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NRE vs COGS

Summary: What's most important? Schedule? Cost? Maybe none of these.

Sometimes we engineers forget that engineering is a business endeavor. Our role is simple: help the company make a profit. Everything else is secondary. Without profits a company fails. With them it prospers.

It's critical we make engineering tradeoffs that facilitate that profit. Non-Recurring Engineering costs (that price of developing a product) has to be balanced against other factors, like the cost to manufacture the widget. Saving $50k of engineering effort by adding $5 of parts in a system whose product lifecycle won't exceed, say, 1000 units, is often a sound engineering and business decision. Conversely, it can make sense to add a lot of effort to removing a few bucks of cost from a high-volume product.

These judgments cannot be made without a lot of information about costs and volumes, which too few of us are privy to. This means we're operating in an information vacuum which makes it impossible to make the best decisions for the company. It's like driving with your eyes closed. Sure, you might get there, but probably won't.

A correspondent who wishes to remain anonymous sent an email recently which sparked my interest. He wrote: "Our finance department recently did us a great service by identifying the breakeven point in a development cost vs. product cost tradeoff analysis. This breakeven took into account lost opportunity cost in the higher development cost scenario, lost profit in the higher product cost scenario, gross vs. net revenue, and profit targets. The result was a guideline that our teams can tailor to their program (since the tradeoff is dependent on a particular products lifetime sales volumes)."

Wow! This is a highly disciplined outfit which has crossed traditional departmental barriers to give the engineers the information they need to build products optimized for feeding the bottom line.

You'd think more organizations would adopt such a gestalt approach to profits. Yet I suspect few do. By walling this information off from those who need it most the odds of creating a successful product or company wanes.

Instead, all we hear are the screams about schedules.

What about your company? Do you get these sorts of briefings?

Published October 7, 2010