Economics of development and production of electronic devices - Volume 1

Are you considering launching your own electronic product and want to be sure not only of the return on investment, but also that it will have a solid and lasting position in the market? Do you want to create a successful product that will become a long-term standard in its category and that will generate a profit? We have prepared a three-part article for you in which we will look at the economics of developing and manufacturing electronic devices in detail.

What we write about and for whom

At ASN Plus, we have extensive experience in custom electronic device development. We help our customers with the technical as well as the economic side of things that goes hand in hand. For those who are considering launching their own electronic product on the market, we have prepared a comprehensive article based on our long-established know-how.

What you will learn

In this article, we'll look at the key aspects relating to the economics of development and production that you need to consider before starting your own project. You'll also learn what decisions you'll face during the actual product development process. Last but not least, we'll break down what the cost of a product consists of, how we can influence it, and where it is (and isn't) appropriate to look for ways to save money.

Given the scope of the issue, we have divided the article into three parts. In the first part, we focus on the technical and economic analysis and then on the functional characteristics. The second part is devoted to the electrical schematic design and PCB layout. In the third part we look at prototyping, testing, mass production introduction and product launch.

Part 1 - Analysis and Functional Characteristics

When deciding whether to embark on the development of an electronic device at all, not only does the difficulty of the development work itself play a role, but also the cost of the final product and the expected sales.

If you intend to develop a sophisticated product for a demanding application, assume that the pressure on the cost of the product will be less than if you were developing a product for general consumption. One thing is true - to be successful, the product must meet the functional characteristics generally expected of a product in the category. At the same time, it must be price competitive.

Functional characteristics

Functional characteristics are the sum of all parameters and characteristics that describe the proposed product. It is here that we often encounter a contradiction in the search for the right balance between quality and price. Many people, when considering a new product, start from the idea on the final price without having a clear idea of its quality parameters. Thus, at the very beginning of product development, they are already starting from unrealistic expectations.

Developing a product analysis

At the beginning of the development process (before the decision to implement the product is made), it is necessary to first carry out a technical and economic analysis of the product. In the technical analysis:

  • define the functional characteristics of the product,
  • develop the electrical, mechanical and, if necessary, software concepts,
  • design the various stages of development and production,
  • calculate the development and production costs.

The calculation of the development and production costs is then the basis for an economic analysis, which shows whether the product development is economically feasible.

What is included in the functional characteristics

The functional characteristics are the sum of all the electrical and non-electrical parameters of the product, including the parameters of the environment in which the product will be deployed and including the standards to which the product will be tested. In addition, the functional characteristics also contain a summary of all the features and functions that the product is intended to have.

If we do not define the functional characteristics accurately enough in the product analysis, we are unable to design the product correctly and efficiently, and ultimately we cannot judge how effectively we have developed the product. In the analysis, we can consider several options that differ in functional characteristics, so that we can select the option that best meets our objectives according to the final calculation.

An important part of the analysis is also the creation of mechanical, electrical and software concepts for the device.

Mechanical concept

The mechanical concept includes all the mechanical parts of the product, including the PCBs themselves. It is important to have an idea not only of the external design of the device or the materials used. It is also important to consider how the whole device will be assembled and how it will be installed in operation.

Electrical concept

The electrical concept is the layout of the electronic part of the device into separate functional blocks. The output is a so-called block diagram of the device, in which the individual functional blocks are connected by buses and signals.

In general, each PCB contains at least one function block. However, it may contain more, depending on the mechanical concept. The electrical design also includes consideration of the way in which the individual blocks are designed. Each of the blocks may be designed as a new design in the development process or may be a purchased part (third party product).

Software concept

As part of the software concept, we must first consider what parts the product software will consist of. A basic and integral part of any programmable device is the firmware, which provides the actual functionality of the hardware part of the device.

The firmware can be single-level or multi-level depending on how many programmable elements our device contains. The firmware can be further supplemented by with a desktop, mobile or web-based customer application and possibly with other service applications. The device can also include a web interface.

If we have an overview of the different pieces of software, we need to choose the appropriate software platforms and tools to create the firmware and software. The infrastructure required for firmware upload in production, firmware upgrade at the customer's site or data backup is also part of the software concept.

The concept will serve as a basis for calculating

The concept of the device is used as a basis for the subsequent calculation. Therefore, it must be detailed enough so that we can specify not only the development costs, but especially the production costs.

In simpler cases, where we repeatedly use a known solution, or in cases where a less precise calculation is sufficient from a commercial point of view, we can draw on experience. We can then calculate the cost of components based on a block diagram or simplified mechanical concept.

However, if we know that it is a completely new solution, based on a new component base, or if it is a large-scale installation, we have to take a comprehensive approach. Even as part of the analysis, it will probably be necessary to carry out a detailed design of the electrical schematic or mechanical parts and to create a so-called bill of materials (BOM).

Material and custom mechanical parts will then be requested from selected suppliers. This will ensure that the manufacturing cost estimate is accurate and up-to-date. In many cases, we will use the knowledge and experience that we will discuss in the following parts of the article in the calculation. For example, when calculating the cost of electronic boards, we will have to consider the parameters and characteristics of the PCBs already in the analysis and include them in both the cost for prototyping and the estimate of the production cost of the product in mass production.

Scheduling of development and production stages and risk assessment

On the basis of the established functional characteristics and the concept developed, we proceed to the scheduling of the development and production stages and to the assessment of the risks that may occur during development. Each of the stages represents a separate development and production task, to which can be assigned a workload in hours, material costs and a completion date.

The different stages give us an overview of the development costs. In addition, they help us in project management. At the completion of each stage, we are able to recapitulate the time spent and materials and have an indication of where the project stands. Assignment of workload and material costs are based on the company's know-how gained from working on past projects.

It is important to note that while the pressure to reduce workload disproportionately at this stage of the analysis makes the costing look good at the end of the analysis, it can lead to false positives conclusions. The analysis is not intended to be a means of confirming a predetermined conclusion as to whether or not the project will be implemented. The analysis is intended to be indicative of real development and production costs.

Risk assessment

Risks can be assessed generally for the development of the facility as a whole or for each stage separately. They can vary in severity from moderate, where there is a risk of at most a slight delay or cost increase, to very severe, where there is a risk of the project being stopped and not completed.

Common risks include, for example, degraded component availability, design complexity, CPU platform change, challenging certification, challenging environmental conditions, lack of development capacity in the company, concurrency with other projects, etc.

Risks can impact both price and development completion time. The development plan should therefore take these risks into account. For example, if we know that we will be working on two projects in parallel, this must be reflected in the scheduling. If we know that we will be working with a new type of processor, then this has to be reflected in the workload because we will not be able to use existing feature libraries.

Outputs from the analysis

Based on the analysis we have done, we can produce a calculation of development and production costs along with a clear list of risks. In general, the costing should include a reasonable margin.

Development costs

The development costs consist mainly of the labour costs that we have identified in the stage list and the costs of materials and services that we will need for the development (including any software licences).

Production costs

Manufacturing costs represent the cost of materials (electronic components, circuit boards, mechanical parts, packaging material, etc.) and the cost of services associated with manufacturing and distribution (PCB fitting, PCB painting, testing, product assembly, packaging, shipping, etc.).

The technical analysis is followed by an economic analysis

The technical analysis should be followed by an economic analysis. In it, the selling price of the product is determined on the basis of the production price and the development costs. The market analysis will also compare the product with competing products on the market. The economic analysis will also assess the severity of the risks and their potential impact on the project. The economic analysis should result in a recommendation as to whether the product should be taken forward for development.

Good quality analyses are important not only in terms of costing and assessing the profitability of the project. They serve as a key source of information and as a guide for subsequent development. Once the analyses have been carefully prepared, we can finally dive into the actual development phase of the electronic device. This begins with the creation of the electrical schematic, which we will cover in detail in part two.

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Ing. Jiří Březina
Senior HW Developer