Manufacturing engineers typically consider building equipment internally for three reasons: cost, control and competitive edge. But, do-it-yourself projects tend to tie up personnel, facilities and development time. The answer to the make or buy question typically depends on factors such as time constraints, the size and structure of the manufacturer and its engineering department, the assembly application and the type of machine.
Indirect costs associated with assembly and test systems include intangibles such as time, risk and opportunity.
Designing and building an automated assembly system presents a significant engineering challenge. This is not a part-time job. Companies that try to shoehorn it into an already overtaxed engineering department’s schedule too often pay the price in terms of project delays and outright failure.
If a project involves a mission-critical component or subassembly where Six Sigma levels of quality are not good enough, it inherently carries a commensurate amount of risk to the organization. As a result, a company weighing the risk vs. benefits of developing such a system internally rather than outsourcing it must include a risk factor as an indirect cost.
For instance, what will happen if the project is late or fails? What will be the impact on the company’s relationship and reputation with its customer? Will failure jeopardize other pending new business awards? Are there financial penalties built into the contract for missing deliveries?
Often, any savings a company was anticipating from building its automated assembly system internally quickly evaporates in the face of penalties, malfunctioning assemblies, or expedited freight and overtime charges for dealing with failed components. Generally speaking, the tighter the delivery schedule for a new system, the higher the risk.
In addition to considering time and risk, engineers need to examine opportunity cost. That is defined as benefit that has not been realized elsewhere by the organization because resources, such as people and equipment, have been allocated to a given project.
Some companies express opportunity cost as missed return on investment (ROI). You can do this by entering the normally expected revenue (or other output) generated by an engineer as a percentage of his or her cost.
For example, companies typically expect their engineers to generate three dollars in revenue for every one dollar of cost (salaries and benefits). If they do, they would be generating an ROI of 300 percent. If you pull a team of three engineers off normal assignments for a period of six months to design and develop an automated assembly system, you need to factor in an opportunity cost to your project.
The costs associated with developing an automated assembly system can be accounted for as a capital asset or as project R&D expense. If it can be classified as capital equipment, these costs can be depreciated, reducing their immediate impact on net income. Normally, to be eligible for capital depreciation, the assets must remain useful over the full period of depreciation (usually two or three years).
Ideally, assets should also be useful over a number of projects. On the other hand, if the costs of developing a system in-house are treated as project R&D expense, it will affect the company’s net income in the current financial period. This is a call that must be made by your company’s financial executives. A
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