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Decrease Cost in the Manufacturing Process

To decrease overall costs, you have to pull different levers at different stages of manufacturing, from the design phase to ongoing production — and you have to know which levers to pull.

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Your overall costs are far more than the sum of your Bills of Material (BOM)

Your company needs to understand the true Cost of Goods Sold (COGS), which is how much you pay for each unit. On top of this, you also need to understand the fixed costs, which includes items such as tooling, stencils, test fixtures, Non-Recurring Engineering (NRE) (ie. engineering services), pre-production samples, safety compliance, etc.

The product's material costs = the COGS

Many companies assume they can sum up the Bill of Materials (BOM) cost and arrive at the COGS. They must also include labor, scrap, factory overhead and profit as well, which can be significant. For large items, logistics (i.e. shipping) can also add up, especially if the products need to be air shipped to meet a schedule.

Retail Price
Retail Price The price at which the Retailer sells your product to their customers.
Gross Margin Percentage
Gross Margin Percentage (Net Sales Price - COGS) / (Net Sales Price), expressed as a percentage.
Retail Margin Percentage
Retail Margin Percentage (Retail Price – Net Sales Price) / (Retail Price), expressed as a percentage.
Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS) The sum of material cost, manufacturing overhead and labor costs of the product you’re selling (i.e. what you pay the factory for each unit). Often, the costs of transportation and warehousing are added, producing the total cost per unit of delivering a product to your customer.
Net Sales Price
Net Sales Price The price you sell the product to your customer, including any adjustments to include the effect of commissions, discounts, and allowances and for estimated returns. If you are selling Direct (e.g. through your website), this is the end customer. If you are selling through a Retail channel (e.g. Target), then this is the customer. As a side note, in the case of Retail, you effectively have two different customers to satisfy.
Unknown Unknowns
Unknown Unknowns The price you sell the product to your customer, including any adjustments to include the effect of commissions, discounts and allowance and for estimated returns. If you are selling Direct (e.g. through your website), this is the end customer.

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COGS Drivers

Your Design

  • Material and Component Selection 
  • Fabrication Method 
  • Manufacturing Efficiency (First Time Yield, machine tonnage, assembly labor, number of operations, etc.) 
  • Quality Requirements (driven by requirements / Voice of Customer) 
  • Packout (replaceable vs. rechargeable batteries; packaging; spares, etc.) 
COGS Drivers

Manufacturing Partner

  • BOM Transparency
  • Profit Margin 
  • Labor Rate 
  • Currency 
  • Geographic Location (shipping, tariffs, etc.) 
  • Capability (in-house vs. outsourced) 
  • Supply Chain (Purchasing Power, volume (piggy back), Consigned vs Purchased, etc.)

Model Price Breakdown

Screen Shot 2019-07-17 at 2-05-38 PM

Non-Recurring Engineering

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Non-Recurring Engineering (NRE) refers to one time / fixed costs that will be incurred to manufacture a product as represented by the diagram above.

*Tooling is the cost to make the steel molds required to manufacture components. .

COGS values

Once the COGs values are known, the hidden killer becomes the payment terms with both the factory and also the end customer.

By negotiating better terms, it is possible to significantly reduce the working capital requirements.  

Component terms
When you pay your supplier

CM terms
When you pay your Contract Manufacturer

Customer Terms
When your customers pay you

Shipping
When/How your product gets to your distributor

Understanding Gross Margin in Hardware

Gross margin represents the amount of money you retain after manufacturing that can be put towards marketing, R&D and profit.

Learn More

Get Your Complete Guide to Decreasing Manufacturing Costs

Understanding your manufacturing costs will help you be successful. Know everything from Cost of Goods Sold to Gross Margin to better negotiate terms with your supplier, CM and end customer.

Read the Guide 

I'm glad we went through Dragon. They really helped with understanding all the costs associated with this product domestically and overseas. If we break MOQs for overseas manufacturing we will definitely pursue with Dragon's RFQ and PM services.

Mark Klibanov
Co-founder and Chief Product Officer, Gesture Logic

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