In manufacturing, tooling means things like cutting tools, dies, fixtures, gauges, jigs, molds or patterns that are for use in producing a specific product creating the specific form of the item. In procurement the most frequent reference to tooling means a metal die that is used in conjunction with an injection molding piece of equipment or metal stamping piece of equipment to produce an item of a specific form and size that will be unique to the item being produced where the buyer’s payment for such tooling may be required. There are also CNC (Computer Numerical Control) tools. CNC tools are used in a machining process where computers are used to control machining tools such as lathes, mills, routers and grinders. Since these tools are not unique to a specific product most of the time they buyer would not be paying for such equipment unless they were required for additional capacity. It is the first type of tooling that this blog is about.
Tools may be described as soft tools or hard tools. Soft tools are usually lower cost. They are good for medium-low volumes with a high mix of production. They lead to a higher piece part cost. They provide faster lead time and response. They are more flexible to change design. They will result in increased product variances over time. Hard tooling is usually higher cost because of the materials and processes used to make the tool. It will produce a lower piece part cost. When you use hard tooling there is no flexibility in the design, a change in design requires a new hard tooling is usually higher cost. There is no flexibility in design. Hard tooling result in a longer lead time because of the time needed to build the hard tool. It provides for repeatability of the product and results in less product variances. It is used for high volumes. The physical difference between hard tooling and soft tooling is the materials used to make the tools. A hard tool is usually made of hardened steel that is machined to the exact size needed. A soft tool is made of other materials such as silicon, epoxy resin, and lower temperature melting materials such as zinc alloys, and aluminum, etc.
Whether its hard tooled or soft tooled, a tool will have a useful life (a certain number of “hits” or stampings) before it will no longer be able to produce within acceptable tolerances. From an accounting perspective for tooling you probably have several ways to depreciate the cost of the tool. Depreciation can be done as:
1. Straight line (cost minus salvage value divided by the number of years of useful life).
2. Unit of production depreciation basis (cost minus salvage value divided by estimated number of production units).
3. Sum of years (cost – salvage value, where the total number of years are added (a five year life would total 15 (1+2+3+4+5) and year 1 would be 5/15ths, year 2 would be 4/15ths, etc).
4. Double declining balance (cost minus salvage value where the useful life (say 5 years) has 2/5ths of the current book value is depreciated each year so as the years go out the depreciation amount decreases as it’s based on that year’s book value that reflects prior depreciation.
5. Another accelerated method may spread the depreciation cost over the term of the contract if the tool cannot be used elsewhere.
As a buyer if you pay for tooling it can affect future sourcing decisions. The tooling you purchase and own may not compatible with a different supplier's equipment. That can potentially lock you into the supplier because to switch to a new supplier you have two costs. The cost to write off any remaining amount to be depreciated on the old tool as it's now obsolete and the cost of the new tool. One way to protect against that without getting locked into long term contracts with the supplier would be to negotiate options to extend the contract with a pre-agreed pricing formula at the same time you sign the initial contract. That allows you to determine what the best option is for you.
If the supplier agrees to pay for tooling and amortize the cost into the purchase price, you need to agree upon the number of units it will be amortized over, the per unit amount being charged and have an automatic price reduction once the cost has been fully amortized. Otherwise you will be paying for tooling cost well after the item has been fully paid for. Doing that also helps establish what your cost would be if you needed to terminate the agreement or let the agreement lapse without having met the amortized quantity agreed.
There are a number of factors to consider with tooling:
Who owns the responsibility to replace the tool if it breaks?
Is the tool for your sole use or can the supplier use it with other customers?
The set-up and tear down cost for the tool are costs that don't affect the tooling cost. They affect your piece part cost. Those along with your run rate affects your piece part cost as those costs apply each time you don't have continuous production. Depending upon what those costs are it may pay to order and inventory more than you need to reduce the number of times you incur those costs.
When you purchase something that requires tooling that you have to purchase you would normally have a separate tooling agreement or tooling purchase order. There are a number of terms that you would want in such an agreement. For example:
1. You want them to insure the tool against normal perils such as theft, and damage or loss due to fire, floods, etc. and have you named as a loss payee.
2. You want the tool to marked with your inventory control sticker showing the fact that your company owns the tool so you could retrieve it in the event the supplier went bankrupt.
3. You want them to perform maintenance and calibration of the tool to keep it in good working order.
4.You want them to be liable for the replacement of tool in the event of negligent set up, operation, or tear down of the tool that damages or destroy the tool.
5.You want the use of the tool restricted solely to your company unless you otherwise agree and are compensated.
6.You want the right to enter their premises if necessary remove the toll that you own.
7.You want language where they agree that they will not financially encumber the tool.
8.You want the tool to not to be moved without your agreement.
9.You want the supplier to not alter or modify the tool.
10. You want the right to inspect the tool.
11.You want the right to remove the tool at any time.
12. In most situations the buyer wants to own both the design of the tool and the tool itself. Owning the design of the tool makes it your intellectual property that the Supplier couldn’t use to have tools made for others without infringing your intellectual property rights. If you own the tool ,unless you have another commitment with the supplier that locks you into using the supplier (like a firm quantity commitment), you have the flexibility to move the tool at any time to another supplier. That helps keep competition in the equation for future negotiations.