Let’s face it – you’re here because you have a product you want to produce, not because you are a financial forecasting guru. However, your success hinges on your ability to realistically model the costs of your production.
One of the best methods for cost analysis is called “should cost analysis”. This method of forecasting helps to document the estimated costs after researching materials, labor, overhead, and profit margins.
The benefits to should cost modeling include:
1) Price Control. When planning your investments, having an idea of what each component costs if you were to procure them individually allows you to have better understanding of the costs the manufacturer is quoting. If the quoted expense is within 10% of your estimation, you are probably getting a good price on the product and should not spend too much time negotiating.
2) Quality vs Cost. When you understand the costs associated with each step of the process, it becomes clear that a partner who comes in with a quote below your estimate is likely not going to provide the highest quality service or materials.
3) Focus on Cost Reduction. By establishing a prior agreement on a financial model, you can work with your manufacturer to potentially drive down the overall costs.
Consider it this way: when you buy a car, you can visit multiple dealerships, take test drives, talk to the salesperson, escalate to a manager, get a few perks thrown in such as an extra warranty or paint protection, and eventually make a deal based on the best package for the least amount of money. Or, you can research the dealer’s invoice price on the car you want and what the market is for markups. Then dig into any special discounts for that make and model. You walk into the dealership of your choice, tell them the price you want to pay (your “should cost”), and work out the delivery. The should cost needs to be fair but will save you time trying to manage strategic negotiations and gives you the confidence you are getting the best price possible.
If you think that should cost analysis is too complicated for your product development, this may change your mind: materials are often 80% of your overall investment, therefore, by simply taking control of your material cost you will have achieved 80% of your should cost goal.
There are tools, resources, and seminars out there that can help you model should costs. ACDi will continuously work with you to maximize your investment. We will source vendors who most efficiently produce parts or materials. If our quotes exceed your should costs, we will review our quote in order to get the best price possible. We can also work with you to redesign the products in order to make it less complex and reduce the manufacturing costs. Contact us today to get started on your electronics contract manufacturing project.