I happened to stumble upon an article on SpendMatters from a few weeks ago by Sheena Moore:
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:
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 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:
- What processes will be used to make a product? Each major process probably needs its own multiplier for accuracy.
- What physical part attribute most strongly drives cost in each process?
- 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.
- Material Cost Multipliers are useful, but can be dangerous. They should be applied by experts or with expert guidance.
- My analysis shows that Sheena is even MORE correct in that the bracelet is not worth it.
- Kudos to Tiffany for Jedi Mind Tricking girls into believing a $1,600 bracelet is worth 3x as much.
- 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.)
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.”Google+