Engineering Economics

I'm going to deviate from technical discussion and get into money a little. Engineers are often under pressure to reduce costs. Someone asked for advice this week on removing a couple of parts that are not needed for a particular version of a product that we are shipping. Removing those parts has some implications, which include testing to verify that there are no "gotchas", possibly releasing a new program image to account for the parts not being there, further testing of that new image, and so on.

It's good for engineers to have at least some grasp of the tradeoffs involved in their decisions. In this case, we are talking about 14 cents of savings per board. At 5,000 units per year, this comes out to $700. (Network infrastructure does not have the volumes of consumer products.) At 10,000 we are at $1400. Is it worth the time?

How much is engineering time worth? You could try to figure the hourly cost. Divide the salary by 2,000 hours per year. Don't forget to add the cost to the employer of benefits, employer's share of taxes, worker's comp, office space, supplies, all that expensive depreciating equipment in the lab. $100/hour is probably low. What about $500? Maybe.

What else could an R&D engineer be spending his time on? What about new product development?

How much does an engineer bring to the bottom line in new product development? How much of the profits should be allocated to engineering? We grudgingly have to give some credit to marketing, legal, human resources, and other groups that keep the company going. Say engineers make up a third of the overhead. Then maybe it's fair to take credit for a third of the net profit.

How much profit for a new product? We can look at net margins for the business and figure what percentage of overall business profits is due to the new product.

The higher the volumes, the more it makes sense to pay someone to work on the problem, whether it's taking 14 cents of parts off a board, or developing a new product. We engineers are often isolated from these kinds of numbers, especially in a large company. We rely on upper management to set our priorities. But we can at least throw around some rough numbers and figure out if we are pulling our weight.