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Differential Manufacturing Cost Assessment of High Efficiency Clothes Washer Designs Phase II Final Report

Report to U.S. Department of Energy

November 9, 1998

Arthur D. Little, Inc. Acorn Park Cambridge, Massachusetts 02140-2390 Reference 35539Table of Contents

1.0 Program Status
................................................................................................1 1.1 Program Objective
.....................................................................................1 1.2 Phase II Objectives
....................................................................................1 2.0 Assumptions
..................................................................................................... 2 2.1 Definition of High Efficiency Designs
.........................................................2 2.2 Manufacturing Assumptions
......................................................................2 2.3 Conventions for Manufacturing Cost Estimates
.........................................3 3.0 Approach
...........................................................................................................3 3.1 Bill of Materials (BOM)
...............................................................................4 3.2 Fabrication Processes
...............................................................................5 3.3 Assembly Processes
.................................................................................6 3.4 Baseline Manufacturing Assumptions
........................................................? 3.5 Cost Data Aggregation
..............................................................................7 4.0 Results
.............................................................................................................. 9 5.0 Variability and Uncertainty in Manufacturing Cost
......................................14 5.1 Key Parameters
.......................................................................................14 5.2 Sensitivity Analysis
..................................................................................14 6.0 Conclusion
......................................................................................................17List of Figures

Figure 1: Full Product Cost
.....................................................................................3 Figure 2: Manufacturing Cost Assessment Approach
............................................4 Figure 3: Structured Bill of Materials
.......................................................................5 Figure 4: Fabrication Process Cycle Time Estimates
.............................................6 Figure 5: Fabrication Process Equipment and Labor Requirements
...................... 6 Figure 6: Examples of Uniform and Triangular distribution Forms
.......................... 8 Figure 7: Differential Cost Estimates for Higher Efficiency Designs
....................... 9 Figure 8: Full Production Cost Breakdown by Cost Category for High Efficiency and Baseline
.......................................................................................... 1O Figure 9: Full Production Cost Breakdown by Sub-Assembly Level for High Efficiency and Baseline Vertical Axis Designs
......................................... 1O Figure 10: Overhead Cost Breakdown by Category for High Efficiency and Baseline Vertical Axis Designs
............................................................... 11 Figure 11: Investment cost Breakdown by Major Manufacturing Processes
........... 12 Figure 12: Sensitivity Analysis of Tooling and Equipment Investment..
................... 13 Figure 13: Sensitivity Analysis on Labor Rate
......................................................... 15 Figure 14: Sensitivity Analysis on Actual Plant Output
............................................ 16 Figure 15: Sensitivity Analysis on Equipment Depreciation Life
.............................. 17

iiList of Tables

Table 1: Major Manufacturing Processes
...................................................................5 Table 2: Key Assumptions
..........................................................................................? Table 3: Key Manufacturing Input Parameters and Monte Carlo Simulation Description
....................................................................................................8 Table 4: Greenfield Investment for an Annual Production Volume of 1.5 Million Units
..................................................................................................12

iiiVertical Axis Baseline Clo.thes Washer Manufacturing Cost Assessment Phase II - Final Report 1.0 Program Objective The main objective ofthis project is to quantify the differential manufacturing costs of producing high efficiency clothes washers based on (1) a proprietary Vertical-axis (V-axis) design, and (2) commercially available Horizontal-axis (H-axis) designs. The overall project consists oftwo phases: Phase Iprovides a detailed and objective cost estimate ofa state-of-the-art, high volume, Y-axis washer as a baseline for further analysis. The major objective ofthis phase is to obtain stakeholder comment on the costing methodology and baseline costs. Phase IIdevelops a differential cost estimate for the proprietary Y-axis design and for commercially available H-axis clothes washers, relative to the baseline clothes washer evaluated in Phase 

### I. 1.1 Program Status This report describes the final results of Phase II and the overall program. Several manufacturing plant visits were conducted along with process equipment and supplier interviews, complete teardown of5 clothes washers, sensitivity and risk analysis, and incorporation ofstakeholder suggestions from the March 11-12 workshop.
1.2 Phase II Objectives
• Use the manufacturing cost assessment methodology developed in Phase I • Provide a differential manufacturing cost estimate for a proprietary vertical axis design and two commercially available horizontal axis designs compared to the Phase I aggregated baseline estimate • Report the differential manufacturing costs as a range to maintain confidentiality ofthe datain the results • Obtain comment from stakeholders as to the "reasonableness" ofthe differential manufacturing cost estimates and assumptions2.0 Assumptions 2.1 Definition of High-Efficiency Designs Three highefficiency clothes washers were selected for the Phase II differential manufacturing cost assessment. Thetwo horizontal axis designs werebothcommercially available and the single vertical axis design was disclosed in prototype formbyWhirlpool Corp. Two H-axis machines were disassembled, rather than one, in orderto reflect product differences betweenmanufacturers and to aggregate the actualcomponent costs to maintain confidentiality. Eachclothes washerwas analyzed and costed separately. The costswere then averaged at the sub-assembly level and by category. Since different manufacturers have significantly different designs, sub-assemblies are definedbyfunction (i.e. suspension, tub andbasket, transmission and motor, etc.), rather thanby specific components. The differential costs were calculatedby estimating the costs ofthe proprietaryV-axis design, and bothcommercially available H-axis designs then the aggregatedcost for thebaseline vertical axis machine was subtracted. Using Monte Carlo simulations ofkeymodelinputs (based onPhase I) a range ofdifferential costswere generatedfor the high efficiency designs. The results were aggregated for the two H-axis designs and cost percentages presentedby sub-assembly and by cost category. 

### 2.2 Manufacturing Assumptions The samekey assumptions used in the Phase I analysis were used in Phase II:
• An annual clothes washerproductionvolume of 1.5 million units. • Capacityutilization at 95 percent. (Sensitivityto capacityutilization was conducted in orderto understand therelative impact onthe differential cost). • Investment for a "Greenfield" site, including all new equipment, tooling, installation, and building. • Non-dedicated equipment with a high degree ofautomation for the major fabrication processes (painting, stamping, welding etc.). • Complete manual final assembly to reflect the need for flexibility as multiple models are built. • Typical industry equipment costs, process cycle times and labor content It is understoodthat the cost ofspecific models orindividual manufacturers will vary from this baseline, depending onelements such as the product'sprecise characteristics, actual manufacturing processes, and the product mix in the factory (multiple clothes washer and dryer models). Since the same set ofassumptions is used in the Phase I analysis, differential cost estimate methodologyreduces the impact ofplant-specific characteristics.

22.3 Conventions for Manufacturing Cost Estimates The cost categories used to summarize the differential manufacturing costs developed in Phase II are the same as those used in Phase I which closely parallel the cost categories used in the AHAM datacollection. Direct material, direct labor and overhead (including investment depreciation)' together constitute the full production cost. Othercost elements (SG&A, R&D, interest, etc.) are grouped under the non-production cost category. Togetherthese costs make up the full cost ofthe product as shown in Figure 1. The manufacturing cost assessment will develop the full production cost estimates. Nonproductioncosts will be added based on a top-down analysis ofthe industry.

Full c(?st'ot Product

Full Production Cost 1 Direct Labor !. Direct Material

,.. "'"' liidirect

### Labor Indirect Material Maintenance ·Oepr9ciilti0n •Taxes

### 1n5tir~rice related·. to**a~sets** Utilities Non-Production Cost

Mkt. reS'earch**AdVerti~lng** ·,:;:-: ,_,., :'.pas promotion General·&• .Adrnin.**~~,·** se!Vice& 1 'Slaff units

•**~1e5 per~ri·** .:< .oornP· t,!avet .General oorporalB 'o0sts**'~**romp. etc.**Logi~ic;>··**

.: Warehousing·. ::· Delivery ·. :i!Aecord ·· keeping R&D

Costs associated
. with.efforts ' tOfind new 

### :o.. improved 'J)roducts or· •flrodUctlon'.:; j)iacesses ··· Costs of.·<. borrowing .fUi\ds

1 Tax Reform Act of 1986, essentially, requires companies to measure cost of goods sold as the full production cost ofthe goods sold. Figure 1: Elements of Full Cost of Product
3.0 Approach The manufacturing cost assessment methodology described in Phase I and used to generate the aggregatedbaseline cost estimate, is a detailed, component-focused, activity based technique for rigorously calculating the manufacturing cost ofa product (direct materials, direct labor and some overhead costs). This methodology has been successfully applied by Arthur D. Little to products at various stages ofdevelopment, from early R&D to production. Figure 2 shows the three major steps in generating the manufacturing cost for the baseline and high efficiency designs.

1 Overhead costs in the AHAM data collection do not include investment depreciation
3Raw 

### Fabrication Finished Materials Materials


# - Processes**~** 

### Bill of 

# - - 

### Assembly Materials Purchased Parts 

### Processes


# - - Figure 2: Manufacturing Cost Assessment Approach
3.1 Bill of Materials (BOM) 

### The first stepin the differential manufacturing cost assessment was the creation ofa complete and structuredbill ofmaterials from the physical tear down ofthree high efficiency clothes washers. To conduct the teardown, two H-axis clothes washers were purchased and completelydismantled and a prototype V-axis machine was dismantled and examined at Whirlpool, BentonHarbor, Ml. Eachpart was characterized according to weight, dimensions, material, and quantity. A separate BOM for eachclothes washer was created. TheBOMincorporates all materials, components, and fasteners with estimates ofraw materialcosts orpurchased part costs, as appropriate
.. Assumptions onthe sourcing of parts and in-house fabrication were based onprevious industry experience, recent information in trade publications and discussions with major clothes washer manufacturers. To improve ourunderstanding ofthe industry's current manufacturing practices, interviews and plant visits were conducted at major clothes washer manufacturing facilities (primarily during Phase I). These visits focused on observing and characterizing current manufacturing practices for the majority ofthe partsin the baseline
. and highefficiency clothes washers. Forinternally fabricated parts, manufacturing processes were identified onthe BOM for eachcomponent. Cost estimates for raw materials and purchased components were drawn from the Phase I analysis and where appropriate from Arthur D. Little's manufacturing databases, manufacturers and suppliers. Adjustments to the cost estimates for purchasedparts and raw materials were made, as appropriate, to include price discounts typically available at the purchase volumes in question. Figure 3 is a section fromthe structuredbill of materials ofone high efficiency clothes washer. This section ofthe structuredbill of materials lists the part number (arbitrarily defined during disassembly), description, material category, sourcing category (fabricated orvended), quantity, dimensions, weight, percent ofscrapin processing, and estimated material cost.

4

## .... I I Category I V I I OD or I 

# ... Mu I I Pro! 1Neighl!lbs) I Scrap I Material No. Dtscriolion I I ? I 

### • I 'Mdlh I Thknesa ThkOS$ I L•noth I 

# .... I s1
..1 I

# -· I 

### " I Cot.ts 1.00 Tub & a.kitAIMmblv ,<·/?>
.. ,,,. ' '"'·'·• ·,• ' "'

.. 

### ······ .'i•Y ··.· 109 Rear ofTub pp 1 ?< 01 0.18 1' 49087 15"" S4.92 ···--·**~"'''"!'·l** \;;::{ !\:<"';'{ .·. ..· . ··' ••.''.' 1.17 Cover/Seal b' =- PPGf I I 1 I 9 I 0.1 01 I 01 I 54.00 I I 0.250 I S0.19 1.10 Stidcer Msc V I 1 I 2 I I 5 I I I x 1.Vi**~;,** ·;. d**A;~-:** :'·

.**.~.:;** ,,

### ...• .•.· '" ,..**~.'** 1.()6 TLl:>TlbSed foan v 25 0.225 0.058 SQ.34 1.07 Front of Tub pp " n1 01• 9 '"7• <:].QA 1.08 Larae Screws Fa;tEra v 23 0.5 0.2 2.36 0.588 S2.30 1.12 TLl:>f<areSed ffioctl Srnto v l 1.924 ,.,,•, S770 1.13 Stiffrer PPGF l 10 0.115 0.115 15 15.00 0.184 S0.14 1.14 RirYiSMSnirYJ SrrirYI v 1 9 0.037 0.186 0.090 Sl.58 1.15 Disn:ric.erQrTTT 8aS 1 3.25 (1.08 1.25 0.010 L>. SO.OD 109 Front Counterwetahl Brace GCRS 60 0.065 1.85 1.650 5% S049 ,<."?C, i r;·t.' ( <:-!!**~·:** ,·:: '''. ''t t.**~** ·, ' ,.,, .. ,.' ' ' ,., :us ?c:;>:**~~''·'':!!** ''-f< ;'-: ::;**~'-~** ' 1.02 Fl s GCRS 10 1.34 0.06 1.55 0.346 5% so 10 1.03 Bolls Fcstener V I 8 I 055 I 0.22 4.65 0.407 I Sl 20 104 Washers GCRS I 8 I 1.25 I 0.06 I I 0.12 I I 0.158 I 15% I SOOS 1.05 Lcdmuts Fcslme< V I 8 I 0.435 I I I 0.3 I I 0.062 I ·. ·1 S0.16

...co**1.bl'.}~** t<.H'.·\< '' ,, ' l.11 Motor Screws Fcstener v 0.535 0.215 1.65 0.062 ''· S0.20 ;;;.'f; t.:<!'i•!**i.;;:~'!' S·;~**  ,\"-!,.> 

### .., ,., .,,, '' ' .,

### .. ·' ,'" ·.· ,' ,'"''··'· ."?·.< 1.50 Basktt Sub-Au 1.51 Recr Pen SS 22 0.00 1 2.778 20% S347 1.52 Si<:eWdls SS 22 0.03 12 4.630 10% S514 1.53 Fr01tP1ece SS 22 003 1 1.852 50% S3 70 •::A I''r,**-~·. ,,f~->~:**  -ul:.-i:>.'. '· " 154 SS Drive Svstem Bolts Fasteners 0 505 0.31 1.16 0 148 125 155 A.artabr Koobs PPGf 2.5 0.08 013 95 23.75 0710 $0.54 1.56 AnrtaklfScrews Fasteners 0.36 0.185 0.65 0.014 $0 13 Fd::>Ass; Tctds 86 12.79S 24.690 $35.S9 Figure 3: Structured Bill of Materials (High Efficiency Clothes Washer) 3.2 Fabrication Processes After each detailed BOMwas completed for the three high efficiency designs, the variations in the Phase I manufacturing processes were identified. The Phase I processes are listed in Table 1. Table 1: Major Manufacturing Processes Fabrication Fixturing Stamping/Pressing (Large, Medium, Small) Brake Forming Finishing Assembly/Joining Adhesive Bonding Spot Welding Seam Welding Cut &Shearing Machining Washing Powder Coating Enameling Deburring Integral Fastener (i.e. clinching) Other Fasteners Injection Molding (Large>1500 ton, Smalk800ton) Casting Press Fitting Inspection &Testing Information on equipment and tooling costs, typical processing cycle times, and materials used for fabrication were copied from the Phase I analysis and additional datafor processes variations were obtained from the ADL manufacturing databases and suppliers. The fabrication process cycle times were directly entered in the BOM and linked to the specific parts being fabricated. Each part had a processing time and labor cost assigned based on an overall labor rate. Forthis analysis $24.00 was used as the average fully burdened labor rate based ontypical yearly wages and benefits for union employees. Sensitivity analysis was conducted onthis parameter because labor rates can vary considerably, depending on geographic location, availability ofskilled labor, and level ofunion representation.

5Figure4 contains an excerpt ofthe non-assembly processing times (seconds perprocess) associated witheachcomponent listed onthe left. This section ofthe modelhas all the processes listed in Table 1, but for brevity a single page was presented in Figure 4. Figure 5.is fromthe equipment summary section, which includes totalequipment and summarized laborrequirements for eachfabrication process.

1,09 RoarofTub I 171 1.17 Cover/SeallorCaoe 1.10 Sicker 15{) 1.06 1.07 1.08 1.12 1.13 1.14 1.15 1.09
1.02 1.03 1.04 1.05 1.11 Tlb-TubSeal Front of Tub Lama Screws Tub·Frame Seal fBooll Slffner I AnaSeal..,........, Disoenseraarm FrontCounlerweietltBraoa

f'laMAS Bdls Washers LocknU1S Mr>tor**At:~>'v'** Motor Screws I I

74.0474681

7.50 7.50 11.098 I

10.042

I
.. l.Mgo •. 

# -m Snl' · •- ·Cul& · • Pllsticllold t-----..,.1.50=!:-Bu""'u"""l.;-Su.,...l>A,._11_._+-1--+-t--tl-------1. p,.... '. P11• · ......: .F
.... · · ·SfliNF': "lleolllftO**~:'.;\l--:'~--+'='11oc1""1u=m"T--=5m1-=-1--t** 1.51 RearPM 5.0 5.0 1.52 ISkleWalls 25.0 SD SD 1.53 Front Piece 5.0 5.0 SS Drive $VIfem Bolts 1.55 AcitatorKnobs 10.601 1.56 AritatorSaews I I I I Tolab 10 33 15 5 8 245 22 10 Figure 4: Fabrication Process CycleTime Estimates (High Efficiency Clothes Washer)

·Manufaclull• 

### .... •::&mall
. 'llnlke Cut• ·.**~ij** Plastlc lldd '.i)P19sa ·. Fonn Shear Mac:Hne' Medium SrnaD t-----+---+----+---+------t:ii'::!' 

# u;;:n: Seconds 25 21 61 24 8 220 60 258 127 70 #of Distinct Pans perOperation 5.00 5.00 17.00 6.00 3.00 3.00 20.00 4.00 14.00 22:00 #Total E uioment RAnLiired forNon-Oedicatiii:t Use 3 3 7 3 1 22 6 26 13 B 7 e ./ ·1 <..•22"" "'· 20 "26 ... " 13**;~<>s<··:** .. ModellnoutlDeoendsondedicationl • :'1'3 · • 3 ·" #Peoole/Macline 1.50 1.00 1.00 0.50 0.50 0.50 0.50 1.00 1.00 1.00 Actual #Clnorators Reouired ·. }"t**~~.·:,;3,.,<"** .'·. 1 :',**i/,~>tl"'** 1-0 :',,, I'' ·13**',/_8,~',ji** Em.iomentDeorecialion ISMtNYear S.43 S.27 S.11 S.14 S.02 51.63 S.01 S2.63 S.44 S.12 Total Eal.ioment Investment !SMM s9**~** s1 s1 s s13 s s29 ss s1 Material Cost/Unit 5.0 2.1 3.1 0.0 0.0 1.1 0.0 0.9 0.5 0.2 Figure 5: Fabrication Process Equipmentand Labor Requirements (High Efficiency Clothes Washer) 3.3 Assembly Processes Inthe final step ofthe cost assessment, assembly times and associated direct laborcosts were estimated. Assemblycycle times were primarily derived from reversing the disassembly ofthe selected tear-down clothes washers. The assembly sequence was built into the structuredBOM, culminating withfinal assembly, testing and packaging. The structuredbill ofmaterials and manufacturing process summaries provide detailed direct material, direct labor, indirect material, and investment costs. Indirect labor costs were estimatedby assuming a consistent indirect laborcontent from the baseline high

6volume vertical axis washer. Although today's labor content maybe higher in the three high efficiency designs, we assumed that high volume production ofthese designs over several years would improve production efficiencies and result in an indirect labor content comparable to the current baseline vertical axis designs. In Phase I the indirect labor content was calculated to be on average 0.5 labor hour per unit which was added to the direct labor content derived from the teardown analysis. In Phase II we took the proportion ofindirect to direct labor (32%) derived from Phase I and applied it to each high efficiency design evaluated. This resulted in an average indirect labor content for the high efficiency designs of0.39 hours. The indirect labor is included in the overhead estimate, along with indirect materials, utilities, depreciation, maintenance, taxes, and msurance. 3.4 Baseline Manufacturing Assumptions Table 2 lists the key manufacturing assumptions used in the baseline manufacturing cost assessment. T

able 2: Key Assumot1ons Cateaorv Work Days per Year Averai:ie Shifts per days Runtime per Shift Lot Size Equipment Uptime Assembly Downtime Wai:ies Capital Recovery Rate Equipment Depreciation Life Total Plant Depreciation {includes buildinQ and conveyor) Maintenance Utilities Taxes Insurance Capacity Utilization *Fabrication, 2.5 Shifts, Assembly 1.0 Shifts **Building and conveyor - 23.5 year depreciation Assumption 249 days 2.0 shifts* 8 hrs 1 work day 90% 20% $24 per hour 0% 10.1 years** 17.1 years 4% of Equipment Cost 1.7% of Materials Cost 0.9% of Factory Cost 0.8% of Factory Cost 95%
These financial assumptions are based on general industry practices, determined from manufacturer interviews, 1992 U.S. census data, and internal Arthur D. Little sources. 3.5 Cost Data Aggregation Topreserve the confidentiality ofthe manufacturing cost data, we have aggregated the H-axis differential manufacturing cost and presented the results ofthe Whirlpool V-axis prototype and H-axis costs as a range. The range was generatedby a Monte Carlo simulation on the key manufacturing input parameters to ourbaseline analysis. The input parameters and distributions are show in Table 3 and Figure 6.

7Table 3: Key Manufacturing Input Parameters and Monte Carlo Simulation Description 

## :!llKev**R~ramet~r** >',

## .;~ml**4iwRr:i~i:!l~11~•11R.aramete~·~~nge ~iEost** **mlc~l1walue**

,**,,,,-:&}:_~** !}}*""**~r.;:m** ', "'**iqk7"~** i,**:..~** ,**~4""~""~** Labor Rate Unifonn Actual Plant Output Triangular Equipment Depreciation Unifonn Life Total Investment Triangular Maintenance Unifonn Equipment Uptime Triangular Utilities Triangular

Baseline

17 24 28 Labor Rate ($/hr.) $17 to $28 per hour 900,000to 1.5 million 7to15 50%to 150% 2.5%to 5.5% 70%to 95% 1%to 3.5% 1.425 million

100%

4% 90% 1.7%

"MostLikely Baseline"= 1.425million

900,000 1.5 million Plant Output
Figure 6: Examples of Uniform and Triangular Distribution Forms 

### Byusing a range ofdifferential costs we have provided sufficient data for DOE's engineering analysis to be completedbutprotected the confidential manufacturing cost dataestimated for several clothes washer manufacturers.

84.0 Results Figure 7 presents the range ofdifferential costs associated with the higher efficiency clothes washer designs. The cost range for the H-axis designs is based onthe two machines that were dismantled and therefore has a much greaterrange ($104) than the Y-axis prototype ($44). The range ofdifferential cost ofthe Y-axis prototype is at the upper end ofthe aggregated H-axis differential cost range.

200 180 Range= $146 to 190 160 Range= $71-$175 140**~** o; 120 0 0**~** 100 c**~** 80**~** c 60 40 20

0 V·Axls Prototype Aggregated H·Axis Note: Range is based on 1000 trials for Monte Carlo simulations; aggregated baseline Vaxis unit cost Is constant
Figure 7: Differential Cost Estimates for Higher Efficiency Designs Comparison ofthe higher efficiency designs with the aggregated baseline based on the cost categories used in the AHAM data submittal (direct materials, labor and overhead) indicates a marked increase in the percentage ofdirect material costs. Figure 8 graphically compares the three higher efficiency designs and the aggregated baseline Y-axis washer. Although the percentage increase is approximately 15%, on average, the direct material costs for the higher efficiency designs is nearly twice the direct material costs for the baseline Y-axis washer. A closer examination, at the sub-assembly level, ofthe full production cost ofthe aggregated H-axis designs and the Y-axis prototype identifies a significant increase in the percentage ofcosts for the pump, controls and valves. In the higher efficiency designs, the pumps, controls, and valves make up 30to 40% ofthe total cost, while in the baseline Y-axis machines the pumps, controls, and valves account for only 20 percent ofthe total. These components clearly are a major cost addition in the high efficiency models.

9

# - 8 u c 0 :;::: u :II 

# ,, e A. "5 

# "" 0 

# - c GI 

## e GI A. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Aggregated Baseline Aggregated H-axis V-axis Prototype CJ Overhead CJ Direct Labor •Direct Materials

Figure 8: Full Production Cost Breakdown by Cost Category for High Efficiency and Baseline

;; 0 

### " c**~ ~**  ... 

# . A. 0 c**~** Q, 100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% Aggregated Baseline Aggragated H-axls V -axIs Prototype EJM1sc. +Final Assy •cabinet cPump, Controls, & Valves •Suspension cTrans/Motor •Tub & Basket

Figure 9: Full Production Cost Breakdown by Sub-Assembly Level for High Efficiency and Baseline Vertical Axis Designs' A breakdown ofthe overhead costs for the baseline V-axis and high efficiency designs is shown in Figure 10 with the key assumptions for each cost category. These costs are estimatedbased onthe teardown analysis and typical values for the appliance

1024% se;.

:1F;;ltciist**c&t~ory** ,'**~,;iJi\IJ**ll,-8asiS'"r*h ._, ihhv' 

# • Indirect Labor Teardown and industry analysis 

# • Indirect Materials Teardown analysis 

# • Maintenance 4.0% oftotal capital investment D Utilities 1.7% of material costs !ill Depreciation Teardown analysis 

# • Taxes 0.9% of full production cost Insurance 0.8% of full production cost Figure 10: Overhead Cost Breakdown by Category for High Efficiency and Baseline Vertical Axis Designs (Starting with indirect labor at 3 o'clock and continuing clockwise) manufacturing industry. We have included the overhead costs to more accurately predict the total differential cost ofthe higher efficiency designs, but the difference in overhead costs for the baseline and higher efficiency designs has a minor effect on the final differential cost estimates. Depreciationcosts from fixed investments in equipment and tooling, a major overhead cost element, have been estimated based on the requirements derived from the component cycle times and production volumes. Production volumes, in conjunction withequipment process times, will determine the number ofpieces ofequipment necessary and the plant investment costs. For the sizing ofthe plant and the number ofpieces ofequipment, we have assumed an up-time of90%. Table 4 shows the investment for a plant capacity of 1.5 million units peryear for the baseline Y-axis and the high efficiency designs.

11Table 4: Greenfield Investmentforan Annual Production Volume of 1.5 Million Units

Aggregated V Axis $116 9.30 $226 16.3 Aggregated H-Axis $82 10.6 $192 18.3 V Axis Prototype $124 10.3 $234 16.6

Note: Building and conveyor investment isheld constant at $110.43 millionand a depreciation lifeof23.5 years. The variation in investment between the baseline and high efficiency designs is explained in Figure 11: the percentagebreakdown ofthe tooling and equipment investment. The investment costs are primarily drivenby design choices and manufacturing process selection. The percentage ofinvestment in machining operations for the aggregated V

- axis baseline is substantially greaterthan the machining investment for the highefficiency designs. Also the high efficiency designs differ in manufacturing process selection with the H-axis designs emphasizing injection molding operations more than the V-axis prototype which has a greaterpercentage ofmetal forming (i.e. stamping, bending, etc.).

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Aggregated V·Axls Aggregated H·Axls V·Axls Prototype Figure 11: Investment Cost Breakdown by Major Manufacturing Processes •coating CIStsmplng/Bendlng •Machining Dln)ectlon Molding •Faate nlng/Flxturlng

The building investment currently assumes 1,000,000 square feet at $100/sq. 

### ft. and 10.7 miles ofconveyor at

# an average price $185/foot. A multiplier of 1.6 (additional40% for installation and 20% for auxiliary equipment) was used onthe purchased equipment costs to calculate the totalequipment investment. Because ofthe high volume production, hard

12tooling is included in indirect material costs and is amortized yearly. We have assumed that the useful life ofthe equipment and building on average is 17.1 years (which agrees reasonably well withthe 1992 census ofmanufacturers) and we used a simple straight line depreciation assumption to calculate the yearly amortizedperunit cost. These assumptions can vary greatly, and have a significant effect on the total investment and the depreciation element ofthe overhead costs. Figure 12 shows the impact ofa±50% variation in investments onthe manufacturing cost differential for the aggregated H-axis and v-axis prototype designs. Although the variation in investment is large the high volume production and significant percentage ofdirect material and labor costs result in a relatively minor impact on differential cost.



### c 

## 2. fl $175.00

$150.00

() $125.00 ]i 

# I
$100.00

$75.00

50% 60% 70% 80% 85% 90% 95% 100% 105% 110% 115% 120% 130% 140% 150% Actual Investment Relative to Estimate Figure 12: Sensitivity Analysis of Tooling and Equipment Investment We have not included the cost ofcapital in the products full production cost, since this cost is an interest which is considered in the estimate ofthe non-production cost. For future analysis, the methodologycan apply a capital recovery factor (CRF) to the total investment in order to estimate the yearly cost ofcapital, but at this time we have not included it in the baseline units full production cost. The full cost ofthe product, which includes non-production costs (SG&A, R&D, and interest, see Figure 1) were established for Phase I using the industry cost structure developed in an earlier studyby Arthur D. Little. Phase II focused on full production differential cost, therefore we have not analyzed any differential costs in marketing, sales orresearch and development. This differential cost

13element will be consideredlater during manufacturer impact analysis and evaluated using the Government RegulatoryImpact Model (GRIM). The results ofour differential cost analysis presented in this report consider full production cost only. 5.0 Variability and Uncertainty in Manufacturing Cost Since the current differential cost assessment represents only a fraction ofthe clothes washer models available, and the estimates have inherent variability and uncertainty, we have conducted sensitivity and cost simulations to understand the impact ofthis variability and uncertainty onthe differential manufacturing cost. This analysis willprovide us with a greaterunderstanding ofthe range ofprobable differential costs. We use primarilytwo methods to analyze the variability and uncertaintyin the manufacturing cost assessment:
• Sensitivity analysis is used to quantify the impact ofvariability and uncertainty for any one specific parameter.
• To understand the interaction and impact ofmultiple parameters weuse Monte Carlo simulations. This analytical technique allows us to input a range ofdatawith probability distributions and generate an estimatedrange for the manufacturing cost with a quantifiable level ofcertainty. 5.1 Key Parameters The physical teardown and activitybased cost estimating conducted on the baseline and high efficiency clothes washers removes much ofthe uncertainty about materials, components, and manufacturing processes. Many ofthe manufacturing processes however, carry some variabilitybased onindividual manufacturers and product differentiation. This results in some variation in the totalcapital investment, the utilization ofthat capital, maintenance costs, and equipment uptime. Also average labor rates for different manufacturers can vary, so sensitivity analysis to determine the impact ohcosts is warranted. In addition to the variability in for example, input parameters,.a certain degree of uncertainty accompanies the estimation ofmanufacturing process capabilities and equipment investment estimates. The impact ofthis uncertaintyis quantifiedbyusing sensitivity analysis. 

### 5.2 Sensitivity Analysis Based onourPhase I analysis (we have conductednumerous) sensitivity analyses onthe higher efficiency differential costs. We have identified the most appropriate and significant parametersthat will impact full productioncost and the significance ofthe variation onthe engineering analysis. The sensitivityresults are presented as a range for the v-axis prototype and aggregated H-axis designs to maintain confidentiality.

14We have presented sensitivity analysis on labor rates, capacityutilization (plant output) average equipment depreciation life and investment (see section 4.0) since these assumptions have the most significant impact onproduct cost and are a major source of differentiation in the manufacturer impact analysis phase ofthis rulemaking. 

### LaborRate The 1992 Census datafor household laundry equipment manufacturers indicates an average fully burdened labor rate of$18 perhour while some union wages couldbe as high as $28 perhour. Therefore, we conducted a sensitivity analysis ofthis parameter in orderto understand the impact ofthis variability.

0 

### "' 

### ::. 1ii 0 $175.00

$150.00

0 $125.00 ]! E 

# i $100.00

$75.00

17 18 19 20 21 22 23 Labor Rate (USO/hr) Figure 13: Sensitivity Analysis on Labor Rate 24 25 26 27 28

The manufacturing cost model indicates that a $17 to $28 labor rate variation would result in approximately a $20 differential in full production cost. This variation is similar to the results obtained during Phase I sensitivity analysis.

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### Capacity Utilization(Plant Output) One important source ofvariability is the utilization ofa plant's capacity. We therefore consideredlowerutilization ofthe 1,500,000 million unit peryear Greenfield plant outlinedin this study. The impact ondifferentialcost ofthis productioncapacityrange (900,000 to 1.5 million units) is approximately $20/unit.

$200.00

$175.00

$150.00 iS**~** ;;**~** $125.00 .!! 

# i
Cl $100.00

$75.00

.90 .95 1.00 1.05 1.10 1.15 1.20 1.25 1.30 1.35 1.40 1.45 1.50 Actual Output (Mllllons of Units perYear) Figure 14: Sensitivity Analysis on Actual Plant Output


### EquipmentAverageDepreciation Life The depreciation life ofa piece ofmanufacturing equipment has beeninvestigated, and there still remains a significant degree ofvariability between manufacturers. To understand the impact ofthis variability, we conducted sensitivity analysis.

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# .. •

iS CJ) 2. u; $175.00

$150.00**~** $125.00 .!! 'C I!!**~** c $100.00

$75.00

5.0 6.0 7.1 8.1 8.6 9.1 9.6 10.1 10.6 11.1 11.6 12.1 13.1 14.1 15.1 Actual Equipment Life (Years) Figure 15 Sensitivity Analysis on Equipment Depreciation Life We assumed that the average depreciation life on the equipment could vary from 7 to 15 years, which translates into a cost differential ofapproximately $11 6.0 Conclusion Arthur D. Little has completed the manufacturing cost assessment ofa Y-axis baseline clothes washer and the differential manufacturing costs ofseveral high efficiency designs. Ourestimate ofthe full production cost ofthe baseline vertical axis washer was $202. The differential cost for the H-axis designs range from $71 to $175 depending primarily on design and variations in key input parameters (see Table 3). The high efficiency vertical axis prototype differential cost varies from $146 to $190 based on variations in the same manufacturing parameters. The wide range ofcosts in the H-axis concepts are driven by the individual product features and attributes.· In general, the differential manufacturing cost for the higher efficiency designs is based onperformance and product features and not strictly efficiency improvements.

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