Reduce Cost of Goods Manufactured (COGM)

Cost, cost, cost, the eternal topic in every project.

When we talk about reducing costs in the supply chain, we’re actually talking about reducing the overall costs, instead of just part of costs in the supply chain. Because fixating too much on a single spot could lead to the cost increase in other areas, which is definitely not what you want to see in your project.

That said, it’s still crucial that you know how many types of costs your project consist of. This is important in helping you make plans to reduce the overall supply chain cost.

In this post, we’ll talk about one of the them: the cost of goods manufactured. Hope it could give you some insights into the topic and hopefully help you make better spending decision.

What is cost of goods manufactured?

What cost of goods manufactured entails is actually pretty straight forward.

To manufacture a good, you’ll need direct materials, direct labor salaries, and all the rest manufacturing spending (the overheads) that make your product idea into an actual product that you can sell.

All the costs happening in making the product can be counted as the cost of goods manufactured, or short for COGM.

In a nutshell, here is the formula:

*The cost of goods manufactured = direct materials + direct labor cost + manufacturing overhead assigned. *

Why reduce the cost of goods manufactured?

Just like any other types of costs, reducing the cost of goods manufactured could be a strong boost to your business. To break it down for you, by reducing the cost of goods manufactured, you can:

Increase profit margin

This is the most important reason why you should always reduce the cost of goods manufactured. In fact, increasing company profit margin is the top reason why you want to reduce the project cost. After all, company profit is what sustains your business.

Maintain business sustainability

With the profit margin increased, it’s natural that your company would put more effort in investing the sustainability of your business. That said, your company is more likely to build its reputation and brand, and in the long run, add more value to your business.

Increase customer satisfaction

Reducing the cost of goods manufactured means that you need to reduce the cost of direct material, or increase working efficiency, or do both at the same time.

Keep up with the industrial trend

It’s not uncommon that a certain industry is left behind when it refuses or fails to keep up with the advanced technology. This is also true in hardware manufacturing. With the profit margin achieved, your company will be more likely to invest more in research and development. This is how you can keep up, or even lead the industrial trend.

How to reduce the cost of goods manufactured?

With all that being said, it’s time for us to see what the real money is: how can you reduce the cost of goods manufactured (COGM)?

Here are 3 areas that are perfect for you to start from:

Customer oriented

This means shortening the order management cycleensuring on-time delivery and increasing product quality.

1. Shorten order management cycle

Order management cycle refers to the period of time when a customer place the order, to they receive the goods from the manufacturer. This plays a crucial role in increasing customers’ trust in a business.

To reduce the overall time spent in the order management system, your company can try to map out new logistics strategies, best utilize the ERP system, and re-allocate the delivery resources to best fit your markets.

2. On-time delivery

On-time delivery helps tremendously in increasing customers’ satisfaction in a business.

Fail to deliver goods in time could lead to more costs in the overall supply chain. For instance, calls will be made, emails will be sent, and logs and inventory will be double-checked. None of these add value to your product, and they cost you customer satisfaction in the end.

3. Increase product quality

The higher quality your product is, the less you’ll have to spend on it.

It may sounds a bit counter-intuition, but it’s true. To make higher quality product requires that you and your manufacturer can anticipate and fulfill customers’ needs. This is part of what makes your product stands out from the crowd, so you don’t have to waste a bunch of money to learn the hard lesson of always stick with quality products.

Focus on the product

By focusing on the product itself, you earn more opportunities for your business.

To do so, you can count on lean manufacturing, and six sigma methodology.

1. Lean manufacturing

Lean manufacturing is more of an approach to reduce waste in the manufacturing process. It strives to find a way to make high quality product in the most efficient and economic way. with less labor resources, inventory, time and space. To know more about it, feel free to read Lean supply chain to reduce product or project costs.

2. Six sigma

Define, measure, analyze, improve and control. This is also called the DMAIC method.

By adopting this method, you and your team review each project at its final stage, so you can get to the root cause of the problem, and find mitigation plans for them. This is how you can make sure that you’re actually solving problems, not just putting out fire or postpone them to a later time.

Focus on the process

Find ways to reduce product types, standardize design and raw material purchasing processes are where you can start with the process-focused methodology.

Reduce your product types, so you can better cater to your customers’ needs. In addition, you can reduce the number of your suppliers and shutdown low-efficient factories. This is how you can reduce the costs.

By standardizing the design and purchasing processes, your company is on the way to purchase raw materials with less money. This also makes customization possible.

The above 3 areas can’t work well without every one in the company pitching in. With reducing cost of goods manufactured surely being an important part for the company’s goal, it’s crucial that the employees receive proper training and have enough motivation to realize it.

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