OrCAD X Resources

When Your Component Is Unavailable: Alternates, Last Buys, and Counterfeits 8 www.cadence.com Cost of redesign Engineering estimate. Include the engineering hours, prototyping costs, testing, certification fees, and the delay to production during the redesign period. This is the benchmark against which the lifetime buy cost is compared. Component unit cost and minimum order quantity Procurement / distributor quote. Note that last-time buy pricing may differ from standard pricing. Manufacturers sometimes increase prices for LTB orders due to the non-recurring engineering cost of a final production run. 3.2 The Inventory Carrying Cost That Most Engineers Undercount The visible cost of a last-time buy is the purchase price. The less visible cost is what it costs to hold that inventory over the storage period. Industry benchmarks for electronic component inventory carrying costs typically range from 20 to 30 percent of inventory value per year when all factors are included. Those factors are: f Capital cost: the opportunity cost of capital tied up in inventory rather than deployed elsewhere. Use the company's weighted average cost of capital (WACC) or the finance team's hurdle rate for this estimate. This is typically the largest single component of carrying cost. f Storage cost: warehouse space, climate control if required, racking, and associated labor. Some component types require temperature and humidity controlled storage; factor in the premium for these conditions if applicable. f Insurance: most companies insure warehouse inventory against loss. The premium is typically expressed as a percentage of insured value. f Degradation and obsolescence risk: the probability that some portion of the inventory will become unusable before it is consumed. For a product with uncertain demand, this risk is directly proportional to how much you over-buy relative to actual consumption. Calculation example: A last-time buy of 10,000 units at $8 per unit = $80,000 in inventory. At a 25 percent annual carrying cost rate, holding that inventory for two years costs $40,000, half the purchase price again, before accounting for any units that are never consumed. If the redesign cost is $60,000 and can be executed in six months, the carrying cost argument for redesign improves significantly as the storage period extends. 3.3 The Quantity Decision The core question is the probability-weighted cost of each approach: Factor Last-time buy Redesign now Upfront cost Purchase price x quantity Engineering, prototyping, certification Ongoing cost Inventory carrying cost x years None once complete Risk if demand exceeds plan Shortage if under-bought No shortage risk Risk if demand falls short Excess inventory write-off Sunk cost in redesign Time to implement Immediate, no production disruption Production gap during development Best suited when Short remaining production life, low redesign complexity, stable forecast Long remaining production life, high inventory carrying cost, high forecast uncer- tainty For the quantity calculation itself, the standard approach is: 1. Start with the base-case production forecast for the full remaining product life including service spares requirements. 2. Add a safety buffer for forecast uncertainty. The appropriate buffer depends on historical forecast accuracy for this product. If forecasts have typically run within 20 percent of actuals, a 20 percent buffer is defensible. If forecast accuracy is poor, a larger buffer may be justified, but it increases the carrying cost exposure proportionally. 3. Subtract current on-hand and pipeline inventory.

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