Page 5: Other costs
Material scrap values - The allowance for scrap is usually estimated by referring to historical level of spend incurred. The introduction of Statistical Process Concept (SPC) should change this. The SPC approach is based on the prevention concept. Critical product characteristics are monitored during the manufacturing process. Excessive variation due to changing process elements such as tool wear are detected by the control charts and the process parameters are then adjusted accordingly before the statistical process limits are exceeded and scrap produced. These percentage values applied to future work is likely to be lower than past historical data and these improvements in working practices help to create a competitive advantage over British Aerospace’s competitors.
Support costs - These relate to the various supporting departments within any organisation including Project Management, Production Engineering and Technical Departments which are involved in the project and whose contribution must be included in a price. A charging rate is provided by the Finance Department. This rate is comprised of all the other cost to the company, such as the building, electricity and depreciation. The format of this charging rate varies between companies and will be dependant upon the methods used to allocate cost.
Converting data into a selling price - These processes are key activities which ultimately provides man hours and material costs to the Commercial organisation who are responsible for converting the basic data into a selling price. Should the company be successful with the bid, then the basic man hours and material costs will form the basis of the manufacturing budget against which performance will be regularly monitored. Adverse performance is highlighted and corrective action taken to ensure the appropriate level of return on the business is delivered.
Responding to the request for price - A request for price may not always include a target price. If a target price is not supplied, comparisons can be made when the costs are compiled. These may be either a comparison with similar work packages under manufacture or an assessment of competitor’s prices. This approach provides an overall view of the proposal’s competitiveness.
Once the price has been decided within a competitive cost structure, it is time to consider other customer requirements. For example, what delivery programme is the customer looking for and over what time frame does the customer want a price. Do they want a price at 1996 economic conditions or a price for a delivery of a number of sets over a five year period? Exact requirements are usually identified within the request for price. Should the requirement be for an average price fixed over a five year period, then consideration must be given to:
- Rises in material and labour costs;
- Financing costs;
- Risks associated with the terms and conditions within which the suppliers and customer will operate.