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.
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.
*Tooling is the cost to make the steel molds required to manufacture components. .
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.
When you pay your supplier
When you pay your Contract Manufacturer
When your customers pay you
When/How your product gets to your distributor
Gross margin represents the amount of money you retain after manufacturing that can be put towards marketing, R&D and profit.
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.
“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.”