May 072012
 

I happened to stumble upon an article on SpendMatters from a few weeks ago by Sheena Moore:

Friday Rant: What’s in a Brand? For Tiffany’s new “Rubedo” Cuff, a Preposterous Mark-Up

The article about the manufacturing cost versus the price of a new bracelet at Tiffany. If you don’t know what Tiffany is, you’re probably unmarried and have not been dating. Some say you can’t put a price on love; Tiffany disagrees and will help you do it! The first great thing about the article is Sheena’s calling out of Tiffany’s deceiving marketing.  Apparently, they told her the bracelet is made of a golden “metal” called “Rubedo.”  No ladies it’s not gold; it’s something better; it’s Rubedo. (Rubedo is actually just an alloy that helps Tiffany water down the gold to make more $$$. Sheena and I had a good laugh about this on the phone).

Sheena’s article caught my eye for two reasons. First, I’m just really cheap, and the idea of a $7,500 bracelet made of 55% Copper and 31% Gold flabbergasted me. However, more interesting than my miserly instincts was that Sheena does a nice little product cost analysis of the bracelet. In doing so, she highlights another form of fool’s gold:  Material Cost Multipliers.

The Material Cost Multiplier

Material Cost Multipliers are a simple idea. They postulate that one can first calculate the cost of a product’s raw material and multiply it by a number to get the overall “Piece Part” cost.   But wait, you may object: how can this be valid? Why would someone vastly oversimplify the product cost calculation like that? That’s simple: calculating actual cycle times and tooling costs for each machine needed in the product’s manufacture is HARD, and it requires a lot of manufacturing knowledge.

Material Cost Multipliers just sweep all that nastiness under the rug… or into the multiplier, in this case. They have the following assumptions:

  • Assumption 1: Parts is Parts. Remember the old Wendy’s commercial making fun of the contents of Chicken McNuggets? No? Well I do, and you can too, by watching the video below.

The Material Cost Multiplier inherently assumes that all parts that you are manufacturing require the same processes and have the same complexity of design. For example, assume that our Tiffany bracelet and this Gucci Earring had the same mass:

Product Cost Bling Hiller Associates

Assume these had the same mass!

Would you guess that both of these items take the same effort to make? If you said  ‘no,’ you are right.

  • Assumption 2:  The Biggest Loser – The Material Cost Multiplier also assumes that the part mass is very highly correlated to the part’s processing costs. Therefore, the more mass you lose, the more your processing cost goes down in DIRECT correlation.  There is no doubt that many manufacturing costs do have a correlation to the mass of the part, but many do not. For example, the polishing or burnishing of the Tiffany bracelet is much more dependent on the surface area burnished, the complexity of the surface, and the hardness (composition) of the material than the mass of the item.

The Cost of the Tiffany Bracelet

Sheena received notice from a colleague that material is only about 25% of the cost of an item. So, Sheena first did a nice material cost analysis of the bracelet. She says that the cost of material is $1,500.  Although, she does not account for scrap or loss, this is a pretty good assumption, given that this type of material which can be re-melted.  Also, the manufacturing process is likely a net form process, where there is virtually no loss in specific design).  I would, however, question the assumption that:

  • Material Cost = 25% * Piece Part Cost.
  • Or, Materal Cost * 4 = Piece Part Cost. Basically, 4 is her Material Cost Multiplier.

First of all, that seems backwards in the world of simple metal part manufacturing which, in my experience would be more likely to have:

  • Material Cost = 75% * Piece Part Cost
  • Materal Cost * 1.33 = Piece Part Cost).

In fact, I think the processing costs are even lower than my general assumption. Just looking at the picture of the bracelet, my guess is that this is made by a routing such as:

Extrusion Routing for Jewelry Hiller Associates

CLICK TO ENLARGE! Tiffany Bracelet Mfg Routing

Extrusion is very efficient and cheap, especially for a straight cylinder. I would shoot from the hip and say the processing is definitely under $20 (probably under $10). Let’s say we have the $1500 raw mat’l cost + $20 processing/logistics + $100 for marketing (which might be outrageously high). That’s a $1,600 Fully Burdened Cost for the high class Wonder Woman wrist bracer (you’ll need 2 for Halloween).  At a price of $7,500, just one bracelet is generates $5,900 PROFIT (370+% margin)! I did a product cost analysis in one of the commercial Product Cost Estimation tools for a very similar looking part to the Wonder Woman Tiffany Bracer, and I got a result of $5.25 (Extrusion = $2.20, Flaring = $0.7, Marking = $0.50, Polishing = $1.30, Packaging – $0.55). My former co-founder’s wife owns a florist and gift shop and once told me told me once that typical mark-up for jewelry is ~50%, so the bracelet should be priced (at max) at $3,200, not $7,500.

So are Material Cost Multipliers bad?

No, they are not necessarily bad or inaccurate… but they often can be because they are misapplied. It’s important to know:

  1. What processes will be used to make a product?  Each major process probably needs its own multiplier for accuracy.
  2. What physical part attribute most strongly drives cost in each process?
  3. Make sure if someone gives you a multiplier that it is based on these considerations?

Consider the differences:

  • Sheena’s general manufacturing Material Cost Multiplier  = 4x –>Processing Cost = $6,000!
  • Eric’s general simple part metal manufacturing Material Cost Multiplier  = 1.33x –>  Processing Cost = $1,900!
  • Eric’s manufacturing “judgment” from experience and given the the routing Eric assumed Processing Cost = $20 –> Material Cost Multiplier = 0.013x!!!
  • The Product Cost Estimation Tool’s estimate of Processing Cost = $5.25 –> Material Cost Multiplier = 0.003x!!!

There is no doubt in my judgment that the Product Cost Estimation tool is the closest to reality. Regardless, a fast back-of-the-envelope calculation is far better than nothing. I am a big fan of common sense and back-of-the-envelope reality checks. I applaud Sheena’s effort, which, honestly, is more than many design engineers or purchasing engineers would do in considering the profit impact of their decisions.

Conclusions

  1. Material Cost Multipliers are useful, but can be dangerous. They should be applied by experts or with expert guidance.
  2. My analysis shows that Sheena is even MORE correct in that the bracelet is not worth it.
  3. Kudos to Tiffany for Jedi Mind Tricking girls into believing a $1,600 bracelet is worth 3x as much.
  4. Ladies, your boyfriend’s/fiancee’s/husband’s willingness to buy you the Tiffany Rubedo bracelet may mean he’s filthy rich, desperate, or not too smart… but it may not necessarily mean he loves you.  Admittedly, that’s just my guess… but then again, I’m a product cost guy, not the love Dr.)

Eric

p.s. Guys, perhaps you would be interested in buying the woman of your dreams the Hiller Associates RubedA bracelet. It’s just like the Tiffany RubedO bracelet, but MINE is 35% gold, not 31% like Tiffany.  The only difference is my bracelet will say “H&CO” where Tiffany’s says “T&CO”, and likewise mine says Hiller’s, instead of “Tiffany’s”.  It’s a bargain at $4,999, versus Tiffany’s $7,500.   H&CO:  “Don’t just show her your love; show her your intelligence.”

  8 Responses to “All That Glitters Isn’t Gold… and Neither Are Product Material Cost “Multipliers””

  1. Very interesting…. this explains a lot to me. The last (and only time) I went into Tiffany’s as an open-minded customer to potentially buy a “special” gift for a high maintenance friend, the sales pitch I got was EXACTLY targeting the types of stupid women who don’t actually know the value of anything, but instead trust the leming-targeted media to tell them what’s valuable.

    After her stupid sales pitch, I told her everything they’re selling is extremely overpriced compared with the going rate for gold and silver. Why the markup? What makes Tiffany’s so special?

    Her answer – some other load of crap I don’t remember that didn’t answer the question

    So I probed deeper….

    Q: Do you make everything in America? (Thinking at least I could justify a purchase by knowing it was going into the pockets of Americans)
    A: No, we make our jewelry all over the world (She says this as if it’s something to be proud of which was even more nauseating)

    Q: So then if you make it outside the US, why is the cost so high? Typically when you go ex-US it brings the cost down.
    A: Because it’s hand-crafted…. that’s what makes Tiffany’s so special. It’s uniquely handcrafted. (Hmmm….is that why they all look exactly the same?)

    With a smile on my face I told her that it still sounded like a marketing scam to me, but I did appreciate her time and answers. I told her if I’m gonna buy something hand-crafted I’d rather pay my American friend who makes jewelry to craft something just for me for half the price. And I walked out…never to return again.

    And of course it’s not really handcrafted, it’s manufactured like everything else…. but what if they do have 1 finishing touch to justify their “hand-crafted” marketing, how do you account for “handcrafting” in material cost multiplier calculations?

    P.S. I LOVE your tag line!! H&CO: ”Don’t just show her your love; show her your intelligence.” You really should consider starting your own line 🙂
    I’m forwarding your blog to my jewelry-making friend…. she’s gonna love it!

    • Stacey,

      Thank you for your comments. I am glad there are other Americans still left out there that have love for and loyalty to American Manufacturing, and women who look beyond the brand “Tiffany’s.” “Handcrafted” is obviously a flexible term. If the pipe comes off the extruder in a cut cylinder and then a person manually puts it in a little press for the flaring, this could be claimed to be “handcrafted,” even though that portion of of the manufacture is very fast and cheap, even with manual labor. If this bracelet was hand done from ingot, OK now I am impressed.

      For a further laugh, go to the original blog that is linked and read the response of the irate women who is enraged that Sheena questions the price of Tiffany jewelry. Unlike that commentator, you do not seem so high maintenance, and your shrewdness in getting value for the dollar in your jewelry should be commended.

      We await your order for a Rubeda H&CO bracelet… Operators are standing by.

      Eric

  2. Moderator posting LinkIn Comment that did not post back: http://www.linkedin.com/groupItem?view=&gid=126939&type=member&item=113317345&commentID=79776222&report%2Esuccess=8ULbKyXO6NDvmoK7o030UNOYGZKrvdhBhypZ_w8EpQrrQI-BBjkmxwkEOwBjLE28YyDIxcyEO7_TA_giuRN#commentID_79776222

    Joseph Szpak Jr • Wow this world had a lot of stupid people living in it, $7500 bucks for a copper tube just because it has that name on it. Why can’t I come up with an idea to take money away from stupid rich people like that. That thing is an eye sore as well so seems like that company could sell a piece of garbage if it had it’s name on it. It is sad that there are so many people dumb enough to spend 50 times the true value of a product just for the name.

    • @ Joseph,

      Thank you for commenting. To be fair, the tube is 31% Au, but the ridiculousness of the cost stands. I supposed that Tiffany’s lovers might respond to us that there IS more than $7,500 worth of value in the piece. $1,600 of it is in the actual material, value add, distribution, etc. The rest, and more, to them is:

      1. The ‘aesthetic’ value of the piece. The might liken it to a piece of artwork and decry us as tasteless barbarians for not appreciating this.
      2. The ‘transferring of quality/brand’ to themselves. Many might not like to admit this, but we all know people who delight in giving free advertising to clothing brands, cars brands, etc. because they believe (at least subconsciously) that the value of the brand they own and display inherently makes them cooler, classier, etc. etc.

      What the proportions of 1 vs. 2 are in each individual customer of the piece, who can say? People who claim they only care about 1 should be asked why they don’t go buy a similar piece of similar quality without the Tiffany’s name on it… such as the Hiller Associates Rubeda Bracelet 🙂

      Eric

  3. Moderator posting LinkIn Comment that did not post back: http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&discussionID=113317485&gid=2263672&commentID=80008502&trk=view_disc&ut=0-bWnW1S0YWRc1

    RON FERRO • Good article, Eric!

    I have used multipliers and they were very product line specific just as indicated in your article. They save time and effort; however, advisable to go through the system calculations to validate or confirm that the multipliers still apply. The results are less reliable when applied to configurable SKU’s in that the subsets of the SKU can vary widely thus creating variations from (dare I say it – standard/factor) multiplier. These “thumb nail” guide posts typically supplied by the comptroller or accounting manager who got them from the marketing or product development groups’ guru.

  4. Yes, much like a scalpel. In the hands of a surgeon it heals; in anyone else’s hands it hurts or kills.

  5. Is it alright to put a portion of this on my personal site if perhaps I publish a reference to this web page?

    • Alisa,

      Thanks for contacting me. My policy on this is, that you may feel free to republish a portion of the page under the following guidelines:
      1. You may publish a part of the article, but not the whole article without specific consent
      2. You hyperlink to the original article on my blog and reference the blog and me by name
      3. You do not assert that I am endorsing your product, service, blog, etc.
      4. Feel free to comment, disagree, etc., but I ask that you fairly represent my viewpoint when referencing, i.e. you do not take a thought out of context in how you cut up the quotes.
      5. You are not reposting to a nefarious site (e.g. pornagraphy, sedition, criminal behavior, etc.)

      Thank you for thinking of us.

      Eric Hiller

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