We understand rolling out new products isn’t cheap, but knowing how to reduce your manufacturing costs can make a big difference in your overall production budget. Labor, materials, and overhead costs are three essential areas to consider for your manufacturing costs to be easier on the pocket. Please read below and learn the ten critical factors for managing manufacturing costs for your company’s new product designs without compromising quality.
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Why companies need to understand their total manufacturing costs
While it can be gratifying and exciting to have your own manufacturing business, sometimes, it can be tricky to manage and earn enough profits. Determining your total manufacturing costs, including 3D design, invention design help, product engineering services, etc., can help you quote and price your products most profitably. It also eliminates the need to quote rates that are not necessarily related to cost and has something to do more with competition instead.
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Some manufacturers often make several mistakes that often affect their business process, and these include the following:
- They fail to analyze estimated or “actual vs. standard” costs after the completion of the shipment.
- They make decisions regarding work they should or shouldn’t take according to the lack of accurate cost information.
- They misunderstand the relationship between productivity or efficiency about cost.
- They price their quotations or products based on gut instinct instead of factual data.
Understanding your company’s fully burdened manufacturing costs is crucial for various reasons. First, these costs are the basis for establishing your specific pricing strategies, and these costs also determine the ability of your company to compete. Finally, manufacturing costs can also serve as the basis to make you qualified as a vendor to your target customers.
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Help identify target markets.
Pricing strategies can help you identify the markets that you should or can target. Being aware of your manufacturing costs can also have a significant effect on your quotation process. It enables your company to develop strategic changes and stay competitive in future and current markets. Your manufacturing costs, for instance, can help determine if you can remain a low-cost producer. In addition, identifying the overall costs of manufacturing new features, you plan to incorporate into your products will help you price your new product designs accurately, ensuring the highest profits possible.
Pricing new products
Also, if you wish to enter a new market, the manufacturing costs will help you know how much it will cost you to do so and will let you price your items accordingly. If your manufacturing costs are higher than those of your competitors, you might have difficulty succeeding in the market you plan to enter.
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Profitability level
The growth in your company’s sales is determined by your ability to manufacture competitive products at a cost that will allow a profitability level that can benefit your organization in the long run. Entering specific markets just for entering one without a solid understanding of the cost to deal in that market is a surefire recipe for disaster. Since competition will determine your market selling price, knowing your actual costs will allow you to make better decisions when pricing your new 3D product designs.
Difference between manufacturing costs and production costs
Manufacturing costs and production costs are terms that are often used interchangeably. However, these two are different concepts. Production costs reflect all expenses related to how a company conducts its business. Manufacturing costs and prototyping design services, on the other hand, represent only the specific expenses that are essential for making the product. These two figures evaluate the overall costs of running a manufacturing business. The particular revenue that a company generates should be more than the total expense before it becomes profitable.
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Production costs
Production costs include most of the variable and fixed costs of running a business, and labor and raw materials are production costs.
- Fixed costs – often include advertising budget, building rent, business equipment, and other miscellaneous expenses that don’t increase or decrease with moderate changes in the business’s volume.
- Variable costs – go up and down as the production volume also changes. Other variable costs are wages, supplies, and other expenses that can change with the production level.
Manufacturing businesses compute their total expenses for every item’s production cost. Of course, this number is essential to set the item’s wholesale price to identify whether the new product design is profitable. When the production rate increases, the company’s revenue also increases, with the fixed costs remaining steady. As a result, the cost to manufacture each item will decrease, helping the business earn more profit. A lower fixed price per item can motivate a company to grow its production to its total capacity. It lets the business achieve increased production marketing after considering all the variable costs.
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Manufacturing costs
Mostly, manufacturing costs are sensitive to changes in production volume. Total expenses of manufacturing will increase together with the increase in production. The opportunity to get a lower fixed price per item motivates most businesses to continue to grow their output to the total capacity. There are no substantial changes in the per-item costs. But still, additional production will always generate additional costs of manufacturing.
As mentioned earlier, manufacturing costs are the three broader categories of expenses: labor, materials, and overhead. These are all direct costs, which means that the salary of the accountant of the company or the supplies in the accountant’s office is not included here. However, the foreman’s supplies and compensation are. To put it simply, the production costs of a factory are the overall expenses of conducting business. The manufacturing costs are expenses directly connected to building a product, for example, new product design, product engineering services, etc. Manufacturing and production costs should be included in calculating the per-item cost of conducting business.
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Direct labor costs
Direct labor costs are mainly made up of wage spending that can be consistently and assigned explicitly to manufacturing a product. In addition to regular wages, direct labor costs can also include the following:
- After-hours pay
- Health insurance
- Profit share contributions
- Leave entitlements
- Matching payments to retirement plans
- Redundancy payouts
- Time in lieu
- Travel expenses
There are three essential factors to consider to help reduce and manage direct labor costs:
1. Avoid overscheduling staff
A widespread mistake that most owners of manufacturing businesses often commit is unnecessarily scheduling their staff members for shifts. Most of the time, managers will try to guess the number of staff required for a certain period.
Unfortunately, this is a hit or miss method that sometimes results in overscheduling. As a result, it can increase costs because employers will end up paying wages for staff members who are not needed in the first place. To prevent these unnecessary expenses, your company can consider using scheduling software to automate the process according to the past week’s demand.
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2. Use the right tools to optimize processes
You might not realize it, but many small businesses still manage their time, resources, and staff the old-fashioned way using the odd Excel sheet or pen and paper. Although these methods may be enough for new businesses, they may not be sustainable as a company starts to grow. It is why it is recommended for companies to use SaaS software for point of sale, payroll, accounting, inventory management, and more. Using the right tools can help you reduce unnecessary costs often associated with excessive stock orders and overstaffing concerns.
3. Review hours and wages of staff
This might also be the best time for you to review your staff’s wages. Do you need all the staff members who are on the books at the moment? Can you retrain some of your team to perform new roles to add more value to your company? Since a significant amount of your budget goes into hiring and keeping your staff members, ensuring that every dollar is well-spent is vital.
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- Salary raises
In general, staff income can go up after some time. Before you confirm any raises in pay, make sure you know how much similar companies are paying for those roles. Try to delay any salary increases until the right time comes when it becomes appropriate. It is also essential to have clear and transparent communication with any affected staff and inform them if there is anything they can do like upskilling.
- Staff turnover rate
The staff turnover rate is one of the most related costs. If your company has a high staff turnover, it can make the business prone to incurring huge costs because of the constant need to go through the recruitment process. Hiring new staff also requires advertising which can be expensive. Working with recruitment agencies that can help with hiring or using freelance design services might even be necessary. To avoid this problem, try to reduce staff turnover as much as possible by identifying the specific reasons why people leave in the first place.
You might want to talk to your employees to learn their perspectives on the issue. For instance, does it have anything to do with the workplace culture? is it pay-related? Are some roles starting to feel like a revolving door, and if yes, why is it so? Raising these questions is the secret to addressing problems related to staff turnover. Aside from this, you might also need to consider if all staff members should be full-time or if you can reduce some roles to part-time. It will also lower costs to let you use cash somewhere more important.
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Material costs
Costs associated with direct materials are known as material costs, which can be easily associated with production. These material costs can include everything from raw materials, energy, and fuel costs to spare parts and packaging designs. These often make up a large part of total costs, making it a significant concern for most manufacturing businesses.
What can manufacturers do to lower material costs, then? Reducing manufacturing costs is not only about staff expenditure. Companies shouldn’t just limit themselves to this particular approach alone. You can try to follow the four strategies below to reduce and manage your material costs:
4. Purchase materials only when necessary
Most companies often make the common mistake of ordering more inventory than needed. Excess stock will only reduce your cash flow and ability to turn to your company’s backup funds. It is why business owners should be thorough as far as ordering their stocks is concerned. The best practice here is to use inventory software that can accurately predict future demand according to sales trends in the past instead of just making a wild guess. You can also consider if a just-in-time approach will also suit your business. It is an approach where stocks are ordered respectively when you make more sales.
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5. Negotiate with your suppliers
The skill of being able to negotiate prices is something that comes to you naturally. It is recommended for business owners to carefully think and plan how to deal with suppliers and make sure that they remain strategic when agreeing on costs. Establishing a genuine and solid supplier relationship is the first step here. After you build good rapport, you will feel less uncomfortable negotiating money.
6. Redesign and review processes or products
Manufacturing processes and products can sometimes become inefficient. It will be best to regularly review your processes and products to calculate their value and how much they will cost you. You can then redesign the processes or change your consumer product design to enhance efficiency. A coffee shop owner, for instance, realizes that his expenses are higher on materials than the current industry benchmark. He decides to review the products, and among them, he discovers that one of these requires packaging that is more expensive than the others.
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The owner evaluates the packaging material and learns that the function is the same, with no additional value compared to the rest of the products. However, it only adds more to the total costs of materials; therefore, he needs to rethink his packaging concept design. He switches the pricey packaging material for the standardized packaging material used for the rest of the products. He gets to save more than he expected because he can now have a bulk purchase of the packaging materials.
7. Replace pricey materials with their more affordable counterparts
Never make the mistake of using the same raw materials for all your products throughout the life cycle of your business. As your company grows, you also need to consider using alternative raw materials that produce similar or identical end products that are more economically sustainable. For example, consider how you can use alternative materials for cheaper DFM designs or recycle certain materials into brand new products. These small changes can dramatically help you lower your manufacturing costs.
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Overhead costs
Overhead costs include gas, electricity, manufacturing site maintenance, supplies for staff such as uniforms, vehicles, printing, and the rest of the related expenses. Lowering overhead costs may be vital to reducing overall manufacturing costs and can help free up some cash you can use for other aspects or areas of your business.
8. Consider how you spend your maintenance budget
Many business owners often neglect maintenance costs because they see these as a necessary evil. Business owners and managers must regularly review maintenance costs to ensure that they are not unnecessary or excessive.
9. Go through the miscellaneous warehouse or office costs
Additional costs you must consider for your manufacturing businesses or companies include staff supplies, office supplies, staff vehicles, fuel, cleaning services for the staff rooms, security keys, uniforms, and other miscellaneous costs. Like anything else, these small things can quickly add up; if you check carefully, you might find room for improvement.
Be sure to go through these smaller costs and check that you don’t overspend on unnecessary stuff or pay more than you need. For instance, you can try switching to a different coffee or office stationery brand. It will not be such a drastic change to everyday life, but you will soon learn how it can dramatically lower your overall costs.
10. Review rental expenses
Many owners of new businesses often neglect their rental costs. Since it is a significant expenditure, it may seem like there is no way that you can cut back on your expenses in this area. But it is necessary for all manufacturing businesses to regularly review their rental costs, regardless of whether they only have one or two sites and warehouses or more.
Consider if the rent you pay for the sites or locations is worth it. Is your profit from that site higher than your rental cost? If not, you might want to look for a smaller space or reduce the number of rental locations.
How Cad Crowd can assist
Whatever stage of the product development cycle you’re currently at, Cad Crowd’s design services are available to help you realize your project’s goals. Whether you’re looking for CAD design, manufacturing, or patenting services, our network of product design experts is at your service.
