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December 14, 2017

6 Factors Driving Manufacturing Costs

The word “money” is considered a marketing power word. Its use in a headline or caption will almost always grab your attention. Why’s that? Because it’s something we’re either trying to get more of or trying to hold onto.

So, you can probably guess the top-of-mind question for customers looking for a contract manufacturer. You guessed it: “What’s this going to cost?”  

It’s an important question — critical, really. But it’s also one that can’t even begin to be answered without an awful lot of prior conversation and exchange of information. The cost of doing business takes a lot of things into consideration including overhead, the price of raw materials, labor costs, profit margins and the manufacturing process your product requires. Our experience has shown there are six factors driving manufacturing costs.

Supply & Demand

When it comes to discussing the cost of raw materials for your project, there is no more important driver than supply and demand. Simply, the more people want an item, the more it will cost to purchase it. The same principle goes for your raw materials. Here's a purely hypothetical example: Let’s say your product needs natural rubber but a weather event knocked out rubber production in Southeast Asia. The remaining natural rubber will certainly go up in price. The price of synthetic rubber will probably increase as well since some manufacturers might opt to use it instead of natural rubber. It’s basic economics.

A good contract manufacturer looks out for their customer by:

  • Watching the trends - A good contract manufacturer pays attention to what's happening with the prices of commodities and materials.
  • Offering solutions - You want a CM that not only lets you know what could happen, but is proactive, already looking for alternate suppliers or materials.
  • Acting transparently - When you’re talking sourcing and procurement, you don’t want surprises, you want transparency. If there’s a change in price you want someone who informs you right away, so you have as much time as possible to come up with a solution. Sometimes the manufacturer will absorb the price increase for the first month, then pass along the increase the following month.
  • Providing reciprocity - Likewise, if a customer knows the cost of a material has dropped significantly, they will often ask the manufacturer for a price break. Is your contract manufacturer open to that type of relationship?

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Manufacturing Process

The manufacturing process used to make your product is determined by what it is and how it will be used. Similarly, the process used to make the product affects the cost of the product. In other words, not all plastic products are created for an equal cost. For example, you can make a plastic part using different processes including plastic injection molding, compression molding and extrusion molding. Each process has pros and cons, cost is only one factor. The method you choose is not driven by cost but by application.

Volume

Usually, the more individual items you purchase, the less it costs. Costco, Sam’s Club and BJ’s Warehouse are demonstrations of the consumer's willingness to buy more to pay less. In the same vein, the more of your item that is manufactured, the less it will cost per item. This is also a way of determining what manufacturing process to use. For example, you wouldn’t die cast for a product with low volume because it’s not cost efficient — the cost of making the metal die and purchasing casting equipment is too high.

Test & Certifications

Your product might need special testing to earn certifications the market requires, like UL/ETL or FDA approvals. That cost is folded into the price quoted by your contract manufacturer. The testing process is complicated, expensive and can be lengthy. Our advice is to work with a CM that has experience in this area. It’s also helpful to have a project manager overseeing this process.

****Read more about How a Project Manager Sets You Up for Success ****

Labor

The higher the costs of labor, the more it costs to produce. Labor costs have been a chief driver in moving manufacturing overseas and with good reason. That said, labor costs are rising in some countries causing a shift in manufacturing locations. An experienced CM can help you find the best labor pool for your project at the best price.

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Uncertainty

Economies don't like surprises. The reactions tend to be swift and sharp. In this global economy, the immediacy of information means that markets can fluctuate for reasons that wouldn’t have caused a shift in the past. Speculation around a nation’s political or economic health can cause currency fluctuations that can affect the price of materials or labor.

We get it. You want concrete answers to your money questions. But keep these factors in mind when you’re wondering “How much will it cost to make my…” A reputable contract manufacturer won’t be able to throw a figure back at you right away. 

Learn more about what a contract manufacturer needs from you by downloading our free pricing checklist below:

 Download-Pricing-Checklist-What-a-Manufacturer-Needs-from-You

 

 

Filed Under: Contract Manufacturing, Pricing, Sourcing Materials, Procurement