A penny saved is a penny earned. On the manufacturing front, it couldn’t be more true. Reducing product costs to save overall expenses is one of the eternal goals of the project management. After all, lower product costs mean bigger market competitiveness and thus better business profitability.
Speaking about reducing product cost, there are two things that you can do: save more and spend less.
On the save more front, here is the rough equation of product cost:
Product cost = material cost + overhead + labor
By reducing the material, overhead and labor costs, you’re saving more.
On the spending less front, negotiating for a better deal, finding alternative product sources, and spotting opportunities to cut down unnecessary expenditure are good starters.
To better help you identify project cost drivers and reduce the overall expenses, we break the overall product costs down to the following 5 aspects. Read and see how you can save more and spend less for your product.
Material cost
The material refers to all the materials, parts, assemblies, sub-assemblies, and components required to build the product. When multiplied by each of the required quantity, you’ve got the material cost.
It’s a good starter if you ask your supplier for a bill of materials (What is a Bill of Materials (BOM)?), from which you can pretty much get most of the helpful information you need.
When you get a hold of the bill of materials, ask yourself:
- Are there alternative materials and parts that can achieve the same function?
- Can I negotiate with the supplier for a better pricing if I promise to buy a large quantity over time?
- What parts are unnecessary and can be eliminated from the product? (This is more often seen at the product early stage.)
Try to find out opportunities to cut the material cost, and you’re on the right path to a lower product cost.
Labor and overhead costs
Labor costs include wages, payroll taxes, pension contributions and insurance you spend in recurring workers that helps with the assemble and manufacture of the product.
The overhead costs are what’s necessary to make the product. For example, property taxes, facility rents and utilities are some of the examples of the overhead costs.
Te reduce such costs, here are some tips that might be of help:
- Automate and outsource non-critical tasks;
- Standardize the assembly line, or choose a supplier who is capable of process and part standardization and automation;
- Rent rather than buy office equipment;
- Replace fixed wages and salaries with commissions or fees;
- Move to a cheaper working space.
The above tips might not work for companies of various sizes, so be discreet and go for the ones that actually work for you. After all, it’s a big decision to make for every member in the team.
Non-recurring expenses (NRE) costs
Non-recurring expenses refers to the one-time up-front costs for newly designed or updated product. Your supplier usually charges you for the NRE costs for tooling and programming. For more information about non-recurring expenses, feel free to move on to here: What is NRE (non-recurring engineering) cost?
When you receive the NRE invoice from your supplier, check to see if you can minimize the cost by:
- Designing a physically small PCB (printed circuit board) and only incorporate only necessary multiple layers;
- Increasing the quantity of your order and panelize multiple projects;
- Picking only the trustworthy and reputable supplier for long term co-operation.
Even though some NRE costs are unavoidable, all hopes are not lost. There is always something that you can do.
Purchase price variance (PPV)
Product purchase variance, also known as purchase price variance, is a great way of telling you whether your spending on the product is above or less than the planned number. In other words, whether you’re saving for your company. Here is more about Purchase Price Variance (PPV): Calculated for lower costs and better profitability if you’re interested.
If you don’t have a product purchase variance report, or you don’t think the one submitted by your supplier tells you what you need to know, here is a free template for you to download: PPV report template.
With the product purchase variance, you can well see for yourself whether you should switch to the alternative product material, or even to a new supplier, to cut the costs and save more money.
E&O costs
E&O stands for excess and obsolete. E&O inventory refers to products that have reached the end of their product life cycle. In other words, there is no market for them anymore.
To reduce the excess and obsolete inventory costs, here are some ares that you can pay attention to:
- Liquidate obsolete inventory;
- Donate the excess and obsolete inventory for tax reduction;
- Re-market some of the E&O items;
- Sell the excess and obsolete items at a discount;
- Bundle products.
That concludes what we have to say about product cost reduction.
Frankly speaking, the cost reduction procedure can be far more complicated than what you might expect. And here are just 5 of the most important areas that you should pay attention to. If you can, find some professionals and experts to help you with the cost reduction process. The spending would pay back much more than you think.
Want to reduce your product and the overall supply chain cost? Feel free to reach out and see how Insight Solutions Global achieve your goals for you.
