Managing Manufacturing Costs for Your Company’s New Products – 10 Key Factors To Consider

This post covers essential factors for managing manufacturing costs for your company’s new products. Hiring a 3D printing company to assist with rolling out new products isn’t cheap, especially when you’re mass manufacturing. Knowing how to reduce your manufacturing costs can greatly impact your overall production budget. Labor, materials, and overhead costs are three important areas to consider for your manufacturing costs to be easier on the pocket. Read on below and learn the ten key factors for managing manufacturing costs for your company’s new products without compromising on their quality.

Why companies need to understand their total manufacturing costs

While it can be very rewarding and exciting to have your own manufacturing business, managing and earning enough profits can sometimes be tricky. Determining your total manufacturing costs can help you quote and price your products most profitably. A professional product and concept design firm can help. This also eliminates the need to quote rates that are not necessarily related to cost and has something to do with competition instead. Some manufacturers often make several mistakes that often affect their business process, and these include the following:

They fail to analyze estimated or “actual vs. standard” costs after the completion of the shipment.
They make decisions regarding work they should or shouldn’t take according to the lack of real cost information.
They misunderstand the relationship between productivity and efficiency regarding cost.
They price their quotations or products based on instinct rather than factual data.

The benefit of understanding manufacturing costs

Understanding the fully burdened manufacturing costs of your company is crucial for various reasons. First, these costs are the basis for establishing your specific pricing strategies. These costs also determine the ability of your company to compete. Finally, manufacturing costs can also serve as the basis for qualifying you as a vendor to your target customers.

Pricing strategies can help you identify the markets you should or can target. Being aware of your manufacturing costs can also significantly affect your quotation process. It enables your company to develop strategic changes and stay competitive in future and current markets. Hiring a freelance design for additive manufacturing expert and knowing your manufacturing costs, for instance, can help determine if you can remain a low-cost producer. In addition, identifying the overall costs of manufacturing new features you plan to incorporate into your products will help you price your products accurately.

This will also ensure the highest profits possible. Also, if you wish to enter a new market, the manufacturing costs will help you know how much it will cost you to do so and will let you price your items accordingly. If your manufacturing costs are higher than your competitors, you might have difficulty succeeding in the market you plan to enter.

The growth in your company’s sales is determined by your ability to manufacture competitive products at a cost that will allow a profitability level that can benefit your organization in the long run. A DFM service can help. Entering certain markets just for the sake of entering one without a definite understanding of the cost to deal in that market is a surefire recipe for disaster. Since competition will determine your market selling price, knowing your true costs will allow you to make better decisions when it comes to pricing your products.

Difference between manufacturing costs and production costs

Manufacturing costs and production costs are terms that are often used interchangeably. However, these two are different concepts. Production costs reflect all expenses related to how a company conducts its business. Manufacturing costs, on the other hand, represent only the specific expenses that are essential for making the product. These two figures are used to evaluate the overall expenses of running a manufacturing business. The specific revenue that a business generates should be more than the total expense before it becomes profitable.

Production costs

Production costs include most of the variable and fixed business costs. Labor and raw materials are costs of production. Fixed costs often include advertising budget, building rent, business equipment, and other miscellaneous expenses that don’t increase or decrease with moderate business volume changes. Variable costs go up and down as the volume of production also changes. Other variable costs are wages, supplies, and other expenses that can change with the production level.

Manufacturing businesses compute their total expenses for every item’s production cost. Of course, this number is important to set the item’s wholesale price. When the production rate increases, the company’s revenue also increases with the fixed costs remaining steady. As a result, the cost to manufacture each item will decrease, helping the business earn more profit.

A lower fixed cost per item can motivate a business to continue growing its production to its total capacity. It lets the business achieve increased production marketing after considering all the variable costs.

Manufacturing costs

For the most part, manufacturing costs are sensitive to changes in production volume. Total expenses of manufacturing will increase together with the increase in production. The opportunity to get a lower fixed cost per item motivates most businesses to continue to grow their production to the total capacity. There are no substantial changes in the per-item costs. But still, additional production will always generate additional costs of manufacturing.

As mentioned earlier, manufacturing costs belong to the three broader categories of expenses: labor, materials, and overhead. These are all direct costs. This means that the salary of the accountant of the company or the supplies in the accountant’s office is not included here, but the foreman’s supplies and salary are. Simply put, the production costs of a factory are the overall expenses of conducting business. The manufacturing costs are expenses that are directly connected to building a product. Manufacturing and production costs should both be included in calculating the per-item cost of conducting business.

Direct labor costs

Direct labor costs are mainly made up of wage spending that can be consistently and specifically assigned to manufacturing a product. In addition to regular wages, direct labor costs can also include the following:

After-hours pay
Health insurance
Profit share contributions
Leave entitlements
Matching payments to retirement plans
Redundancy payouts
Time in lieu
Travel expenses

To help reduce and manage direct labor costs, there are three important factors to consider.

10 Key factors to consider for managing manufacturing costs

1. Avoid overscheduling staff

A common mistake that most owners of manufacturing businesses often commit is unnecessarily scheduling their staff members for shifts. Most of the time, managers will try to guess the number of staff required for a certain period. Unfortunately, this is a hit-or-miss method, sometimes resulting in overscheduling. Have you considered freelance product design for assembly services?

As a result, it can increase costs because employers will end up paying wages for staff members who are not needed in the first place. To prevent these unnecessary expenses from incurring, your company can consider using scheduling software that can automate the process accurately according to the demand in the past weeks.

2. Use the right tools to optimize processes

You might not realize it, but many small businesses still manage their time, resources, and staff the old-fashioned way using the odd Excel sheet or even pen and paper. Although these methods may be enough for new businesses, they may not be sustainable as a company starts to grow. This is why it is recommended that companies use SaaS software for point of sale, payroll, accounting, inventory management, and more. Using the right tools can help you reduce unnecessary costs often associated with excessive stock orders, overstaffing concerns, etc.

3. Review hours and wages of staff

This might also be the best time to review the staff and wages. Do you need all the staff members who are on the books at the moment? Can you retrain some of your staff to perform new roles that can add more value to your company? Since a significant amount of your budget goes into hiring and keeping your staff members, ensuring that every dollar is well-spent is important. In general, staff income can go up after some time. Before you confirm any raises in pay, make sure you know how much similar companies are paying for those roles.

Try to delay any salary increases until the right time comes when it becomes appropriate. It is also important to have clear and transparent communication with any affected staff. You need to inform them if there is anything they can do, like upskilling. The staff turnover rate is one of the most related costs associated with staff. If your company has a high staff turnover, it can make the business prone to incurring huge costs because of the constant need to undergo the recruitment process.

Hiring new staff also requires advertising which can be expensive. Working with recruitment agencies that can help with the hiring process might even be necessary. To avoid this problem, try to reduce staff turnover as much as possible by identifying the specific reasons why people leave in the first place. You might want to talk to your employees about their perspectives on the issue. For instance, does it have anything to do with workplace culture? is it pay-related?

Are some roles starting to feel like a revolving door, and if yes, why is it so? Raising these questions is the secret to addressing problems related to staff turnover. Aside from this, you might also need to consider if all staff members should be full-time or if you can reduce some roles to part-time. it will also lower costs to let you use cash somewhere more important.

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Material costs

Costs associated with direct materials are known as material costs, which can be easily associated with production. These costs include raw materials, energy, and fuel costs for spare parts and packaging. These often comprise a large part of total costs, making them a major concern for most manufacturing businesses. What can manufacturers do to lower material costs, then? Lowering manufacturing costs is not only about staff expenditure. Companies shouldn’t just limit themselves to this particular approach alone. You can try to follow the four strategies below to reduce and manage your material costs:

4. Purchase materials only when necessary

Most companies often commit a very common mistake, and that is ordering more inventory than needed. Excess stock will only reduce your cash flow and your ability to turn to your company’s backup funds. This is why business owners should be thorough as far as ordering their stocks is concerned. The best practice here is to use inventory software that can accurately predict future demand according to sales trends in the past instead of just making a wild guess. You can also consider if a Just-in-Time approach will also suit your business. This approach is where stocks are ordered responsively when you make more sales.

5. Negotiate with your suppliers

The skill of being able to negotiate prices is something that comes to you naturally. It is recommended that business owners carefully think and plan how to deal with suppliers and make sure that they remain strategic when agreeing on costs. Establishing a genuine and solid supplier relationship is the first step here. After you build good rapport, it will feel less uncomfortable for you to negotiate money.

6. Redesign and review processes or products

Manufacturing processes and products can sometimes become inefficient. It will be best to regularly review your processes and products to calculate their value and how much they will cost you. You can then redesign the processes or products to enhance efficiency. A coffee shop owner, for instance, realizes that his expenses are higher on materials than the current industry benchmark. He reviews the products and discovers that one requires more expensive packaging.

The owner evaluates the packaging material and learns that compared to the rest of the products, the function is the same with no additional value. However, it only adds more to the total costs of materials. He switches the pricey packaging material for the standardized packaging material used for the rest of the products. He gets to save more than expected because he can now bulk purchase the packaging materials. This is where a freelance packaging design service can be invaluable for your business.

7. Replace pricey materials with their more affordable counterparts

Never make the mistake of using the same raw materials for all your products throughout the life cycle of your business. As your company grows, you also need to consider using alternative raw materials that produce similar or same-end products that are more economically sustainable. For example, consider using cheaper alternative materials or recycling certain materials into brand-new products. These small changes can dramatically help you lower your manufacturing costs.

Overhead costs

Overhead costs include gas, electricity, manufacturing site maintenance, supplies for staff such as uniforms, vehicles, printing, and the rest of the related costs. Lowering manufacturing overhead costs may be key to reducing overall manufacturing costs. It can help free up some cash that you can use for other aspects or areas of your business.

8. Consider how you spend your maintenance budget

Many business owners often neglect maintenance costs because they see these as a necessary evil. Business owners and managers must regularly review maintenance costs to ensure that they are not unnecessary or excessive.

9. Go through miscellaneous warehouse or office costs

Additional costs you need to consider for your manufacturing businesses or companies include staff supplies, office supplies, staff vehicles, fuel, cleaning services for the staff rooms, security keys, uniforms, and other related miscellaneous costs. Like anything else, these small things can easily add up, and if you check carefully, you might find room for improvement.

Be sure to go through all these smaller costs and check that you don’t overspend on stuff or pay more than is necessary. For instance, you can try switching to a different coffee or office stationery brand. It will not be such a drastic change to everyday life, but you will soon learn how it can dramatically lower your overall costs.

10. Review rental expenses

Many owners of new businesses often neglect their rental costs. Since it is an important expenditure, it may seem like there is no way that you can cut back on your expenses in this area. But it is a must for all manufacturing businesses to regularly review their rental costs, regardless of whether they have one or two sites and warehouses or more. Consider whether the rent you pay for the sites or locations is worth it. Is your profit from that site higher than your rental cost? If not, you might want to look for a smaller space or reduce the number of rental sites.

How Cad Crowd can help

At Cad Crowd, we have a network of some of the best manufacturing services on the market. If you’re looking to get your product manufactured, CAD services, or if you’re at an earlier stage, let us help. Find out how it works today. Contact us for a free quote.