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DRAFT 

Workshop Version 1.0 

Vertical Axis Baseline 

Clothes Washer 

Manufacturing Cost 

Assessment 

Phase I 

Preliminary Report 

Prepared for: 

U.S. Department of Energy 

February 24, 1998 

Arthur D. Little, Inc. 

Acorn Park 

Cambridge, MA 

02140-2390 

Reference 35539 
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Table of Contents 

1.0 Program Status ..................................................................................................... 1 

1.1 Program Objective ...................................................................................... 1 

1.2 Phase I Objectives ...................................................................................... 1 

2.0 Assumptions ......................................................................................................... 2 

2.1 Baseline Definition ...................................................................................... 2 

2.2 Manufacturing Assumptions ........................................................................ 2 

2.3 Conventions for Manufacturing Cost Estimates .......................................... 3 

3.0 Approach ................................................................................................................ 4 

3.1 Bill of Materials (BOM) ................................................................................ 4 

3.2 Fabrication Processes ................................................................................ 5 

3.3 Assembly Processes ................................................................................... 7 

4.0 Preliminary Results .............................................................................................. 7 

5.0 Variability and Uncertainty in Manufacturing Cost .......................................... 10 

5.1 Key Parameters ........................................................................................ 1 O 

5.2 Sensitivity Analysis ................................................................................... 11 

5.3 Monte Carlo Simulation ............................................................................. 15 

6.0 Conclusion and Phase II Program Plan ............................................................ 16 

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1.0 Program Status 

Vertical Axis Baseline Clothes Washer 

Manufacturing Cost Assessment 

Phase I - Preliminary Report 

This is a preliminary report of the Phase I program. Manufacturer visits and data 

collection have not been fully completed at this time; this report will be updated as 

appropriate to reflect any new information that is collected before the March 11-12 

Workshop. 

1.1 Program Objective 

The main objective of this 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) a commercially available Horizontal-axis (H-axis) design. The 

overall project consists of two phases: 

Phase I provides a detailed and objective cost estimate of a state-of-the-art, high volume, 

Y-axis washer as a baseline for further analysis. The major objective of this phase is to 

obtain stakeholder comments on the costing methodology and baseline costs. 

Phase II develops a differential cost estimate for the proprietary V-.~is design and for a 

commercially available H-axis clothes washer, relative to the baseline clothes washer 

evaluated in Phase I. 

This report describes the preliminary results of Phase I . Several manufacturing plant 

visits provided critical input into its preparation, and additional visits will be conducted 

before its completion. Other elements of the program yet to be completed include 

additional process equipment and supplier interviews, sensitivity analysis on critical cost 

parameters, and incorporation of stakeholder suggestions/modifications. An updated 

version of this document will be available for review prior to the March workshop. 

1.2 Phase I Objectives 

• Develop a clear and consistent manufacturing cost assessment methodology for 

clothes washers. 

• Provide a detailed manufacturing cost for a high production volume "typical" clothes 

washer for a baseline estimate. 

• Report the results of the analysis in a way that preserves confidentiality of data. 

• Obtain input from all stakeholders as to the validity of the methodology and on the 

"reasonableness" of the baseline manufacturing cost estimates. 

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2.0 Assumptions 

2.1 Baseline Definition 

Two clothes washers were selected to be used in the baseline cost assessment. They are 

among the top selling machines as reported in sales data obtained from the ELCAP 

service. Two machines were disassembled, rather than one, in order to reflect product 

differences between manufacturers in the baseline vertical axis washer, and to then 

aggregate the actual component costs to maintain confidentiality. Each clothes washer 

was analyzed and the cost was estimated separately. The costs were then averaged at the 

sub-assembly level and by category. Since different manufacturers have significantly 

different designs, sub-assemblies are defined by function (i.e., suspension, tub and basket, 

transmission and motor, etc.) rather than by specific components. In Phase II, the 

differential costs will be calculated by estimating the costs of the proprietary Vertical-axis 

(V-axis) design, and a commercially available Horizontal-axis (H-axis). This cost 

estimate will be conducted on an add and omit basis using each baseline vertical axis 

machine. From these analyses, a differential cost will be generated for each baseline and 

design option and then the results will once again be aggregated by category and subassembly. Each machine will also be tested to obtain its energy consumption, according 

to DOE test procedure, Appendix Jl. 

The following is a list of the key characteristics describing the baseline clothes washers: 

Baseline Clothes Washer Characteristics: 

• 27" overall width 

• 3 wash/rinse temperature settings 

• Unheated rinse 

• 3 Settings for Load Size 

• 2 wash/spin speeds 

• 8 or more wash cycles 

• Super capacity wash basket 

2.2 Manufacturing Assumptions 

Key assumptions used in the Phase I manufacturing cost assessment include: 

• An annual clothes washer production volume of 1.5 million units. Note: future 

analyses will include separate baseline cost estimates for a smaller and larger volume 

manufacturer. 

• Capacity utilization at 100 percent. (Sensitivity to capacity utilization will be 

conducted in order to understand the impact on the baseline cost.) 

• Investment for a "greenfield" site, including all new equipment, tooling, installation, 

and building. 

• Full or semi-automation of the manufacturing facility for major fabrication processes 

(painting, stamping, welding, etc.). 

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• Manual final assembly to reflect the need for flexibility in production of multiple 

models. 

It is understood that the cost of specific models-or individual manufacturers-will vary 

from this baseline, depending on elements such as the product's precise characteristics, 

actual manufacturing processes, and the product mix in the factory (multiple clothes 

washer and dryer products). Also there are considerable differences in the levels of 

vertical integration as some manufacturers prefer purchasing partially complete subassemblies to manufacturing themselves. However, as this set of assumptions will 

remain constant for the Phase II analysis, the differential cost estimation methodology 

reduces the impact of plant-specific characteristics. 

2.3 Conventions for Manufacturing Cost Estimates. 

The cost categories used to summarize the manufacturing costs developed in Phase I 

closely parallel the cost categories used in the AHAM data collection. Direct material, 

direct labor and overhead (including investment depreciation) comprise the full 

production costs. Other cost elements (SG&A, R&D, interest, etc.) are grouped under 

the non-production cost category. Together these costs make up the full cost of the 

product as shown in Figure 1. The manufacturing cost assessment will develop the full 

production cost estimates. Non-production costs will be added based on a top-down 

analysis of industry structure. 

Full Production Cost 1 

Direct 

Labor 

Direct 

Material Overhead 

. Indirect labor 

Selling 

..... 

I Mkt. research 

Non-Production Cost 

General & 

Admln. 

! ; Costs of 

i service & 

R&D , 

...,..,.... _ __,! 

..... I 

: Costs 

: associated 

Interest l ..,_. _ __,, l.. - -·- _.J 

r-~--

1Costs 

[of Indirect Material i Advertising · staff units 'with efforts i borrowing ! · Maintenance ; POS promotion 

: Depreciation : Sales person 

Taxes : comp. + travel 

· Insurance related I logistics 

: to assets : • Warehousing 

. • Dellvery 

: ·Record ! keeping 

• Order entry/ 

l ... ~r":.8-~lng __ J 

to find new J funds 

·General 

; corporate 

. costs 

·comp. etc. 

1 Tax Reform Act of 1986, essentially, requires companies to measure cost of goods sold as the full production cost of the goods sold. 

Figure 1. Full Product Cost 

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3.0 Approach 

The manufacturing cost assessment methodology used is a detailed, component-focused, 

activity based technique for rigorously calculating the manufacturing cost of a product 

(direct materials, direct labor and some overhead costs). This methodology has been 

successfully applied by Arthur D. Little to products at various stages of development, 

from early R&D to production. Figure 2 shows the three major steps in generating a 

baseline manufacturing cost. 

Raw 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 step in the baseline cost assessment was the creation of a complete and 

structured bill of materials from the physical tear down of two high volume vertical axis 

clothes washers. To conduct the tear down, two vertical axis clothes washers were 

purchased and completely dismantled. Each part was then characterized according to 

weight, dimensions, material and quantity. A separate BOM for each clothes washer was 

created. 

The BOM incorporates all materials, components, and fasteners with estimates of raw 

material costs or purchased part costs, as appropriate. Assumptions on the sourcing of 

parts and in-house fabrication were based on previous industry experience, recent 

information in trade publications and discussions with major clothes washer 

manufacturers. To improve our understanding of the industry's current manufacturing 

practices, interviews and plant visits were conducted at major clothes washer 

manufacturing facilities. We anticipate that three visits will be completed prior to the 

March workshop and additional visits will be scheduled as necessary. These visits 

focused on observing and characterizing current manufacturing practices for the majority 

of the parts in the baseline clothes washers. For internally fabricated parts, manufacturing 

processes were identified on the BOM for each component. 

Cost estimates for raw materials and purchased components were drawn from Arthur D. 

Little's manufacturing databases and supplemented with information obtained from 

manufacturer and supplier sources. Adjustments to the cost estimates for purchased parts 

and raw materials were made, as appropriate, to include price discounts typically 

available at the purchase volumes in question. Figure 3 is a section from the structured 

bill of materials of one baseline clothes washer. This section of the structured bill of 

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materials lists the part number (arbitrarily defined during disassembly), description, 

material category, sourcing category (fabricated or vended), quantity, dimensions, weight, 

percent of scrap in processing, and estimated material cost. 

1.00 I I I !Tub 8t Basket Assembly 

Part Final aSl 1388.00 v OD or Weight (lbs) Scrap 

No. Descriotlon 1800.00 Catel[ory ? • Width Thlm88 Lenl[th Steel Other % 

1.01 Tub Plastic l 22.5 0.09 22.5 5.520 ·'· , ~-

1.03 Water Level Box Plastic l 2.75 0.085 1.75 0.066 ... 

1.02 Tub to Susoenslon Seal Rubber l 2.6 0.3 1.225 0.066 

1.07 Bleach tube Rubber l 0.6 0.09 5.2 0.036 ' ' 

1.30 Basket Assv 

l.201 Bosket Enomld Steel I I l I 20.5 I 0.055 I 18 I 13.500 I I 15% I 

1.221 Lint Collector Plastic I I l I I I I I 0.475 I I 

l.211 Bosket Bolonclno Rina w/Woler In II Plosllc I I 1 I 20.5 I 0.09 I 2 I I 1.400 1.· I 

1.49 Uooer Aaltatcir Assv 

l.SOA Fabric Dispenser - Top Plastic l 3.81 0.05 1.6 0.108 

I.SOB Fobrlc Dispenser - Cup Plosllc l 3 0.05 5.5 0.074 

I.SOC Fabric DlsPenser - Bottom Plastic l 4 0.06 5 0.148 

1.51 Clutch Cover Plastic 1 3.25 0.05 0.9 0.030 ' 

1.52 Clutch Cover Seal Rubber l 3.15 0.16 0.010 

l.75 Lower Aaltator Assv 

1.60 Bottom Aoltotor Beorlno Plastic l I 2.95 0.26 0.016 

1.59 Bottom Aallalor Plastic l I 13.5 0.15 13 1.816 

1.58 Uooer/Lower Aoltotor Beorlno Plastic l I 2.6 0.05 0.775 0.016 ·' 

1.57 Upper Aoltotor Plastic l I 3.75 O.l 11.5 0.934 ' 

1.85 Aaltator Clutch Assv '''·' 

1.85 Anltator Clutch Assv 

1.56 Clutch Bodv I Plastic I I l I 2.63 0.08 2.265 I I 0.052 I I 

l.55 Ratchet Stoos I Plastic I I 4 I 0.4 0.15 0.9 I I 0.016 I . ·. I 

l .54 Clutch Bottom Cover I Plastic I I 1 I 1.75 0.05 0.4 I I 0.006 I •· I 

Sub-Totals 22 13.50 10.79 

Figure 3: Structured Bill of Materials 

3.2 Fabrication Processes 

After each detailed BOM was completed, the major manufacturing processes were 

identified. These processes are listed in Table 1. 

Table 1: Major Manufacturing Processes 

Fabrication 

Fixturing 

Stamping/Pressing (Large, Medium, 

Small) 

Brake Forming 

Cut & Shearing 

Machining 

Injection Molding (Large> 1500 ton, 

Medium 800-1500 ton, Small<BOO ton) 

Casting 

Finishing 

Washing 

Powder Coating 

Enameling 

Deburring 

Assembly/Joining 

Adhesive Bonding 

Spot Welding 

Seam Welding 

Integral Fastener (i.e. clinching) 

Other Fasteners 

Press Fitting 

Inspection & Testing 

Material 

Cost,$ 

$3.31 

S0.04 

$0.03 

$0.02 

$4.13 

$0.29 

$0.84 

$0.05 

$0.03 

$0.07 

$0.02 

$0.0l 

$0.0l 

$0.82 

$0.0l 

$0.42 

$0.02 

SO.Ol 

so.oo 

$10.12 

Information on equipment and tooling costs, typical processing cycle times, and materials 

used for fabrication was obtained from the ADL manufacturing databases. Equipment 

suppliers were contacted for further details concerning equipment capabilities and 

processing parameters (cycle times, scrap rates, etc.). 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. 

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For this analysis $24.00 was used as the average fully burdened labor rate based on 

typical yearly wages and benefits for union employees. Sensitivity analysis was 

conducted on this important parameter and is presented in Section 5.0. This parameter 

was investigated because labor rates can vary considerably, depending on geographic 

location, availability of skilled labor, and level of union representation. 

Figure 4 contains an excerpt of the non-assembly processing times (seconds per process) 

associated with each component listed on the left. This section of the model has all the 

processes listed in Table 1, but for brevity a single page was presented in Figure 4. 

Figure 5 is from the equipment summary section, which includes total equipment and 

summarized labor requirements for each fabrication process. 

1.00 I I I ITub & Basket Assembly Manufacturlna 

Part Flnal as• 1388.00 Powder Enamel Large Medium Small Brake cut& 

No. Description 1800.00 F:lxtnrin., Wash Coatllll! B•l.tn.r Press l?ress Press Form Shear 

1.01 Tub 1n.o 1.0 

1.03 Water Level Box 5.0 

1.02 Tub to Susoenslon Seal 

1.07 Bleach tube 

l.30 Basket Assv 

1.20! Basket I 40.0 I I I 4.0 I I 10.0 I 30.0 I 2.0 

1.221 Lint Collector I I I I l I I I I 

1.211 Basket Balanclna Rina w/Water In it 5.0 I I I I I -. I 

1.49 Uooer Aallafor Assv 

1.SOA Fabric Dlsoenser - Too 

1.SOB Fabric Disoenser - Cuo 

1.50C Fabric Disnenser - Bottom 

1.51 Clutch Cover 

1.52 Clutch Cover Seal 

l.75 Lower Aallator Assv 

1.60 Bottom Aaitator Bearlna 2.000 

1.59 Bottom Aaitator 

1.58 Uooer/Lower Aaitator Bear/no 

1.57 UnnAr Aaltator 

l.85 Aaltator Clutch Assv 

f .85 Aaltator Clutch Assv 

1.561 ClutchBodv 

1.551 Ratchet Stoos 

1.541Clutch Bottom Cover 

Sub-Totals 62.0 4.0 10.0 30.0 3.0 

Figure 4: Fabrication Process Cycle Time Estimates 

Manufacturlna I I I Powder I Enamell 

Fb:turlno Wash Coatlnir Baklnll Large I Medium I 

Press Preas 

Small I Brake I Cut & I 

Press Form Shear 

Seconds I 115.0 I 17.7 I 17.7 I 4.0 I 14.5 I 36.3 I 19.5 l 51.8 I 100.8 I 

#Stations Required I 9 I 2 I 2 I l I 2 I 3 I 2 I 4 I 8 I 

#People/Machine! 1.00 I 1.00 I 5.00 I 5.00 I 1.00 I 0.50 I 0.25 I 0.50 I 0.50 I 

Actual #Operators Required! 9 I 2 I 10 I 5 I 2 I 2 I 1 I 2 I 4 I 

Equipment Cost/Station (Millions) I $0.01 I so.50 I $50.00 I $50.00 I $3.20 I $2.10 I $0.80 I so.15 I so.08 I 

Equipment Cost (Mllllons)I $0.05 I $1.00 I $100.00 I $50.00 I $6.40 I $6.30 I Sl.60 I $0.60 I S0.60 I 

Running Cost ($)1 I 0.2 I 6.6 I 3.0 I I l I I I 

Figure 5: Fabrication Process Equipment and Labor Requirements 

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In addition to the process time and labor costs associated with fabrication, labor times for 

assembly associated with each part are included. 

3.3 Assembly Processes 

In the final step of the cost assessment, assembly times and associated direct labor costs 

were estimated. Assembly cycle times were primarily derived from reversing the· 

disassembly of the selected clothes washers. The assembly sequence was built into the 

structured BOM, culminating with final assembly, testing and packaging. 

Once the cost estimates for each machine was finalized, a detailed summary was prepared 

for relevant components, subassemblies and processes. 

The structured bill of materials and manufacturing process summaries provide detailed 

direct material, direct labor, indirect material, and investment costs. Indirect labor costs 

were estimated by subtracting the direct labor hours, determined from the bottoms-up 

analysis, from the current average total labor hours per unit (1.8 hours). The current 

average labor content was derived from a top down analysis of several household laundry 

equipment manufacturing plants and can be confirmed with data from the 1992 Census of 

Manufacturers. Although the 1992 Census would indicate an average labor content in the 

household laundry equipment segment to be 2.1 labor-hrs per unit, we believe 1.8 hours is 

more accurate, as a savings of 0.3 hrs per unit, or approximately 14% for the industry 

over the past 6 years, could be expected. The indirect labor-hour per unit was multiplied 

by the average labor rate ($24) in 'order to estimate the indirect labor cost. The average 

direct labor hour per unit was 1.32 hours; therefore the indirect labor content was 

calculated to be on average 0.48 labor hours per unit. The indirect labor is included in the 

overhead estimate, along with indirect materials, utilities, depreciation, maintenance, 

taxes, and insurance. The direct labor cost total is approximately $32 per unit, while the 

indirect labor costs are estimated to be $11.50 per unit at the fully burdened $24 per hr 

labor rate. 

4.0 Preliminary Results 

Table 2 presents a summary of the aggregated full production cost, built up from material, 

direct labor and overhead costs, for the baseline vertical axis clothes washer. These costs 

have been aggregated based on the two machines that were dismantled. 

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Table 2: Cost components for Baseline Vertical Axis Clothes Washer 

Sub assemblies Material Direct Labor Overhead Full Production 

Cost 

Tub & Basket 

Transmission/Motor 

Suspension · 

Pumps, Controls, and 

Valves 

$16.12 

$35.37 

$4.33 

$24.20 

$5.93 

$6.89 

$2.40 

$2.63 

$12.04 

$10.44 

$3.94 

$3.27 

$34.08 

$52.70 

$10.68 

$30.10 

Cabinet $20.35 $7.41 $24.98 $52.24 

Misc. & Final Assembl~ $16.70 $6.53 $4.75 $28.48 

llldllllilC~1lliBl¥illl~1!t~:~$;1~1l7,:!0.'Z~:~mlml;1[Ji11JR)0g'\flh!$3.n:!tt,9~~~;,#i;;t~r1~'.~~~S$~9i~2!~~;.'1Xri~''~~+ . ;•·$208'.28:: :.: : : :. I 

A detailed breakdown of the aggregated overhead costs and the key assumptions for each 

cost category are presented in Table 3. These costs are estimated based on the bottoms up 

cost analysis and typical values for the appliance manufacturing industry. Taxes are not 

directly related to a product design, therefore no change between the baseline and any 

higher efficiency washers is anticipated. Also, maintenance, utilities, and insurance are 

primarily related to equipment quantity and cost of investment and therefore are indirectly 

driven by product designs. We have included these costs to estimate the production cost 

of the baseline but anticipate that variation with future higher efficiency designs will have 

a secondary effect on differential cost. 

Table 3: Overhead Cost of Baseline Clothes Washer 

Cost Category 

Indirect Labor 

Indirect Materials' 

Maintenance 

Utilities 

Depreciation 

Taxes 

Insurance 

$11.40 

$19.09 

$7.11 

$3.54 

$14.76 

$1.87 

$1.66 

Cost Basis 

Teardown analysis 

Teardown analysis 

4.0% of total capital investment 

1. 7% of material costs 

Teardown analysis 

0.9% of full production cost 

0.8% of full production cost 

Although the overhead costs are slightly higher in this analysis than the top down industry 

analysis, much of this difference can be attributed to the significant investment in a 

greenfield site. The allocation of direct and indirect labor can also vary with any single 

company's individual practices. Fixed investments in equipment and tooling have been 

estimated based on the requirements derived from the component cycle times in 

production volumes. Production volumes, in conjunction with equipment process times, 

will determine the number of pieces of equipment necessary and the plant investment 

costs. For the number of pieces of equipment, we have assumed an up-time of 90%. 

Table 4 shows the aggregated investment for a production volume of 1.5 million units per 

year. 

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Table 4: Fixed Costs (millions) for Baseline Vertical Axis Clothes Washer 

Subassemblies Equipment, Tooling Building and Total Investment 

and Installation Conveyors Estimate 

Tub & Basket $66.7 $18.2 $84.9 

Transmission/Motor $21.5 $5.8 $27.3 

Suspension $15.8 $3.9 $19.7 

Pumps, Controls, and $4.3 $0.3 $4.6 

Valves 

Cabinet $145.3 $43.8 $189.1 

Misc. & Final Assembly $13.6 $4.1 $17.7 

l110'.f~1M1•t~m11t:~,101BE~:m·~1~;'1Hs~~mt$~6?.021mr11i6n~'.~·,:e;~;;jiHll;rnJ;1i::i $i6.s1fillli1uQ11 E·: ~;1i~~;.i , .. ,. · · :$a'4s,s·:mi11iorr·' •... :: ··J 

The building investment currently assumes 750,000 square feet at $100/sq. ft. and a 

multiplier of 1.6 (additional 40% for installation and 20% for auxiliary equipment) was 

used to calculate installation and auxiliary equipment costs. We have assumed that the 

depreciable life of each piece of equipment on average is 14 years and we used a simple 

straight line depreciation assumption to calculate the yearly amortized per unit cost. A 

sensitivity analysis to lower equipment lifetimes is presented in Section 5.2. For building 

and conveyor investments we assumed 25 years and 20 years respectively for an average 

depreciation life. The building costs were allocated by sub-assemblies on an equipment 

cost basis, not on a specific spatial requirement for each piece of equipment or 

manufacturing process. The assumptions for investment requirements, capacity 

utilization and.planning and accounting practices can vary greatly, and.have a significant 

effect on the total investment and the depreciation element of the overhead costs. 

Because of this, these assumptions will be the subject of further sensitivity analysis. Also 

we have not included the cost of capital in the products full production cost, since this 

cost is an interest which is considered in the estimate of the non-production cost. For 

future analysis, the methodology can apply a capital recovery factor (CRF) to the total 

investment in order to estimate the yearly cost of capital, but at this time we have not 

included it in the baseline units full production cost. 

The full cost of the product, which includes SG&A, R&D, and interest costs (Figure 1), 

will be arrived at using the industry cost structure developed in an earlier study by Arthur 

D. Little. This previous study derived the cost structure from public data on the major 

appliance industry. Figure 6 is a percentage breakdown of the full cost of a product, 

defined in Figure 1. This manufacturing cost assessment will estimate the direct 

materials, direct labor and overhead for a baseline unit which, according to the industry 

cost structure, represents approximately 74% of the full cost of a product. 

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R&D 

1.8% 

Overhead 

11.7% 

10.2% 

Income from 

Operations 

6.0% 

Material 

52.0% 

Figure 6: Washing Machine Industry Cost Structure Derived from Public Data 

5.0 Variability and Uncertainty in Manufacturing Cost 

Since the current cost assessment represents only a fraction of the baseline clothes washer 

products available, and the estimates have inherent variability and uncertainty, we have 

conducted extens~ve sensitivity and cost simulations to understand the impact of this 

variability and uncertainty on the baseline manufacturing cost. This analysis will provide 

us with a greater understanding of the range of probable costs, and will help identify key 

cost elements requiring further critical review and investigation. We used primarily two 

methods to analyze the variability and uncertainty in the manufacturing cost assessment: 

• Sensitivity analysis is used to quantify the impact of variability and uncertainty for 

any one specific parameter. 

• Monte Carlo simulations are used to understand the interaction and impact of multiple 

parameters. This analytical technique allows us to input a range of data with 

probability distributions and generate an estimated range for the baseline 

manufacturing cost with a quantifiable level of certainty. 

5.1 Key Parameters 

The physical teardown and activity based cost estimation conducted on two actual clothes 

washers removes much of the uncertainty about materials, components, and 

manufacturing processes. Many of the manufacturing processes however, carry some 

variability based on individual manufacturers and product differentiation. This results in 

some variation in the total capital investment, the utilization of that capital, maintenance 

costs, and equipment uptime. Also average labor rates for different manufacturers can 

vary, thereby warranting the need for a sensitivity analysis to determine its impact on 

costs. 

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In addition to the variability in input parameters, a certain degree of uncertainty 

accompanies the estimation of manufacturing process capabilities and equipment 

investment estimates. The impact of this uncertainty is quantified by using sensitivity 

analysis. 

5.2 Sensitivity Analysis 

We have conducted numerous sensitivity analyses and have selected the most appropriate 

and significant parameters that will impact full production cost. The sensitivity results 

are presented for both units. 

Labor Rate 

The 1992 Census data for household laundry equipment manufacturers indicates an 

average fully burdened labor rate of $18 per hour while some union wages could be as 

high as $28 per hr. Therefore, we conducted a sensitivity analysis on this parameter in 

order to understand the impact of this variability. 

$215.00 

~ $210.00 ·;: 

~ ... 

CD 

.c :a $205.00 

0 == 

0 

0 

CJ $200.00 

$195.00 

15 17 19 21 23 

Cost of Labor ($/hr) 

Figure 7: Sensitivity Analysis on Labor Rate 

25 27 29 

The manufacturing cost model indicates that a $17 to $28 labor rate variation would 

result in approximately a $20 differential in full production cost. 

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Capacity Utilization (Plant Output) 

One important source of variability is the utilization of a plant's capacity. We therefore 

considered lower utilization of the 1.5 million unit per year greenfield plant outlined in 

this study. 

$240.00 

;;:- $230.00 c 

~ .. 

QI 

.r. 

:3 $220.00 

:;:: 

8. 

iii 

8 $210.00 

$200.00 

$190.00 +-------+----+-----1------+-----+-----'f-----l 

800,000 900,000 1,000,000 1,100,000 1,200,000 1,300.000 1,400,000 1,500,000 

Actual Output (Washers per Year) 

Figure 8: Sensitivity Analysis on Actual Plant Output 

If the greenfield baseline clothes washer manufacturing plant operates at 60% of its 

optimal capacity this would result in an increase of approximately $12 per unit. 

Total Investment 

There is a considerable amount of uncertainty in estimating the equipment requirements 

of the total plant and its total cost. We therefore conducted sensitivity analysis versus this 

parameter. In this case we have varied the estimate considerably from -50% to +400% of 

the aggregated baseline cost estimate of $267 million. 

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$225.00 

$220.00 

$215.00 

~ $210.00 

~ !ii $205.00 &. 

., 

~ !ii $200.00 Q. 

ti 

8 $195.00 

$190.00 

$185.00 

$180.00 

0% 20% 40% 60% 80% 100% 120% 140% 160% 

Investment Factor (multiplylng estimated equipment investment) 

Figure 9: Sensitivity Analysis on Total Investment Cost 

The x-axis represents a percentage of the baseline investment cost (equipment only) of 

approximately $230-300 million. It is apparent from the sensitivity analysis that a large 

variation in equipment cost ($130 million to $1 billion) could have a significant impact 

($80) on the full production cost, but within a smaller range ( + or - 25%) the effect is 

considerably less ( + or - $4 per unit). 

Equipment Average Depreciation Life 

The depreciation life of a piece of manufacturing equipment has been investigated, and 

there still remains a significant degree of variability between manufacturers. To 

understand the impact of this variability, we conducted sensitivity analysis. 

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.. 

c 

$220.00 

~ $215.00 

... 

.. 

~ ~ $210.00 

8 

$205.00 

IO 12 14 

Average Depreciation Life (years) 

Figure 10: Sensitivity Analysis.on Equipment Depreciation Life 

16 

We assumed that the average depreciation life of the equipment could vary from 7 to 15 

years, which translates into a cost differential of approximately $10. 

Maintenance 

We assume that maintenance costs are related to the magnitude of the asset base. 

212 

210 

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;: 206 Ci 

-; 

0 

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204 

202 

200+-~~--+~~~-1-~~--i---~~--+-~~~+--~~-+-~~~-+-~~--1 

2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 

Maintenance as % of Depreciation 

Figure 11: Sensitivity Analysis on Maintenance 

14 
DRAFT 

Our cost assessment would indicate that within the range of typical maintenance costs (2-

6% of equipment investment) there is not a significant impact on full production cost 

{approximately a range of $4). 

5.3 Monte Carlo Simulation 

To evaluate the key parameters simultaneously and to understand the cumulative effects 

of variability and uncertainty we conducted a Monte Carlo simulation. This process 

generates random inputs within a prescribed distribution which then completes numerous 

iterations ( 1000) to quantify the range of possible outcomes and the probability of each 

occurrence. 

For the simulation we made the following assumptions: 

Table 5: Monte Carlo assumptions for Key Parameters 

Key Parameter Probability Parameter Range Most Likely Value 

Distribution 

Labor Rate Uniform $17 to $28 per hour $24 per hour 

Plant Output Triangular 900,000 to 1.5 million 1.5 million 

Equipment Depreciation Uniform 7 to 15 14 

Life 

Total Investment Triangular 50% to 150% 100% 

Multiplier 

Maintenance Uniform 2.5% to 5.5% 4% 

Equipment Uptime Triangular .. 70% to 95% 90% 

Utilities Triangular 1% to 3.5% 1.7% 

By randomly generating values in the key parameters of Table 5, a distribution of full 

production cost was generated as shown in Figure 12. Based on this analysis, Figure 12 

shows that the variation in key parameters mentioned in Table 5 for washer 

manufacturing results in an aggregated baseline clothes washer cost between $196 and 

$237 with 95% certainty. This range represents a variation of +or - $20 per unit (less 

than 10% ). This analysis can be repeated for different ranges in the key parameters, 

alternative probability distribution functions and for additional parameters if warranted. 

Workshop Version 1.0 15 
DRAFT 

Forecast: Aggregated Cost 

1 ,000 Trials Frequency Chart 2 Outliers 

.031 - 31 

.023 - 23.2 

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(ti 

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- 7.75 ... . 008 a. 

.000 - 0 

$180.00 $197.50 $215.00 $232.50 $250.00 

Certainty is 95.30% from $196.10 to $237.17 $ 

Figure 12: Monte Carlo Simulation of Aggregated Baseline Cost 

6.0 Conclusion and Phase II Program Plan · 

Based on feedback from all stakeholders, Arthur D. Little will conduct additional or 

alternative analysis on the baseline clothes washer. Finally we will initiate Phase II to 

estimate the differential costs of several higher efficiency designs relative to the 

aggregated baseline cost developed in Phase I. 

Workshop Version 1.0 16 

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