Manufacturing is costly, and it can be difficult for a new business to know how much things will cost. To ensure you plan adequately before your product launch, here are some tips for estimating product costs early on.
Experts estimate that the average manufacturer’s margin is around 20%. This means that every $100 worth of goods produced by a manufacturer result in $80 or less available to cover all expenses incurred by the company through sales revenue.
It’s important to note that this does not consider distribution fees, retail markup, customer service costs, etc.; however, this gives us an idea of what manufacturers should expect as far as a margin percentage. For businesses with tight margins (10-20%), the cost of manufacturing must be kept down to avoid losing money.
Startups that plan accordingly upfront will be at a significant advantage over those who wait until the last minute to figure out how much each unit of their product costs. Tracking manufacturing expenses can help businesses forecast final retail prices and calculate profitability. Knowing these numbers before you launch saves you time, effort, and money in the long run.
Collections & Interactions
The first step in efficiently tracking your production is gathering accurate material cost estimates. This means knowing exactly what supplies are needed for each production unit on top of expectations for scrap rates during processing (materials that cannot be used due to defects or inconsistencies).
Lightweight paper goods tend to have higher scrap rates than heavier materials like metals, plastics, and rubber.
It’s essential to set up a system such as MRP software that allows you to keep track of these costs ahead of time. This way, if you find yourself running low on a key material or needing additional supplies closer to production time, you can place an order without any last-minute surprises.
A simple excel spreadsheet with categories for each manufacturing expense (including labor) is the easiest way to collect these estimates.
You would then track unit costs as they change with market fluctuations, product changes, and supplier discounts/pricing deals over time so that when it comes time to finalize your pricing structure for your first production run, accurate projections are easy to come by.
Customization & Flexibility
The next step is to track how much time is spent on each unit of production. Start doing this from the beginning, so you have a good baseline that shows how the manufacturing process scales with increased or decreased workload.
Assembling products can be broken down into multiple processes, including cutting, drilling, grinding, buffing, finishing, cleaning & polishing, assembling & disassembling tooling/dies/molds, and more depending on what your product entails. These tasks may have different labor rates associated with them, so it’s essential to keep track of time spent during each step in the process.
Estimated efficiencies for these operations will also factor in overhead costs such as maintenance and facility expenses, separated from direct labor costs when calculating total costs.
Projections & Timelines
Since the amount of time spent on each unit will fluctuate, it’s important to know how many units can be completed per month, given your current resources and expected workload. This allows you to better adapt to any changes in demand so that you aren’t stuck with too much or too little inventory at one point in time.
Manufacturing has many moving parts, so even small changes to the process can have big effects on total costs, which is why every step of the manufacturing process must be tracked over time. By keeping an accurate record of all expenditures associated with production, businesses can limit their risk and capitalize on opportunities as they arise.
