The manufacturing costs to take into consideration when planning your production

There are many things that can affect the cost of manufacturing your products.

Below are some of the items to not forget about when planning your production run.

Also, as an aside, you do not have to do your manufacturing in China or elsewhere overseas.  Yes it can be cheaper, but just keep in mind it is not always the best option; especially when just getting started.  Read more about how some companies are bringing their manufacturing back to domestic factories.

Samples – These are the first units you order from your chosen factory.  They are not like prototypes in that you should not be tweaking design after ordering.  No they are just to prove the factory’s capabilities and processes.

Tooling – Some products, specifically items that are injection moulded or die cast require significant upfront costs.  This is used to pay for the tools required during the manufacturing process.

Materials – The cost of the product is highly dependant on the cost of materials used.  In fact, the tooling costs can change as well because some materials require more or less expensive tools, inserts, etc.

Labour – The amount of time that people have to spend making your product, the more expensive it can be.

Tolerances – The tighter the tolerances you require – that is how exact your dimensions have to be followed – the more expensive your manufacturing costs will be.  Only specify the tightest tolerance you have to have.

Surface finish – A rough surface finish is generally cheaper, while a mirror polish is generally rather expensive.  The least expensive is not specifying a finish and living with what the tooling naturally provides.

Polishing – Related to Surface Finish above, requiring a polishing step in your process can add to the cost.  This step is typically done by hand and you will be paying for it by the hour.

Deburring – Machined products that have pockets or holes in them, or sharply machined edges, may require a step to remove burrs from these edges.  This is also a manually performed step but greatly increases initial quality and reduces the risk of injury.

Cleaning – Sometimes you may have to include a cleaning step in your process.  This could just be a spray while on a moving conveyor, or require a worker to wipe the product down with acetone or another solvent.

Painting – Spray painting or powder coating will certainly improve the appearance of your product, but also adds to the costs.  Anodizing, plating, and other forms of coloration can also be looked at.

Inspection – If you require tight tolerances or somehow need rigorous inspection, this adds to the expense.  Typically a manual process, CMM can also be used where appropriate.

Shipping – Shipping costs depend on carrier, speed, quantity, weight, size, and distance travelled.  Keep in mind that even shipping containers have weight restrictions – you may not save money by using a 40′ ISO container vs a 20′ because you are already over the weight allowance.

Import Tariffs – Highly political, continually changing, and depends on where the items were made, assembled, and where you are shipping to.  Take advantage of free trade and other treaties.  NAFTA is a good example.

Warranty Costs –  low-quality vs. higher cost of high quality – not always obvious.  Sometime the increase in quality (decrease in warranty costs) does not outweigh the increase in manufacturing, materials, or labour.  Do the math!

Warehousing – If you keep a domestic stock of your product, there is a cost associated with it.  Rent, utilities, taxes – all apply here too.

Assembly – Do not forget to factor in the costs of assembling your product.  It may be more cost effective to ship the parts from an overseas manufacturer but assemble the product at your location.  This could save on shipping costs and allow you to perform pre-delivery inspections (though you probably can’t charge for it like a car dealership)

Minimum Order – If you are not hitting your factory’s minimum order requirements, they could still be filling the order but at a premium.  Periodically take a look at product turnover rates and factory minimum order requirements.

Volume Price Breaks – Similar to the above, most manufacturers will give you a better price if you order a larger quantity of goods.  Look to see if you can take advantage of any price breaks.  Of your supplier does not offer any – ASK.

Forecasting & Longer Lead Time – Finally, related to the two concepts above.  Providing a forecast (usually a moving 12 month prediction) will get you a better price.  This allows them to better plan their production.  Be honest though, it wouldn’t be appreciated if you never order the quantities you predict.  Also, allowing them to take a longer time to produce your goods can offer a price benefit.  This allows them the flexibility to quickly make product for their other customers that did not plan as well as you did.

Dangerous of too much inventory vs. benefits of having items on the shelf – Inventory is expensive, takes up space, and ties up your cash flow.  But in some industries you only get the chance to make the sale if the item is on the shelf.  Thios is particularly true if you are the new kid on the block.  You will get the shot at making the sale if you have something on the shelf that your established competitors do not.  This has always been a great way to get yourself an ‘in’ with a pillar customer.  No two companies are alike and nobody can do this for you – take a very close look at your inventory.

Extending Terms – If you are extending payment terms to your customers, you are essentially in the banking business along with the product business.  The debate on whether or not to extend terms is ongoing.  Yes it is a risk and is more stressful, but many large companies will not do business with a company that does not extend terms.  The most common time frame is “Net 30 Days”, but 15 or 60 days can also be used.  Possible solutions to this are offering discounts for invoices payed in full in 10 days, or asking for a downpayment up front to help pay for materials.  Every business and every deal is different.

Accounts Receivable Factoring – If you find that you do need to extend credit to your customers, but that your cash flow is not where it should be, then factoring is a possibility for you.  This allows you to essentially sell the future receivable for cash today.  Of course, you pay a premium for this benefit, but is much better than running out of cash to pay your factory or to cover payroll.

To increase your competence in business finance and reading the numbers, I highly recommend this book.

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