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As every OEM knows, the cost of bringing a hardware product to market is much more than the sum of its parts. It is the cost of every ounce of material, labour and energy used in its design, fabrication and promotion. And it all must be accounted for in its final price.
What’s eating up your profits?
Nirv Patel’s Cost Calculator neatly illustrates how costs can eat up profit in a product's journey to market.
His model helps businesses figure out what proportion of their final price tag will be needed to cover each part of their ideation, manufacture, distribution, and promotion process if specific sales targets are met.
This is often referred to as the 'Cost of Goods Sold' (COGS).
What's your total manufacturing cost formula?
Source: Nirv Patel's cost calculator
How to use the COGs calculator
Cost models such as these can be used to test different scenarios and see how changes in costs, prices, and projected sales volumes will affect profitability.
Scenario analysis involves creating multiple "what-if" scenarios to evaluate potential outcomes based on varying assumptions.
Sensitivity analysis identifies which cost factors have the most significant impact on profitability, allowing businesses to focus on areas where cost reduction or efficiency improvements can yield the greatest benefits.
What are the costs of bringing a product to market?
1. Manufacturing costs
Materials and labour: This includes all parts and labour needed to make the product. A detailed Bill of Materials (BOM) lists all components and associated costs, ensuring accurate tracking of expenses. Materials costs cover raw materials, components, and any purchased parts. Labour costs include wages for workers involved in assembly, production line management, and quality control.
2. Financing costs
Inventory financing: Companies might need loans to pay for inventory before they get paid by customers. This interest cost is important to include. Inventory financing helps bridge the gap between paying suppliers and receiving payment from customers, ensuring cash flow remains stable. These costs can be significant, especially for start-ups and small businesses.
3. Fulfilment costs
Logistics: This covers the cost of shipping products from the factory to customers, including air, sea, and local transport. Logistics costs depend on the size, weight, and volume of shipments, as well as the distance and mode of transportation. Efficient logistics management is crucial to minimise costs and ensure timely delivery.
Third-Party Logistics (3PL): These are costs for warehousing, sorting, packing, and shipping products to customers. 3PL providers offer services that include inventory management, order fulfilment, and returns processing. Using 3PL can help businesses scale operations without significant investment in infrastructure.
4. Support costs
Customer support: This includes costs for handling returns, warranty repairs, and customer service staffing. Support costs also cover technical support, troubleshooting, and maintaining customer satisfaction. Refurbishing returned products involves repairing or reconditioning them for resale, adding to support costs but also recovering value from returns.
5. Fixed costs
Development and tooling: Upfront costs for product development, tooling, equipment, and certifications. Development costs include R&D expenses, design iterations, and prototyping. Tooling costs are associated with creating molds, dies, and specialised equipment needed for mass production. Certification costs ensure compliance with regulatory standards (e.g., FCC, UL, CE, RoHS). These fixed costs are significant but necessary for bringing a product to market.
Prototyping: Creating prototypes to test and refine the product design involves costs for materials, labour, and specialised equipment such as 3D printers. Prototyping helps identify design flaws and validate functionality before full-scale production, ultimately saving costs by reducing errors and rework in later stages.
Product testing: Thorough testing is crucial to ensure the product meets quality and safety standards. Testing can include functional tests, stress tests, and user acceptance testing. Costs cover testing equipment, facilities, and labour, as well as potential third-party testing services to ensure compliance with industry standards.
6. Internal costs
Internal development and sales: These costs encompass the salaries and benefits of employees involved in product development and sales efforts. This includes engineers, designers, marketers, and sales teams who work on developing the product concept, refining the design, creating marketing strategies, and driving sales. Internal costs also cover administrative expenses and overheads associated with supporting these teams.
How can you make COGs savings without devaluing your product?
As OEMs consider the cost implications of bringing a product to market, and examine ways to increase their profitability, every element of their process and supply chain is under scrutiny.
But often, the focus is on beating suppliers down on price when it comes to materials, packaging, etc., leading to a zero-sum war on quality that ultimately impacts sales.
What parts of your process can be most usefully optimised?
Understanding where your core competencies lie can focus your mind on what should be outsourced and optimised to accelerate your process and find new efficiencies.
You may have an extraordinary talent for R&D, innovation, branding and sales - but the process of prototyping, product realisation, testing and distribution may be where your costs mount up unnecessarily.
Developing products in isolation from manufacturing expertise can represent hidden costs for companies who want to work in the most agile and efficient way possible.
Where does all the money go?
Just consider the following stats:
- 80% of manufacturing costs are locked into a product at the design phase
- 70% of production delays happen due to assembly, cost & quality issues
- 95% of manufacturing process activities add no value for the end-user
For all these reasons the quality of your Design for Excellence (DfX), Value Engineering (VE) and New Product Introduction process can have a massive impact on time to market and the final quality of the product - as designs and processes are reconfigured on the fly to match the realities of the production line.
How to control your COGs and maximise value
What causes the Cost of Goods Sold (COGS) to stack up?
Prototyping inefficiencies
Without integrating manufacturing insights during prototyping, initial prototypes may not be feasible for mass production, leading to multiple iterations, increased costs, and delays in finalising the design.
Design for Manufacturability and Assembly (DfMA) issues
Without DfMA, input early on in your process designs may be impractical to produce. This can result in costly redesigns and production delays.
Designs not optimised for intended manufacturing equipment may require expensive retooling and re-calibration, increasing capital expenditure and production setup time.
A DfMA case study: cold chain value engineering in the Covid crisis
Just take a look at this case study showing how ESCATEC value engineered the production of cold chain data loggers for the delivery of Pfizer vaccines during the Covid pandemic. This case study neatly illustrates how identifying efficiencies in mass production through DfMA can significantly reduce production time and associated costs. Once ESCATEC's DfM recommendations were put in place many parts of the data logger assembly could be automated, leading to reduced cycle times and labour costs.
Lack of procurement expertise
Without expertise in procurement or access to economies of scale, designs and specifications may not include optimal use of materials or components. This can lead to higher costs and inefficient choices, reducing profit margins.
Designs that don't consider future supply chain logistics (such as component obsolescence) can complicate material sourcing and inventory management, leading to production bottlenecks.
Design for testing issues
Do you know how you will test your product to ensure customer satisfaction? A comprehensive test strategy should be developed concurrently with your product design. This approach will result in a cost-effective test process with the best possible test coverage.
Environmental and regulatory compliance issues
Without considering manufacturing processes during design, products may fail to comply with environmental regulations (such as ROHS, REACH, WEEE), leading to legal issues and potential redesigns.
Conclusion
If your business is looking to explore new verticals or add new components into designs - you should seek advice from your EMS supplier at the very start of your R&D project. An integrated approach to design and manufacture is likely to make every part of your process and product more effective and cost efficient in the long run.
It could help you shrink the costs associated with poor quality, manufacturing delays, redesign, retooling and reworking. Adding value at key stages of your product lifecycle will increase your potential for profit.
For more information on How to calculate your total manufacturing cost (and control it) talk to ESCATEC Mechatronics Ltd