East West Manufacturing Blog

Contract Manufacturing Product Pricing | Factors to Consider

Written by Andy Reese | March 09, 2017

When a contract manufacturer sends you a quote, there are three typical responses.

  1. Wow, that’s a bargain!!!
  2. Eh, that’s about what I expected.
  3. THAT MUCH!! Are you kidding me?!

Whatever the reaction, a good contract manufacturer can provide you a costed bill of material (BOM) so you know which categories are driving your cost.

So, what are the key categories? Glad you asked.

MATERIAL          

This includes raw material. You ask for plastic, for example, we ask what type (ABS, PP, PE, etc.) and what grade? Does it need to be fireproof, exposed to cold temperatures or in touch with human skin? Does it need to be low odor? Do you need to verify origin, content or quality? Can you accept a percent or regrind? Plastic is plastic but it needs to meet your specific requirements.

Hardware: Nuts, bolts, perhaps a power cable if it’s an electronic project. These are typically fasteners or sourced components.

Electronics: What grade (for automotive), what manufacturer and are alternatives an option?

OVERHEAD & MARGIN 

Just like your company, your contract manufacturer pays for the equipment, land, building, raw materials, long lead items, interest, insurance, taxes and even make a little margin to reinvest back into new equipment, more land, another building…you get my drift.

PACKAGING

How do you want this packaged? Individually wrapped, boxed, bulk, perhaps retail
packaging, blister packs, individual bags, corrugated boxes, pallet quantity, box quantity, single layer, maybe bubble wrap. The list of options and variables is quite extensive.

 

 

FREIGHT (and maybe DUTY)

And don’t forget the shipping and logistics aspects of your product pricing. This is a complex segment of the pricing equation. These include Ocean, Full Container Load (FCL), Less Than Container Load (LCL), air freight, truck, expedited, need-to-clear customs, any import/export VAT or monetary exchange fees. If your contract manufacturer doesn’t handle this for you, you’ll need to find someone or a team who will.

 

TOOLING 


Do you need a multi-cavity or single cavity tool? How many shots should it last? What 
grade steel? Who owns it? Will your contract manufacturer guarantee it for the life of the project or just the life of the tool?

 

 

COST OF QUALITY

If you have a product requiring assembly, will there be a need for test fixtures or assembly fixture? How long should each product be tested (possible test for heat, or function, or lifecycle). It’s amazing that testing is typically the most underestimated factor in the overall cost of quality. You want your product to be right, every time it leaves the factory. Every factory.

 

THIRD PARTY COMPLIANCE

Does your product need to approved by UL, ETL, CSA, perhaps FDA? It takes time and money to receive validation after thorough third party agency testing. Can your contract manufacturer do the testing for you? Should they? Discuss those costs at the beginning. No one likes surprises, especially when they’re unanticipated price increases. 

 

VOLUME DISCOUNTS     

You can break this down into:

  • How many products per year and at what buying cycle do you really need, and can commit to? (Example: 12,000 per year, 3000 per quarter, 1000 per month.). This is EAU, Estimated Annual Usage, and helps your contract manufacturing partner account for all the other variables to arrive at the best price for you.
  • Purchase minimum order quantity (MOQ). For example, electronic components typically come in reels of 5,000. Anything less must be accounted for. (For example, what else can the CM do with those extra components that are custom built for your project of 3500?)

YIELD or SCRAP

As precise as manufacturers are, it’s inevitable to have a couple cosmetic or functional defects that requires the product to be reworked or scrapped altogether. You can typically budget for 1 to 2 percent at most.

LABOR

Even in our autonomous society where more robots are employed in manufacturing than ever before, you still need people. They need to inspect, move raw material, operate machines, inspect again, test, package, load and ship.

 

 

By now you get the picture. Imagine trying to “best guess” a quick quote when you have at least 10 categories that exist on a sliding scale. You want your contract manufacturing partner to be accurate with their quote. So be prepared to provide multiple levels of details so you know that if you compare one quote to another, you are comparing two very similar price targets (I.e. Apples to Apples).

And be prepared to be patient as well. The more complex your bill of material (BOM), the more factors, categories and time it takes to evaluate to determine a cost.

Here’s a a final scenario: Imagine you call a contractor to quote your kitchen remodel. You explain your vision, show the plans from the architect, and he walks to his truck and comes back in five minutes and says, “It’ll be $46,383.17.”

How much confidence do you have in that ‘ballpark’ quote? Exactly!

Are you ready to take the next step? Click the link below to ensure you've got all the i's dotted and t's crossed in your RFQ: