Non-recurring engineering (NRE) cost refers to the one-time cost to research, design and test a new product or product enhancement, and it’s paid by customers.
In electronics manufacturing industry, the NRE cost usually includes but not limited to:
- Tooling & fixture cost
- Test equipment cost
- Certification cost
- Sample cost
- Engineering support cost
- Production line setting up cost
Even though NRE cost is only a one-time cost, due to product complexity and possible design changes, it can be much higher than expected. In some cases, the actual spending is 2 times to 5 times higher than the originally planned budget.
So, how to come up with a reasonable plan and execute it? Here are 3 simple steps you can follow:
Step 1: Create a budget collaboratively with your supplier
- Don’t create the budget plan all by yourself.
- Select a few suitable contract manufacturers and collect their quotes.
- Be aware of suppliers who may have different methodologies to design and develop tooling & fixtures.
- Request for DFM (Design for Manufacturing), and review it closely to reduce wrong assumptions.
- Ask suppliers to suggest how to reduce the NRE cost.
Step 2: Verify cost breakdown and associated activities
- Cost breakdown is far more useful than a total NRE cost.
- It’s very important for you to get the breakdown of key cost drivers and its associated activities. To get the answers you need, you can ask questions like ‘What’s the rate of engineering support?’, and ‘What they do for EVT support and why they need so much time?’
- Check if there are alternative solutions – Can we rent equipment rather than buy? Can we outsource a certain process or do we have to make it in-house? Is there any way we can integrate 5 testing procedures into 3?
- There are some regular and common testing equipment or labs at Contract Manufacturer site. Ask if you can use them for free or at amortized low costs. When selecting suppliers, don’t be shy to ask what NRE cost they can save for you.
- Be cautious not to drop into a NRE cost game trap – Some suppliers may quote incredibly low costs without clear statement of variant conditions. The tooling cost is absolutely a big portion of that. Verify carefully how many cavities of the molds, what’s the cycle time, what’s the part cost, etc.
Step 3: Control the progress, not wait for results
- Set up deliverable and schedule objectives for NRE costs you are about to spend.
- Define clear roles and responsibilities and get supplier commitment into well-documented contract.
- In normal practice, NRE cost payment term is 50% upfront and 50% upon completion of the tooling/sample or design, etc. However, you may have the opportunity to negotiate to pay 30% of the tooling cost upfront, 40% after the T0 sample approval and the rest 30% upon T1 approval. The engineering support drives lots of cost, so you should always review very carefully before signing for payment.
- Tooling modification is a huge headache. So take your time to conduct professional DFM with suppliers to ease the tooling modification risks.
Last but not the least, large Contract Manufacturers may quote NRE cost very differently from smaller ones. Do not judge them simply by numbers you see. Ask questions, find factors associated to the numbers.
Encourage your suppliers to be honest and direct. Don’t demand and try to negotiate from the very beginning, instead, make sure that they know that you respect their efforts. Meanwhile, you need to get sufficient understanding and clarification, and more importantly, a fair charge.