note: Some forward model programs may use program specific exchange rates. These rates should be used for all translations done in support of the program.
Example
In Germany a part was estimated to cost DM 100. First change the economics to the most recent level. Assume the change in economics changed the part cost to DM 102. The DM 1 Dollar exchange rate was .65 1 1.000. The estimate is therefore translated from DM 102 to USD $66.30. This $66.30 represents the dollar cost of producing this part in Germany. It does NOT mean that the part could be manufactured in the US for $66.30.
Conclusion
All conversion factors used (conversion rates used and the time period they were from) should be noted in estimate work papers, to facilitate future use of the numbers.
Cost Estimating
8.18 Subject: Disclosure Policy

Background
This paper is intended to give guidance on which departmental materials should or should not be shared by estimators.
Discussion
Cost Estimates may be relied upon heavily during price and target setting discussions. There is no specific rule regarding the sharing of estimate data with non-Ford personnel, provided like information is received in return. As a general rule, the level of detail shared should be comparable to the level of detail received. Training and Reference Materials developed and distributed by the Special Studies Group are not to be distributed by estimators to persons outside of the Worldwide Cost Estimating Department. This includes (but is not limited to): Internal TABS/GRIMM Training Books Burden Rate Training Course Materials Summary and Detail Machine Rate Books Cost Estimating Department Discussion/Policy Papers Other CAPE/GRIMM Reference Materials
These training/reference materials are developed specifically for the enhancement of cost estimators' skills and are not intended for outside distribution.
Conclusion
If anyone outside the department requests reference materials regarding the CAPE/GRIMM system please refer them to the Special Studies group, who will provide them with material deemed appropriate to their needs
Cost Estimating
8.19 Subject: Real Profit

Background
One topic of discussion with suppliers is very often the profit markup applied by cost estimating. The supplier might argue that the markup is much to low. However, the paper gives some examples that the real profit can be higher, if the markup is applied only to the supplier own processes and material.
Discussion
Within a "standard" cost estimate the below (maximum) markups are applied bottom line on manufacturing costs. Thus, (in this example) a piece price of 116.91 DM is calculated. Example 1: Cost Estimating Standard Markups Manufacturing Costs Scrap SG&A Profit R&D (Mech. Assy) Total Piece 0,70% 7,50% 4,40% 3,50% 17,40% Absolutes 100,00 EUR 0,70 EUR 7,50 EUR 4,76 EUR 3.95 EUR 116.91 EUR
Lets assume that the content of external purchase parts of the supplier (e.g. standard parts, raw material) is 30 % of total manufacturing costs. Although the absolute profit remains constant, the "real" % profit markup - based only on supplier own material/machine/labour costs - is much higher. Example 2: Adjustments for Purchase Parts Additive Markups Manufacturing Costs External Purchase Parts Own Material / Machines / Labour Scrap (own parts/processes) SG&A (own parts/processes) Profit (own parts/processes) R&D (own parts/processes) Total Piece 1,0% 10.71% 6,80% 5,64% 24.15% 30 EUR 70 EUR 0,70 EUR 7.50 EUR 4,76 EUR 3.95 EUR 116.91 EUR Absolutes 100,00 EUR
The third example shows the increase of profit markup for a content of 50 % of external purchase parts: Example 3: Adjustments for Purchase Parts Additive Markups Manufacturing Costs External Purchase Parts Own Material / Machines / Labour Scrap (own parts/processes) SG&A (own parts/processes) Profit (own parts/processes) R&D (own parts/processes) Total Piece 1,4% 15.00% 9,52% 7.90% 33.82% 50 EUR 50 EUR 0,70 EUR 7.50 EUR 4,76 EUR 3.95 EUR 116.91 EUR Absolutes 100,00 EUR
Results
The rational behind the profit markup is solely a compensation for the business risk (see below). Certainly, the business risk for external purchase parts can be seen as relatively low. Thus, if the bottom line profit markup is re-calculated to be based only on the supplier own business risk (own processes & material) the real profit markup is much higher. It should be mentioned that the capital costs are already covered by the interest rate (for machines) and by a SG&A uplift (for material). Furthermore, the relative (maximum) markups should be used sensibly as 4.4% profit on 1000 DM or on 10 EUR is quite a difference. For more details on Interest please reference chapter 8.0
Cost Estimating
8.20 Subject: Return on Sales & Return on Assets

Background
Widely known and used financial metrics are Return on Sales (ROS) and Return on Assets (ROA). An analysis of ROS & ROA gives valuable information about the profit situation and business performance of a supplier. The ROS is comparable with the profit markup of cost estimating. This paper gives some explanation about the calculation and use of these financial tools and their relationship to the profit markup.
Discussion
The difference between the Profit Markup and Return on Sales is that Profit Markup is desired profit influenced by market conditions and return on sales is achieved profit. The Profit Markup used by estimating is applied to manufacturing costs, whilst ROS is the difference between cost and revenue (profit) expressed as a percentage of revenue.
Example 1: Yearly Turnover (Return on Sales) Estimate Breakdown Manufacturing Costs 0,7% Scrap 7.50% SG&A 4,4% Profit before Tax 3,5% R&DE Mech. Asy Total Piece Cost Piece Costs 100,00 EUR 0,70 EUR 7.50 EUR 4,76 EUR 3.95 EUR 116.91 EUR x Yearly Volume = Yearly Costs 20.000.000 EUR 140.000 EUR 1.500.000 EUR 952.000 EUR 790.000 EUR 23.382.000 EUR
200000
= Yearly Turnover
Return on Sales =
Profit 960 TEUR = e.g. for this example = = 4.1% Turnover 23382 TEUR
The other financial metrics is Return on Assets. This is used to evaluate the compensation for the business risk relating profit to the assets employed. These assets consist of all machine investments; buildings/facilities and inventory (work-in-progress, raw material, buy parts, cash etc.) that are used to run the business. The total assets of a company can be found by looking at the balance sheet. Ideally a company should be run with the lowest inventory as possible. This reduces the asset value and will result in a high return on assets (ROA). It can be seen that a company with very low inventory produces a high number of stock turns and therefore the higher the number of stock turns then the higher the return on assets (ROA).
Example 2: Yearly Return on Assets Assets employed (Assumption) Yearly Turnover (200000 Pcs. @ 117.50 EUR) Yearly Profit before Tax (200000 @ 4,8 EUR) Velocity (23382 TEUR div 8000 TEUR) Return on Sales Return on Assets 8.000 TEUR 23.382 TEUR 952 TEUR 2.9 4.1% 12%
Memo: Assets are determined at one point in time and consist of all investments, whereas turnover is an accumulation over a yearly period and includes total material, labour, burden and profit. Therefore, under normal conditions in an efficient company, assets are lower than turnover.
Returnon Assets= Returnon Sales* Velocity=
TEUR Profit Turnover Profit 952 = = = 12% * TEUR Turnover Assets Assets 8000
Conclusion
Both ROS and ROA are used to measure profitability. Return on Assets indicates the interest rate an owner gets for his business investment. If this is insufficient then he may reduce costs or increase product pricing which will increase profit and raise the ROS and ROA (assuming sales are constant). Special attention should be paid if the profit used to calculate ROS & ROA is before or after tax. In many publications you will find ROS & ROA figures that use profit after tax. However, Ford estimates are before tax costs. Note: You can find ROS & ROA actuals (after tax) of major Ford suppliers on the intranet at web address: http://www.purchasing.ford.com/ prch_controller/html/supplier_profitability.html
Cost Estimating
8.21 Subject: Machine Policy

Background
The GRIMM database is populated with best-in-class machines priced at present replacement cost. Parts should be processed as if the supplier were to buy machines expressly for the job.
Discussion
Cost Estimating policy is to provide estimates based on the lowest cost "Best-In-Country" processes (meeting quality standards) that are reasonably expected to be used in the locale where a part is made. This includes processes not presently used by that supplier. Ford suppliers are expected to match the most cost effective manufacturing processes normally used by anyone in the industry for the particular country or region. Machine data in the GRIMM database is re-quoted every fifth year and adjusted for Producer Price Index data the other years. The "new machine" assumption enables estimators to determine, based upon manufacturers' data and other sources (1) How long machines should run from purchase until needing a major rebuild and (2) How much should be spent to maintain machines over this period. Line rate discussions are also simplified - we may not know the production rate a supplier's machines may be capable of, but we have a good idea of the rate at which new machines may run. If adjustments to the GRIMM database are warranted, a "Ford Technical Update" will inform estimators of the pending change, and the change will be made approximately a week after the release of the Update. Many people view ancient machines at supplier plants and assume that the GRIMM "useful life" (usually 8-15 years) greatly overstates supplier capital costs. The "useful life" shown in GRIMM is the time a machine should run before needing a major rebuild. We allow enough capital and maintenance funds to purchase and maintain new machines. Firms may choose to run old machinery, accept the capital that Ford Estimates give them, then suggest they are not getting enough maintenance funds to cover their actual spending. If the supplier chooses to keep and maintain old equipment, the estimator should not grant the supplier additional maintenance funds. Maintenance funds provided in estimates are accurate in proportion to the capital allocated. Estimators should process parts on machines whose size, speed, etc. is optimal for that part. If suppliers produce parts on a machine, which is too big, powerful, etc., this represents a sub-optimal use of capital for which we do not compensate the supplier. Estimates should assume parts are made on the best available technology, not the capital stock a supplier happens to have in place. Suppliers want to fill existing capital stock with business, but Ford should not pay the penalties inherent in running parts on machines not optimally suited to run the parts. Machines will always be input with lifetime years based upon the best available manufacturer's estimate indicating the machine's useful life. Suppliers may want machine depreciation spread over program life instead of useful life. There are two reasons why the estimator should not agree to raise the depreciation amount in an estimate by spreading the machine cost over program life: We expect the supplier to maintain full production capacity; we pay SG&A accordingly Even if a supplier does have to sell a machine sooner than expected Depreciation rates in GRIMM should adequately compensate machine cost since the value of a used machine is much greater than 'scrap' value Plus they have been provided "full" MRO based on average life-cycle maintenance costs and that cycle has been interrupted early saving the high expense of repairs toward the end of the machines useful life.
Salvage value is typically 5% of the original cost of a machine and is the value of the machine as sold for scrap. This factor is conservative in nearly all cases; most machines, even those in need of major overhaul, have a market value in excess of their scrap value.
Conclusion
The GRIMM database should represent the most cost-effective technology available. Estimators becoming aware of new, more cost-effective processes should contact the GRIMM machine administrators with information on machines necessary to estimate those processes. Machines, which represent best processes and are significantly different from other machines in the database, will be added. Outdated technology will be purged from the GRIMM database, even if suppliers continue to use these machines. Parts should be processed at production rates expected of new machines. Ford Cost Estimating allowances for depreciation and maintenance should not be exceeded. This ensures that estimates are done at 'Best-in-Class' levels.
Cost Estimating
8.22 Subject: Relief Factors

Background
This paper is intended to provide clear definitions of Mass Relief and Tag Relief as well as appropriate conditions for each to be applied to estimates.
Discussion
Mass Relief is when an operation shuts down completely and employees take "breaks" simultaneously. Mass Relief is standard operating procedure for most secondary (off-line) operations and a common practice for several commodities. Tag Relief is when operators are relieved without line stoppage. Procedures, which always use Tag Relief, include (but are not limited to) Extrusion, Die Casting, Foam and Paint Lines. These processes use Tag Relief because operations of this nature cannot be operated efficiently with frequent starts and stops. When using a Tag Relief process, the number of direct labor people will increase. Production yield will rise proportionally so that direct labor cost per part will remain constant. Example: - assume 1 direct labor person at a rate of $12 per hour, and production of 200 pc/hour. Break allocation is 5% (3 minutes per hour); after 1 hour, a Mass Relief operation would produce 190 pcs at a direct cost of $12/hour or $.063/part. Tag Relief would require 1.05 persons, for a direct cost of $12.60/hour, however the production yield would comparatively be 200 pcs: thus the direct labor cost part would remain at $.063/part Per-piece burden cost will decrease as production yield rises. Factors such as depreciation, interest, and MRO, which comprise much of the total burden cost, will remain constant, as the numbers of parts will increases. Therefore constant burden dollars are spread over more parts, lowering perpiece burden cost. Estimates should reflect a reduction or elimination of relief allowance to accommodate direct labor utilized for Tag Relief. Example: Parts produced on equipment which produces 190 pcs/hour (using Mass relief) and has a burden cost of $90 per hour, have a burden cost of ($90/190) = $0.4737 per part. When Tag Relief is utilized, the same hourly burden cost is applied but the production yield increases to the working rate of 200 pcs/hour ($90/200) = $0.4500 per part. Burden cost per part is reduced. GRIMM rates are per-minute rates; and do not specifically assume or imply either Mass or Tag Relief.
Conclusion
There is no set rule regarding the use of Mass vs. Tag Relief. Each option should be considered when developing estimates. When appropriate conditions exist to apply Tag Relief, a substantial benefit may be realized. Estimators should expect suppliers to utilize capital as efficiently as possible on Ford's behalf. Utilization of Tag Relief should be encouraged when estimating product costs and may be a viable point for negotiation where appropriate.
Cost Estimating
9.0 Discussion Papers and Policies NA

The 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 team in North America. 9.1 ED&T (FSS) Component Markups
Cost Estimating
9.1 Subject: ED&T (FSS) Component Markups

Background
The Full Service Supplier ED&T Budget assists Program Teams in identifying the appropriate value added engineering, design and testing activities for a given program design scope. Historically, full service suppliers have requested funds for engineering based on lump sum totals and/or percentage mark-ups based on commodities. Only those costs approved through the FSS ED&T Budgeting Process should be applied to the commodity
Discussion
ED&T funding is based on the value added activities necessary to meet all FDPS requirements during the product development process. There are four steps in the ED&T Budgeting Process: 1. Establish the program design scope. The Ford Program Management Team (PMT) and the Full Service Supplier establish the overall program design scope. 2. Assign the appropriate hours to complete the engineering design and testing activities necessary based on the program scope. The Ford Program Management Team must agree to these hours for engineering, and design activities. Required tests costs as defined by the program design scope should be detailed in the ED&T budget including cost/test, sample costs, and sample sizes/test and agreed to by the PMT. 3. Ford Purchasing assigns the established composite ED&T rate to the budgeted hours. 4. Recovery of the ED&T budget is assigned to the piece cost as part of the variable cost target for the commodity/system. The FSS activities that are directly billable in the ED&T budget are: Product Engineering, CAD Design, and Design Leader Activities that are unique to a particular program. Compensation for functions done during the normal course of business is provided for in SG&A and other markups. The following are not billable to Ford through the ED&T Budget: Basic R&D to improve or design new processes or products not specific the Ford Program included in SG&A Plant engineering activities included in Manufacturing Overhead Troubleshooting breakdowns during normal production > included in Indirect Labor/MRO/SGA Routine design of tools, fixtures, molds, dies, gages > included in Tooling Expense Indirect FSS support activities > included in the ED&T Composite Rate Ford Cost Optimization has completed a study of large and small engineering and design centers to determine the cost drivers associated with engineering and design activities including, but not limited to, CAD design and product engineer salaries, C3P workstation hardware, C3P Software requirements, and facilities costs. As a result of this study, the recommended FSS composite rates are: Body Interior - $55/Hour Body Exterior - $55/Hour Chassis - $57/Hour Powertrain - $57/Hour Electrical - $57/Hour
Conclusion
ED&T must be for work that is directly related to a particular vehicle program. ED&T is a one-time cost that varies depending on the magnitude of change for each application. These costs (Engineering Budget that is supported by a Clear Statement of Work) must be properly evaluated and agreed to by the PMT leaders as reasonable and appropriate. ED&T costs are included in the Affordable Target established for the overall component/system. The FSS Engineering, Design and Testing document can be found @ https://web.keyinfo.ford.com/northamerica/formsanddocs/index.html
Cost Estimating
10.0 Discussion Papers and Policies EU

The 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 team in Europe. 10.1 10.2 Estimator Guidelines for Dealing with ED&T Requests Engineering Design and Testing (ED&T) Markups
Cost Estimating
10.1 Subject: Estimator Guidelines for Dealing with ED&T Requests.

Background
Historically estimators have recovered ED&T costs by simply applying a nominal percentage (1 - 5%) depending on the industry. As more suppliers have become full service and provide the ED&T service that was traditionally carried out by Ford, estimating have encountered claims for ED&T that can fall outside our markups.
Process
The estimator must understand what he is being asked to pay for. It is essential for the estimator to ask the supplier for a full breakdown of any ED&T claim. The breakdown should include the number of man-hours, cost per hour and any materials used. Any company doing business with Ford is obliged to have a certain level of engineering capability and that is historically included in the SG&A allowance and therefore already paid for. This would normally be work carried out by an established engineering team that work on all of the customer projects on an as required basis. Care must be taken to ensure that ED&T claims only cover for incremental work done on unique and specific Ford programs. Having fully understood the suppliers claim the estimator should, in conjunction with his engineering colleagues, decide on the validity of the claim. The engineering community has, in the past, engineered most parts of the vehicle and will probably have some historic data on engineering time. The estimator should also use his judgment and his estimating skills. Once the estimator fully understands and agrees the amount of ED&T cost to be paid they should calculate the markup required to recover the cost over the life of the program. The supplier may want to recover his ED&T cost before the end of the program life but it should be remembered that Ford are in the same position and will be recovering its ED&T and investment costs over the complete program life. Example; - $1,000,000 ED&T cost is incurred for a part. The part is going to be used on a vehicle for a 6-year minimum life. The vehicle is scheduled to be built at 800 per day. The ED&T cost therefore has to be recovered over 6 x 220 (days per year) x 800 = 1, 056,000 parts, which is $0.95 per part. As the part cost is (for example) $22.5 the ED&T percentage should be 4.2%. This approach ensures that an appropriate ED&T recovery is applied and that the estimator is not just applying a nominal percentage that may not be appropriate. As ED&T will be recovered indefinitely the program life should be considered with great care.
Step by step process; Supplier provides details of ED&T claim. Estimator ensures the claim is for incremental work for a specific Ford program. Estimator (in conjunction with engineering) determines the validity of claim and discusses with the supplier if necessary. Estimator determines program/ component life. Estimator calculates percentage (as example) and applies to estimate. When an ED&T percentage calculates to significantly more than approximately 5% the estimator should report the details back to his supervisor before agreeing to a final figure.
Cost Estimating
10.2 Subject: Engineering, Design and Testing (ED&T) Markups

Background
The Engineering, Design and Testing (ED&T) markup may be applied to estimates when suppliers provide both Engineering and Design (E&D) Services or Full Service Supplier (FSS) services to Ford (ED&T).
Discussion
Suppliers can qualify for the ED&T markup by providing E&D Services as a result of Fords request. ENGINEERING is a planned search for knowledge, which can be used to develop or significantly improve products or processes. DESIGN is translating research findings into a new or significantly improved product or process. Suppliers can also qualify for ED&T by providing FSS services - doing design work previously done by Ford. The general rule is that a supplier provided with part prints did not perform FSS Services but a supplier provided with Ford engineering parameters and specifications will need to provide FSS services. The ED&T markup is applied no more than once per estimate, even if suppliers meet both criteria above. The markup is applied to (Manufacturing Cost + Scrap + SG&A + Profit). Examples of items that are already covered in Ford labour rates or SG&A markups and would NOT be considered eligible for an ED&T markup are: Part Process Engineering. Engineering follow-through in early phases of production. Troubleshooting breakdowns during normal production. Routine, ongoing efforts to refine or otherwise improve existing products. Routine design of tools, jigs, moulds, dies. Estimators should, where possible, avoid detailed cost discussions on ED&T as the true incremental engineering man-years required for a specific part is very complex and difficult to ascertain. See next page. Our markups, based on averages, do not claim to compensate suppliers for the exact ED&T costs they may incur on a given part but they will provide adequate compensation to suppliers who do business with Ford over a longer period. Estimators should consider that a ONE percent ED&T allowance on a $1 part over a 200,000 annual volume for 5 years is $10,000. That same ONE percent equates to $4,000,000 (or 50 man years) on a small car seat set.
Conclusion
Estimating policy is that ED&T Markups up to but not exceeding departmental guidelines may be given if suppliers meet the above criteria. (See published ED&T markup by industry guidelines).

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Cost Estimating

Procedures and Support

Procedures and Support

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Procedures and Support

BASIC ESTIMATE STRUCTURE

RAW MATERIAL COSTS

MANUFACTURING BURDEN (OVERHEAD) COSTS

7.0 8.0 9.0 10.0

Procedures and Support

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2.0 Basic Estimate Structure

Indirect Labour Labour

Fringe MRO Labour Standard Parts

Clean & Special Handling Machine Maintenance Tool Maintenance

Labour Labour Labour

Total Piece Cost

End Item Scrap SG&A Profit ED&T Burden

MRO Indirect Materials

Machine Maintenance Capital Operating Supplies

Insu rance Utilities

Tool Maintenance Capital

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2.1 Cost Elements - "Where Is What"

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

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End Item Scrap.

Sales General and Administration (SG&A).

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

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Engineering Design and Testing (ED&T) - North America

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

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Influence on Labour Cost Only Relief

Influence on Burden Cost Only Uptime

Influence on Material Cost Only Reclaimable Scrap

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4.0 Material Cost

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5.0 Labour costs

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Indirect Labour % of Direct Labour - 2001 Economics

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Employee Fringe Benefits Company Mandated

France Portugal Italy

8.4% 7.6% 1.1% 7.8%