What role does your NRE multiplier play with respect to better managing customer change requests on custom designs? Well, while there are varying opinions as to how a company should manage these changes, the best advice I can give is to first determine what your non-recurring engineering multiplier is, and then focus on the fact that any customer changes are exactly that, changes driven by customers who should cover those costs. By this I mean that once you’ve moved past the design phase, and have gone to full-scale production, any and all changes requested by the customer must be charged back to the customer in order to cover your holding costs of inventory. The best rule of thumb is to remember that these stop-and-go changes don’t just affect your production of their custom-made product, but that they ultimately affect your ability to service your entire customer base.
I’ve written several tips on handling customer change requests for small manufacturers . However, it all boils down to answering the following question. What happens when a customer of yours makes a change request after you’ve started production? In order to answer this question, think of how those changes typically involve a review of the design. Think of how they fracture your production schedule. Think of the changes to your production package, how they divert engineering & drafting resources and how your entire team has to adjust work orders, bill of material outlines and assembly drawings. Think of the impact on your inventory when you have to urgently rush in parts and materials to accommodate these changes. Finally, think of how much this costs your company and how each and every time one of these changes occurs, your company simply chooses not to charge the customer.
Now ask yourself whether any profit is made on these orders? I guarantee you that if you don’t charge your customer for their changes, you’ll never make a profit and will at best, only break even. Customer changes must always be charged back to the customer. Don’t rationalize these holding costs and chalk them up to the cost of doing business. Your company is in business to make a profit, and these changes erode profit by increasing your carrying costs and forcing a diversion of manufacturing and engineering resources. So, how does your non-recurring engineering multiplier protect potential losses from these constant changes?
Understanding Your NRE Multiplier
The costing sheet below is taken from the post Charging Customers NRE, Non-Recurring Engineering Charge Of particular importance is the NRE Multiplier. The multiplier itself is meant to cover the costs of your company diverting engineering and manufacturing resources away from standard product lines, over to the customer’s custom design. This is an approach used in software development, Telecom, and any other application where companies often require specially designed products.
The multiplier is based on a simple principle. First, define how much of your production is predicated on manufacturing standard products. Second, determine how much of your revenue is reinvested back into the business in the form of R&D (research & development). Your non-recurring engineering multiplier is simply the percentage of revenue derived by standard products, divided by your R&D reinvestment percentage. For instance, let’s assume your standard product lines represent 90% of your business’s revenue and that your company reinvests approximately 9% of your revenue back into R&D (Research & Development). Your NRE multiplier would therefore be 90% divided by 9% which would give you 10 as a multiplier. This is outlined in the above table under 5. NRE Multiplier
Will this Help Cover the Impact of Change Requests?
The NRE multiplier isn’t meant to cover the costs of any and all customer change requests. This non-recurring engineering charge is meant to charge your customers for the time needed to come up with a design. However, it helps to offset the costs of these changes by allowing you to decide at what point you need to charge your customer to cover your holding costs. How costly are these costs?
In order to answer this last question, please refer to the example below. It’s taken from the post Define Your Inventory Carrying Costs on Custom-Made Products, The three points of reference (1,2,3) outline the company’s carrying costs as the product’s COGS (Cost of Goods Sold) moves through various customer change requests. A&B show the total carrying and finance costs. Think of this as “work in process” inventory, except in the case of customer change requests, that work in process inventory remains idle, waiting for revised designs, revised production packages, new assembly outlines and updated bill of material outlines. These are real holding costs and they increase each time a project is put on hold.
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