COSTING SUPPORT AND COST CONTROL IN MANUFACTURING A COST ESTIMATION TOOL APPLIED IN THE SHEET METAL DOMAIN

Transcription

1 COSTING SUPPORT AND COST CONTROL IN MANUFACTURING A COST ESTIMATION TOOL APPLIED IN THE SHEET METAL DOMAIN PROEFSCHRIFT ter verkrijging van de graad van doctor aan de Universiteit Twente, op gezag van de rector magnificus, prof.dr. F.A. van Vught, volgens besluit van het College voor Promoties in het openbaar te verdedigen op vrijdag 3 mei 2002 te uur. door Erik ten Brinke geboren op 15 maart 1973 te Hardenberg

2 Dit proefschrift is goedgekeurd door: de promotor prof.dr.ir. H.J.J. Kals.

3 Costing support and cost control in manufacturing A cost estimation tool applied in the sheet metal domain Erik ten Brinke

4 ISBN Erik ten Brinke, 2002 Printed by PrintPartners Ipskamp, Enschede, The Netherlands

5 Preface This thesis is the result of five years of research in the field of costing support and cost control in manufacturing. The research has been performed in the framework of a research program focussed on sheet metal manufacturing as part of the IOP-research program supported by the Dutch Ministry of Economic Affairs. The research has been supervised by Prof. H.J.J. Kals, former chairman of the laboratory of Design, Production and Management at the University of Twente. The research has been a continuation of two previous research projects at the laboratory mentioned above. The result of the project An architecture for cost control in manufacturing: the use of cost information in order-related decisions by Arthur Liebers has been a starting point for this research. In addition, the results of the project Manufacturing integration based on information management by Eric Lutters have been employed in this research. I could not have accomplished this research without the help of others. First, I want to thank Prof. Kals and Ton Streppel for their support. Though our discussions weren t that frequent and easy, they helped me to find a proper path in my research. Further, I want to thank Arthur Liebers for passing on the results of his research including his library of cost literature. Also, I want to thank Eric Lutters for his, sometimes philosophical and sometimes repeatedly, explanations of some of the principles of his Information Management approach. Furthermore, I want to thank all of my colleagues at the laboratory. I have appreciated their companionship at work, at activities outside work and at activities outside work at work. Within this research, two students finished their master assignment, resulting in valuable input for my research. Therefore, I want to thank René Veltman and Alex Huttinga for accomplishing their, in their eyes abstract, assignments. In spite of their lack of interest and lack of experience in programming, they made a valuable contribution to the prototype implementation. Finally, I want to thank my parents and sister for their support and patience. Enschede, 24 February 2002 Erik ten Brinke i

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7 Summary In the product development cycle several engineering tasks like design, process planning and production planning have to be executed. The execution of these tasks mainly involves information processing and decision-making. Because costs is an important factor in manufacturing, adequate information about costs is extremely valuable for all engineering tasks. Therefore, a cost estimation system for the generation of cost information and for cost control, integrated in the product development cycle, is required. The integration of engineering tasks in the product development cycle has been a major research topic in the last decades. Because engineering tasks can be seen as information processing tasks, information is the proper base for integration. The Manufacturing Engineering Reference Model developed at the Laboratory of Design, Production and Management, is based on the use of a central information management kernel that facilitates both the availability and the accessibility of meaningful representations of the evolving manufacturing information. Because this reference model is designed especially for the integration of engineering tasks, it is used for the development of the cost estimation system. Based on a literature review on cost control and cost estimation in manufacturing and the Manufacturing Engineering Reference Model, a generic cost estimation architecture has been developed. The architecture consists of six functional modules arranged around the information kernel of the Manufacturing Engineering Reference Model. The separate modules are: Cost Models, Cost Determination, Cost Reports, Risk Analysis, Data Analysis and Data Tuning. The Cost Model module is used for the definition and the management of cost models. Multiple cost models can be defined in order to support all engineering tasks and to be able to compare cost models. Based on a cost model, the Cost Determination module calculates the costs. A cost model can be selected based on a specific cost model, the required accuracy or the available information. Cost reports can be created with the Cost Report module. Information about the quality, the accuracy and the sensitivity of the costs has to be provided by the Risk Analysis module. The analysis of (historic) data is a task for the Data Analysis module, while the Data Tuning module has to tune data. A new method for variant based cost estimation is proposed and positioned in the architecture. The cost models are defined based on the cost structure. With the aid of the cost structure, costs can be defined for any object causing costs. Because cost structures can be attached to the information structures related to the Manufacturing Engineering Reference Model, the costs can be calculated for any object at any aggregation level. Additionally, the cost structure enables the differentiated storage of cost information. Based on the information structures and the cost structures, cost views can be constructed. These cost views visualise the differentiated costs for the user. The cost estimation architecture and the cost structure enable the use of four cost control loops: the engineering and planning feedback loop, the order acceptance feedback loop, the production feedback loop and the accounting feedback loop. Some parts of the cost estimation architecture have been implemented in a prototype system. The prototype system is demonstrated by means of an example from the product development cycle in the sheet metal manufacturing domain. Generative and variant based cost estimation are used to demonstrate cost support and cost control. For generative cost estimation two distinct cost models, direct costing and activity based costing, are used. iii

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9 Samenvatting In de ontwikkelingscyclus van een product moeten verscheidene engineeringstaken worden uitgevoerd. De uitvoering van deze taken bestaat voornamelijk uit informatie verwerken en beslissingen nemen. Omdat binnen het hele voortbrengingsproces van een product de kosten een belangrijke rol spelen, is geschikte informatie over de kosten voor de engineeringstaken zeer waardevol. Daarom is een kostprijsschattingssysteem voor de generatie van kosten informatie en voor de beheersing van de kosten, geïntegreerd in de ontwikkelingscyclus van een product, noodzakelijk. In de laatste decennia was de integratie van engineeringstaken in de ontwikkelingscyclus van een product een belangrijk onderzoeksthema. Omdat engineeringstaken als informatieverwerkingstaken gezien kunnen worden, is informatie de juiste basis voor integratie. Het binnen het laboratorium Ontwerp, Productie en Management ontwikkelde Manufacturing Engineering Reference Model is gebaseerd op een centrale information management kernel, die de beschikbaarheid en de toegankelijkheid van betekenisvolle representaties van de zich ontwikkelende informatie mogelijk maakt. Omdat dit referentie model speciaal voor de integratie van engineeringstaken is ontwikkeld, is het gebruikt voor de ontwikkeling van het kostprijsvoorcaclulatiesysteem. Gebaseerd op een literatuurstudie naar het schatten en beheersen van kosten en het Manufacturing Engineering Reference Model is een generieke kostprijsschattingsarchitectuur ontwikkeld. De architectuur bestaat uit zes functionele modules, die rond de information management kernel zijn geplaatst. De afzonderlijke modules zijn: Cost Models, Cost Determination, Cost Reports, Risk Analysis, Data Analysis en Data Tuning. De Cost Model module wordt gebruikt voor het definiëren en beheren van kostenmodellen. Om alle engineeringstaken te kunnen ondersteunen en om kostenmodellen met elkaar te kunnen vergelijken, is het mogelijk om meerder kostenmodellen te definiëren. Gebaseerd op een kostenmodel berekent de Cost Determination module de kostprijs. Een kostenmodel kan worden geselecteerd op basis van een specifiek kostenmodel, een geëiste nauwkeurigheid of de beschikbare informatie. Kostenrapporten kunnen met de Cost Report module worden gegenereerd. Informatie over de kwaliteit, nauwkeurigheid en gevoeligheid van de kosten moet door de Risk Analysis module worden geleverd. De analyse van (historische) data is de taak van de Data Analysis module en de Data Tuning module moet data op elkaar afstemmen. Een nieuwe methode voor variant gebaseerd schatten van de kostprijs wordt voorgesteld en in de kostpijsvoorcalculatiearchitectuur gepositioneerd. De kostenmodellen worden gedefinieerd op basis van de kostenstructuur. Met behulp van de kostenstructuur kunnen de kosten voor ieder object dat kosten veroorzaakt worden gedefinieerd. Omdat kostenstructuren aan de informatiestructuren, gerelateerd aan het Manufacturing Engineering Reference Model, kunnen worden verbonden, is het mogelijk voor ieder object en op ieder aggregatieniveau de kosten te berekenen. Bovendien maakt de kostenstructuur de gedifferentieerde opslag van de kosten mogelijk. Op basis van de informatiestructuren en de kostenstructuren kunnen kosten views worden geconstrueerd. Deze kosten views visualiseren de gedifferentieerde kosten voor de gebruiker. De kostprijsvoorcalculatiearchitectuur en de kostenstructuur maken het gebruik van vier feedbackloops voor de beheersing van de kosten mogelijk: de engineering en planning feedbackloop, de orderacceptatie feedbackloop, de productie feedbackloop en de accounting feedbackloop. v

10 Sommige delen van de kostprijsvoorcalculatiearchitectuur zijn geïmplementeerd in een prototype kostprijsvoorcalculatiesysteem. Het prototype systeem wordt aan de hand van een voorbeeld uit de ontwikkelingscyclus van een product in het plaatwerk domein gedemonstreerd. Voor de demonstratie van kostenondersteuning en kostenbeheersing wordt gebruik gemaakt van generatief en variant gebaseerd schatten van de kostprijs. Voor het generatief schatten van de kosten wordt gebruik gemaakt van twee verschillende kosten modellen, nl. direct costing and acitivity based costing. vi

11 Table of contents Preface...i Summary...iii Samenvatting... v Part I: The framework 1 Introduction Cost estimation in manufacturing Sheet metal manufacturing Problem definition Scope of the thesis Literature review on cost estimation and cost control in manufacturing Cost Cost types Cost allocation The use of cost information in manufacturing Task oriented cost information The need for information management Cost control The manufacturing planning and control reference model The (cost) control architecture Cost estimation Generative cost estimation Variant based cost estimation Hybrid cost estimation Cost modelling Determination of the scope Determination of the allocation base Determination of the cost functions Sheet metal manufacturing General Mechanical cutting Non-mechanical cutting Joining operations Bending operations Restatement of the problem definition Information Management The Manufacturing Engineering Reference Model Information structuring vii

12 3.3 The information structures Ontologies Process architectures related to Information Management Part II: A generic cost estimation architecture 4 Design of a generic cost estimation architecture Functional specifications Cost information and the information structures The cost estimation architecture Cost Models Cost Determination Data Analysis Risk Analysis Data Tuning Cost Reports Variant based cost estimation and its position in the architecture Employment of the architecture Cost control Cost modelling Costing support Concluding remarks Part III: A prototype cost estimation system 6 Implementation of a prototype cost estimation system System specifications Cooperating systems Creation of databases Design Process planning Production planning The cost estimation system Cost Models module Cost Determination module Cost Reports module Variant based cost estimation Concluding remarks Application of the prototype cost estimation system in the sheet metal domain Example product and context information Example cost models Direct Costing Activity Based Costing Example cost calculations Generative cost estimation Variant based cost estimation Hybrid cost estimation Costing support and cost control viii

13 ïð 8 Conclusions and recommendations Conclusions Recommendations ïð References Terminology Appendices A Time and cost functions from literature A.1 Punching A.2 Nibbling A.3 Cutting A.4 Water jet cutting A.5 Laser cutting A.6 Laser welding A.7 Bending B Example cost structures B.1 Resource information structure B.2 Product information structure B.3 Order Information Structure C Regression analysis D Neural networks E Example product and context information E.1 Components E.2 Information structures E.3 Cost structures ix

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15 Part I The framework

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17 1 Introduction 1.1 Cost estimation in manufacturing Within this thesis, the focus is on cost estimation in manufacturing. Manufacturing refers to the series of interrelated activities and operations involving the design, the materials selection, the planning, the production and the quality assurance of the products (Chisholm, 1990). The product development cycle consists of a combination of manufacturing activities resulting in a product. Production is only a part of manufacturing and the product development cycle. Production is the act or process (or the connected series of acts or processes) of actually physically making a product from its material constituents. Production can consist of fabrication and assembly operations (Chisholm, 1990). Fabrication addresses those operations applied during production that are not assembly operations. The preparation of the actual production of a product is dealt with by engineering. Therefore, engineering includes activities as design, process planning and production planning. During the product development cycle, the execution of engineering tasks includes many decisions to be taken. The decisions are concerned with the product, the production of the product and the disposal/recycling of the product. The decisions are based on several criteria, e.g. technical constraints, but costs are also an important criterion. In order to be able to use costs as a decision criterion, the costs of all aspects of the product have to be known. Because the costs are not known in advance, a cost estimation system is required to generate the required cost information. The cost estimates have to be based on the product information, which is available at a certain stage of the product development cycle. Because the available information is different in amount and detail in different stages of the product development cycle, it is difficult to support all engineering tasks. Besides the use of cost estimation for decision-making, it can also be used to control costs. When the costs can be controlled, it is possible to propose specific product changes reducing the costs. In order to reduce the time span of the product development cycle concurrent engineering is used. In concurrent engineering, the engineering tasks are partially performed simultaneously. Concurrent engineering requires the integration of the engineering tasks in the product development cycle. In order to support the engineering tasks with cost information, cost estimation has to be integrated in the product development cycle as well. 1.2 Sheet metal manufacturing The investigation reported in this thesis has been performed in the framework of a research program focussed on sheet metal manufacturing as part of the IOP-research program supported by the Dutch Ministry of Economic Affairs. Trends in small batch manufacturing in the sheet metal industry are a further decrease of batch sizes, shorter delivery times and lower prices. Therefore, in the sheet metal industry it is crucial to be able to generate cost estimates and to control the costs in order to make fair profit. Many sheet metal companies in The Netherlands are supply companies. Especially these companies have to be able to generate cost estimates quickly and accurately. The cost estimates have to be generated quickly because quotations have to be offered to potential customers in a short time period. The cost 1

18 2 Chapter 1 estimates have to be generated accurately because the margins between cost price and sales price are small due to (inter-) national competition. 1.3 Problem definition The success of a company largely depends on the profit that it can realise. The profit is determined by the costs that are made and the extent in which these costs are recovered. Therefore, it is essential for a company to know the (future) costs and being able to control them. When the (future) costs are known throughout the entire product development cycle, the engineers can make use of cost information during the decision-making processes. Therefore, it is necessary to integrate the cost estimation activities in the product development cycle. For this a system is required that can support engineers and other systems in cost estimation and cost control. The objective of this research is to develop a prototype cost estimation system that can provide cost information throughout the whole product development cycle and that can be used for cost control. In order to be independent of the manufacturing environment, the cost estimation system has to be generic. An implementation of the system has to be applied in the sheet metal domain. 1.4 Scope of the thesis This thesis is composed of three parts: the framework, a generic cost estimation architecture and a prototype cost estimation system. Part I: The framework In the chapter Literature review on cost estimation and cost control in manufacturing, the terminology used in literature and used in this thesis is explained. Furthermore, some methods in the field of cost control and cost estimation are discussed. First, it is explained what costs are, how they can be characterised and how they can be assigned to products. The use of cost information in manufacturing is discussed. For different engineering tasks different cost information is used in a different manner. Furthermore, the cost information produced by different engineering tasks has to be managed properly in order to be able to use it effectively. Second, one method for cost control is discussed. This method is positioned in manufacturing and the distinguished functions are explained. The two most important functions: cost estimation and cost modelling are clarified based on literature. Third, common sheet metal processes are described. Furthermore, time and cost functions from literature are given per process. Finally, an information management approach is described that is very suitable for the integration of engineering tasks in the product development cycle based on information. The related information structures and process architectures are explained. Part II: A generic cost estimation architecture In this part, the design of a generic cost estimation architecture is explained. Based on information from the literature review, functional specifications and information structures, a cost estimation system is designed. The functional modules are described and the function and the use of the architecture are clarified. Part III: A prototype cost estimation system The cost estimation architecture was partially implemented in a prototype cost estimation system. The prototype cost estimation system is demonstrated by means of an example taken from the sheet metal domain. The thesis is concluded with final conclusions and recommendations.

19 2 Literature review on cost estimation and cost control in manufacturing This chapter provides a literature overview on cost estimation and cost control in manufacturing. First, the notion cost will be discussed in general in section 2.1. Next, the use of cost information in the product development cycle is discussed in section 2.2. The use of cost information by different engineering tasks and the need for an information management system is described. Besides the ability to estimate costs, it is necessary to be able to control the costs. Section 2.3 positions cost control in manufacturing and will discusses the sub functions of cost control. The two most important functions: cost estimation and cost modelling are discussed in section 2.4 and 2.5. Section 2.6 deals with the most common sheet metal processes and the related cost and time functions. Finally, the problem definition is restated in section Cost The broad definition of costs is related to the economic resources (manpower, equipment, real facilities, supplies and all other resources) necessary to accomplish work activities or to produce work outputs (Stewart, 1995a). Usually, costs are expressed in terms of units of currency. Therefore, costs are the amount of money representing the resources spent for the production of output. A resource is a physical entity that is required to be able to execute a certain operation. Resources can be e.g. machine tools, tools and fixtures, but also operators and materials. Output can be products and services. During the product development cycle, engineering tasks cause and fix costs. Figure 2.1 shows the influence of several company departments on the product costs as taken from a German research project in machine design (Wierda, 1990). The engineering tasks cause costs because of their contribution to the development of a product. At the start of the product development cycle, no costs are fixed yet (Figure 2.2). The consecutive engineering tasks fix the costs because of the decisions taken. The decisions taken during an engineering task at the beginning of the product development cycle can significantly influence the costs caused by engineering tasks later in the engineering cycle because the solution space for the engineering tasks is reduced by it. Figure 2.1 shows that design itself takes only about 10% of the product costs, whereas it fixes about 70% of the product costs. It has been argued that the latter percentage is misleading because the product specifications already imply some minimal costs. According to Ehrlenspiel, design is responsible for 20 to 30% of the total product costs (Wierda, 1990). The way in which engineering tasks contribute to the product costs depends on the production environment. Figure 2.3 shows a comparison between high-tech production and classic mass production (Thompson, 19??). The figure shows that for high-tech production the costs caused before production are about 5 times higher than for mass production, while the costs of production are about one fifth. For mass production, it is required to be able to estimate the costs of production more accurately than the costs of design and engineering. For high-tech production, the opposite applies. 3

20 Chapter 2 Figure 2.1 Experimentally determined influence of the main departments of a company on the product costs (Wierda, 1990). Figure 2.2 Decreasing costs not fixed and increasing costs caused during the product development cycle (Wierda, 1990). Figure 2.3 Product life-cycle costs (Thompson, 19??). It is easier to estimate costs accurately when more detailed information is available. Since design fixes about 70% of the product costs, it is required to make accurate cost estimates during design. However, during the design process the product information is not yet available in full detail, so it is 4

21 Literature review on cost estimation and cost control in manufacturing difficult to make accurate estimates. This phenomenon is known as the cost estimation paradox, see Figure Cost types Figure 2.4 The cost estimation paradox (Bode,1998a). Total product costs are composed of several different cost items. Possible breakdowns of the product costs are the cost breakdown structures of Fabrycky & Blanchard (Asiedu, 1998) and Liebers (Liebers, 1998) (Table 2.1 and Table 2.2). These two examples show that multiple breakdown structures are possible. A general cost break down structure seems hardly possible. Two important criteria for a good cost breakdown are: all costs must be covered and no costs must be counted twice. Research and development cost - Product management - Product planning - Product research - Design documentation - Product software - Product test and evaluation Total product cost Production and Operations and construction cost maintenance cost - Manufacturing/ - Operations/ construction maintenance management management - Industrial engineering - Product operation and operations - Product distribution analysis - Product maintenance - Manufacturing - Inventory - Construction - Operator and - Quality control maintenance training - Initial logistic - Technical data support - Product modification Retirement and disposal cost - Disposal of nonrepairable - Product retirement - Documentation Table 2.1 The cost breakdown structure of Fabrycky & Blanchard (Asiedu, 1998). The costs from a cost breakdown structure are caused by different resources and the way these costs are related to those resources can be different. In order to get a better perception of costs, costs are classified in different types according to their cause and the relation to their cause. Therefore, it is advantageous to know the costs per cost type Two general cost classifications are on the one hand direct versus indirect costs and on the other hand variable versus fixed costs. Direct costs are costs that can be identified specifically and consistently with an end objective (such as a product, service, software, function, or project), while indirect costs cannot be identified specifically and consistently with an end objective (Shuford, 1995). This means that direct costs can be allocated directly, i.e. the allocation base is known, whereas for the allocation of indirect costs an allocation base has to be defined (Cooper, 1991). The allocation of costs will be treated in more detail in the next section. 5

22 6 Chapter 2 Variable costs are costs that change with the rate of production or the performance of services (Stewart, 1995a). Fixed costs are costs that do not vary with the volume of business (Stewart, 1995a). Furthermore, semi variable costs and step-fixed costs can be distinguished. Semi variable costs are costs that vary somewhat in relation to volume, but their percentage of change is not the same as the percentage of change in volume (Shuford, 1995). Step-fixed costs are fixed costs that alter their behaviour as the activity level moves from one relevant range to another (Shuford, 1995). Costs of generating a production plan - Marketing and promotion - Company management, including control - Sales and order intake - Resource, process and product design - Process planning - Production planning Product cost Costs of executing a production plan Costs of successfully executing a production Costs of re-planning plan - Having production - Repair, rework and resources scrap - Using production - Resource repair, resources including down time - Materials included in - Late delivery the products - Waste Table 2.2 The cost breakdown structure of Liebers (Liebers, 1998). Externally imposed burdens - Contingency allowances - Cost increasing taxes (as opposed to profit reducing taxes) The distinction between recurring & non-recurring and relevant & irrelevant costs is also often used. Recurring costs are repetitive costs that vary with the quantity being produced (Stewart, 1995b). Non-recurring costs are elements of development and investment costs that generally occur only once in the life cycle of a work activity or work output (Stewart, 1995b). Relevant costs are costs that are present in one of several alternatives but are absent, either in whole or in part, in other alternatives (also called differential costs) (Shuford, 1995). These costs play a role in specific decision-making processes, whereas all other costs are irrelevant costs (Liebers, 1998). Other cost types that are frequently distinguished are listed here to illustrate the diversity of cost types: Acquisition costs: Conversion costs: Total expenditures estimated or incurred for the development, manufacture, construction and installation of an item of physical or intangible property, or the total acquisition costs of a group of such items (Stewart, 1995a). A grouping of direct labour and manufacturing overhead into a single summary cost element (Shuford, 1995). Development costs: Costs of a system up to the point where decision is made to procure an initial increment of the production units or the operational system (Stewart, 1995a). Disposal costs: The costs of disposing of a facility, property item, equipment item, scrap, byproducts or excess material (Stewart, 1995a). Life-cycle costs: All costs incurred during the projected life of the system, subsystem or component (research, development, test, evaluation, production, maintenance and disposal) (Stewart, 1995a). Opportunity costs: Loss of income due to not selecting the optimum alternative from a financial point of view (Liebers, 1998)(Blommaert, 1998). Prime costs: Costs of direct material and direct labour (Shuford, 1995). Removal costs: The costs of dismantling a unit of property owing to retirement from service (Stewart, 1995a). Sunk costs: The total of all past expenditures or irrevocably committed funds related to a program/project (Shuford, 1995).

23 Literature review on cost estimation and cost control in manufacturing Cost allocation The allocation of cost is important for a correct interpretation of costs. Cost allocation is a method or combination of methods that results in a reasonable distribution of costs (Stewart, 1995a). For direct costs, this allocation is straightforward. The costs can be calculated from: C = P Q (2.1) with: C: the costs P: the price variable Q: the allocation base In the case of direct labour costs, C is the direct labour costs, P is the hourly rate and Q the number of hours. In the case of indirect costs, the allocation base has to be defined. After this, the price variable can be calculated from: C P = (2.2) Q with: P: the price variable, usually called rate C: the indirect quantity Q: the allocation base The values of the indirect quantity and the allocation base can be obtained from historic information or from prognoses or a combination of both. If, for example, the total direct costs are chosen as the allocation base for the total indirect costs, P is the direct cost burden rate, C the total indirect costs and Q the total direct costs. When the rate is known, the costs can be calculated with equation 2.1. This example illustrates the way in which indirect costs are calculated with the traditional costing method. With this method, the overhead is allocated to products using volume based allocation bases e.g. labour hours, machine hours. When the allocation base is chosen incorrectly, incorrect conclusions can be drawn from the indirect costs. When the indirect costs are calculated with the direct cost burden rate, it would mean that every product with high direct costs also has high indirect costs, which is not the case. Therefore, this can lead to wrong conclusion about the cause of costs. The ratio between direct costs and indirect costs has changed drastically over the past decades because of increasing automation, in both machinery and computers, as illustrated by Figure 2.5 (Thompson, 19??). In the 1950 s, the indirect costs were only a small part of the total product costs while direct labour constituted the biggest part of the total product costs. Therefore, it was not necessary to estimate the indirect costs in a very detailed and accurate manner and traditional costing was an adequate way to calculate the overhead. Figure 2.5 The components of product costs in the United States (Thompson, 19??). 7

24 Chapter 2 Nowadays, the opposite situation is true. Overhead constitutes the biggest part of the total product costs while the direct labour costs are only a small part. The part of the material costs in the total costs has hardly changed. Because of this change, it has become necessary to calculate the overhead more accurately and more detailed. The allocation of the overhead requires the use of other allocation bases that allocate the overhead in a more realistic way. Other methods for the allocation of overhead costs will be discussed in section The use of cost information in manufacturing Different engineering tasks have different information available for generating relevant cost information. In addition, the tasks use different kinds of cost information for different purposes. In section 2.2.1, an overview will be given of the use of cost information for the next tasks: design, process planning, production planning and management. This overview indicates a considerable interrelation between the different tasks and the information that is used. Therefore, the importance of an information management system will be indicated in section Task oriented cost information In the embodiment design phase, decisions about materials, surface roughness, tolerances, shape, dimensions, production methods, etc. have to be made. Because all decisions are mutually dependent, a decision about one aspect can lower the costs for that aspect while increasing the costs of another aspect. For instance, the selection of a cheap material can lead to extra operation steps in order to achieve a certain surface tolerance, which increases the production costs. Several of these dependencies are present. From an analysis of the product design process and its decision making it can be concluded that the costs fixed during product design are caused by the following interrelated cost drivers: geometry, material, production processes and production planning (Weustink, 2000). Next, the interrelation of the cost drivers will be illustrated. The interrelation of the cost drivers causes the interrelation between the engineering tasks, which influences the use of cost information by these engineering tasks. Interrelated cost drivers The geometry includes the shape, dimensions, accuracy, etc. and it determines the material quantity and the production processes that are required. The influence of the geometry on the product costs is obvious. For instance, a higher level of accuracy requires more accurate resources (e.g. machine tools, equipment), which can result in higher production costs. The shape can also cause increasing production costs; a pocket with straight corners requires generally a more expensive machining process (e.g. electrical discharge machining) than a pocket with rounded corners (made by e.g. milling). Material is one of the most obvious cost driving product characteristics, because material costs constitute a large part of the total product costs (see for instance Figure 2.5). Production processes are required to transform (raw) material into a component or to assemble components and/or assemblies into higher-level assemblies. Resources (e.g. operators, machine tools, tool sets, fixtures) are needed to perform the required production operations. The resources have a certain capability, which means that resources have technical restrictions, concerning the power of the machine tool, accuracy, maximum dimensions of the workpiece, etc. The limited capability of resources restricts the execution of certain operations. This has to be taken into account in the planning phases of the product development cycle. The type of production method selected has a significant influence on the production costs. Besides the technical restrictions, resources have also logistic restrictions, which means that a resource will not always be available. With the knowledge of these restrictions, operations can be allocated to the available resources. It is necessary to ensure the due date, because otherwise a fine could be incurred. These time, and therefore, cost consequences must be regarded in the planning phases. 8

25 Literature review on cost estimation and cost control in manufacturing The goal of production planning with regard to costs is to minimise the variable costs that are a result of production planning decisions (Giebels, 2000). The variable costs to be regarded are: extra payments for overtime work, the price for subcontracting minus the variable costs for in-house production, inventory costs due to excessive Work In Process (WIP), lateness cost (in particular penalty costs) and earliness costs for short time delivery of blank materials. A prototype of a decision support system for integrated order planning, which incorporates these variable costs, will be discussed in more detail in section The cost drivers and the engineering tasks In the design phase, the primary decisions are concerned with geometry and material. For proper decision-making, it is advantageous to have information from other engineering tasks, usually performed later in the product development cycle, like process planning and production planning. Initially the designer can get benefit out of cost information related to geometry and material. When cost information about production processes and production planning would be available, this would be of great help to the designer. Because geometry does not cause costs directly, the designer cannot calculate costs for geometry. A way to solve this problem is to use cost information from products that have been manufactured in the past. The assumption is made that geometrically equal products (of the same material) will cost the same. This method will be discussed in section in detail. This method can give cost information quickly because no other engineering tasks, like process planning, are required to generate more information. The designer can estimate the material costs relatively easy when he has access to a material database, which also contains cost information. Another way to solve the problem is to perform other engineering tasks, like process planning, and to use the generated information for cost estimation. The designer must frequently choose between alternative solutions. In the choice between alternatives, the overhead costs are usually less important because they are made anyway. Therefore, only the direct costs are considered in choices between alternatives. In the process-planning phase, the primary decisions are concerned with production processes. A cost based decision between production processes is difficult because cost information about a process largely depends on the resources that are used. Similarity, based on production processes, with products from the past could be used in this case. When resources are selected, the extent of use can be estimated and costs can be calculated with the appropriate cost rates. The choices about the production processes are made based on the technical constraints and the technical ability of the resources. If the availability of resources would be incorporated in the decision making of the process planner, the choices made would probably be more adequate. The unavailability of a resource can result in the use of a more expensive resource than chosen by the process planner, consequently leading to higher costs. In the production-planning phase, the primary decisions are concerned with production planning. Usually, production planning is one of the last phases in the product development cycle before production starts. Production planning determines which resources are used and when they are used. The final decision about which resource will be used for a product, not only influences the costs of that product but also the costs of other products that have to be produced. When a resource is selected for one product, this resource cannot be chosen for another product, which could mean that a more expensive resource has to be chosen for the other product. For the production planner, besides the product costs, the costs of all products in the manufacturing cycle can be important. The primary interest of management is information about the costs and revenues at the end of a certain period, rather than the costs and revenues of a specific product. For the analysis of the costs, it is advantageous to have the costs split up in the different types. Furthermore, based on the analysis of the resource utilisation rates, management can adapt the resources rates. The cost information about products and resources can be used when considering buying new resources. 9

26 2.2.2 The need for information management Chapter 2 From the previous section, it can be concluded that decisions of different engineering tasks influence each other. Furthermore, engineering tasks use information from and/or generate information for other engineering tasks. In order to tune the need for and the availability of information from different engineering tasks, the structuring of information has to be unified and communication between the engineering tasks has to be made possible. When concurrent engineering is applied in the product development cycle, the need for communication increases even more. Concurrent engineering, i.e. the simultaneous execution of shared tasks by separate departments and the control of cooperative decision-making, requires additional tuning of engineering. The possibility of communication between the engineering tasks is based on both the availability and accessibility of coherent information (Lutters, 1997a). In the automation of the product development cycle, engineering databases play a key role (Billo, 1987). An engineering database can contain geometric, physical, technological and other properties of technical objects and the relations between these properties (Billo, 1987). Usually, the engineering tasks require information from multiple databases. Therefore, for the integration of engineering tasks in the product development cycle an information management system is indispensable. In chapter 3, an information management model based on the accessibility of transparent information will be discussed. 2.3 Cost control The function of cost control is twofold. On the one hand, it has to detect cost values and sources of these costs. It can initiate a well-founded product modification in order to keep costs within a predetermined range or to cut costs in general. On the other hand, it must be possible to compare cost estimates with the actual costs. In this way, cost models can be improved. The feedback of cost information is an essential part of cost control. A way of describing and understanding a complex system such as the manufacturing system is the decomposition of the system. A possible representation of decomposition is a reference model. A reference model represents a system as an organisation in terms of its structure of relatively independent, interacting components, and in terms of the globally defined tasks of these components (Biemans, 1989). Many reference models for the manufacturing system have been developed in the last decades, see for example (Lutters, 2001). In section the manufacturing planning and control reference model of Liebers will be discussed. This reference model was developed especially to clarify the relation between cost control and manufacturing. When the position of cost control in the manufacturing system is known, the cost control component can also be decomposed. Another possible representation of decomposition is an architecture. An architecture is a framework which defines the functions, which are required to perform the task of a system, with their input and output (Arentsen, 1995). The cost control architecture that was developed in the context of the manufacturing planning and control reference model of Liebers will be discussed in section The manufacturing planning and control reference model The manufacturing planning and control reference model of Liebers depicted in Figure 2.6 consists of three main components, namely planning, execution and control. The three main components are subdivided into several sub-components. In the reference model, hierarchical planning is assumed. The four planning & control levels that are discerned are the strategic level, the tactical level, the operational level and production. However, for the implementation of the components other planning and control levels can be used. 10

27 Literature review on cost estimation and cost control in manufacturing Figure 2.6 The manufacturing planning and control reference model of Liebers (Liebers, 1998). Planning The main component planning consists of the sub-components strategic planning, technological planning and logistic planning. Technological planning is again subdivided into process planning & resource engineering, product engineering and process planning. Logistic planning is subdivided into resource location planning and order planning. The task of planning is the generation of a valid production plan. Strategic planning decides on the goals of the organization and the strategies for attaining these goals. Closely related to strategic planning is the selection of types of products and the amounts of products to be manufactured. The policy of how to deal with (potential) customers, vendors, makebuy decisions, hourly resource rates etc. are determined by strategic planning. Technological planning generates all required technological information, i.e. the process plan. Process and resource engineering deals with the development of processes and resources as well as the planning of the technical aspects of maintenance, service and repair. Product engineering and process planning comprises the generation of product information and the selection of processes and resources required for the production of the product. The final allocation of work to resources is done by logistic planning, it determines the time frame for the technological applicable resources, i.e. the production plan. Resource location planning sees to it that the right resources, including materials, are in the right place at the right time. Order planning selects the final resources from the set of technically applicable resources determined by process planning. Furthermore, it assigns work to time periods and it decomposes work into smaller units. 11

28 Chapter 2 Execution Plan execution creates the physical product according to the production plan. During production several deviations between the required product and the realised product occur. This can lead to rework that also requires additional planning. Control The main component control consists of the sub-components data collection & processing, strategic control, (functional) quality control, (delivery) time control and cost control. In order to be able to detect deviations between the planned product and the resulting product, it is necessary to collect data by monitoring the plan execution. The data can refer to the product or the processes. After processing the collected data, models for the planning activities can be created or adjusted. Strategic control determines the targets for the performance indicators and the initial solution space for planning activities. The three control components for the performance indicators (functional) quality, (delivery) time and cost have to evaluate the results of a planning and execution activity for each indicator. For the evaluation, the consequences of the results of an activity on the performance indicators have to be compared with the targets set for the performance indicators. For the development of a valid production plan, frequent communication between the components is necessary. Communication with the company environment is dealt with by strategic control. The targets for the performance indicators are passed from strategic control to the other control components. Because the performance indicators affect each other, communication between the control components is essential. The input for the planning components comes from strategic planning. Communication between the components of technological planning and between the components of logistic planning is required. In addition, communication between technological and logistic planning is required. Although a reference model does not contain information flows, the information flow in the reference model is divided into a feedforward and feedback part. In the feedforward part, the planning and execution components generate and process information for the execution of other components. In the feedback part, the control components process and generate information for the improvement of the execution of other components. The main advantages and disadvantage of the reference model of Liebers (Figure 2.6) are listed in Table 2.3 (see also Liebers, 1998). The reference model incorporates both manufacturing planning and manufacturing control. Cost control is part of a generic manufacturing planning and control reference model with generic planning and control components. Overall control is incorporated by the separate control components for the performance indicators (quality, time and costs) and the different levels of Advantages planning and control (strategic, tactical, operational, and production). Communication on all planning and control levels is possible. The planning & control levels are independent of the implementation of the components of the reference model. The reference model can be linked to reference models in business economics, incorporating cost control, thus enabling to incorporate financial control. The reference model does not have a desired single information structure. Disadvantage The three performance indicators limit the utilisation of the reference model. Table 2.3 Advantages and disadvantages of the manufacturing planning and control reference model of Liebers 12