# A Couple of Cost Versus Run Rate Examples

Quote of the Day

As a child, you want something. As a young adult, you beg for relief from something. When you become old, you pray to give thanks for something.

— Kevin Kling, my characterization of his three stages of prayer. His observation very much reminds me of the Benedictine philosophy I heard in my youth, which taught that if you want to be happy think of something to be grateful for.

Figure 1: Engineering
Balances Time, Cost,
and Technology.

I spend a fair amount of time estimating the cost of electronic components with different purchase quantities. In earlier posts, I showed how component cost quotes often reduce by ~7 % per doubling of quantity purchased. In this post, I will present quotes from two different vendors for the same part (normalized to preserve confidentiality). The component quotes from each vendor reduced by 3.6% per doubling of quantity purchased, which differs significantly from my 7% rule. While each vendor had different costs, their rates of variation with purchase quantity were identical. As I thought about these quotes, their deviation from what I usually see made sense.

Normally, I am asking a vendor to deliver parts for which they have already built thousands or even millions of units. In this case, I am asking a vendor to deliver a part that they have never built before. Because of the risk associated with building a component they have never seen, the vendors are conservative and their cost quotes show only a  3.6% per doubling of component purchased. Note that the rules I am working with here are for purchases within a single year. A related rule (Wright's law) holds for year-over-year pricing (blog post).

Figure 2 shows the normalized quotes and my 3.6% cost reduction per doubling curve. I am documenting this information here in the hope it may be useful for those of you who must estimate cost reductions based on purchase quantities.

 Figure 2(a): Quote from Vendor 1. Figure 2(b): Quote from Vendor 2.