A practical guide to reducing your product’s manufacturing cost
Making a profitable hardware product is tough these days. If it wasn’t hard enough with global component supply shortages, increasing lead times, increasing component and labor costs; we now have to worry about tariffs. The survival of many hardware companies depends on their ability to optimize their product’s Bill of Materials (BOM) cost. This post focuses on practical strategies to reduce the cost of making your product.
After receiving quotations from your selected Contract Manufacturers (CMs), it’s not unusual for the BOM cost to come in over expectations. It’s easy to underestimate the cost of labor, components, molding costs, scrap rates, etc. Don’t beat yourself up about it; I’ve been making hardware products for many years and still underestimate the final cost. The process of checking the BOM and looking for ways to save cost is an integral part of the process of creating a successful product. It can also be very satisfying when you do manage to find creative ways to save cost without losing product features.
The first step is to check for basic mistakes and to create an overview for comparison, then deep dive into specific areas to reduce cost.
Product BOMs can be complex, and mistakes from CM’s are common, especially for the first quotation. The first quotation is put together quickly to meet your deadline, and many assumptions are made. Common mistakes include basic spreadsheet errors, including more or fewer components, including columns twice or not including them at all, including over or under spec’d components.
Many factory quotations these days still come in Excel files, so the first task is to make sure everything has been correctly calculated. I find it easier to start at the final cost and work backward, inspecting how each cost is calculated ensuring the different areas are included appropriately, the markup/scrap rates have been added correctly, and everything makes sense.
The second step is a simple sanity check to make sure you have the same total number of components in the quotation as the initial BOM provided to the factory. If the numbers don’t add up investigate to see what’s extra or missing. Sanity checking is particularly essential for consumer electronics with many passive electronic components or if features have been changing often.
During this process, you will find things that decrease or increase costs. While it might be tempting only to point out mistakes that decrease costs, correcting oversights that increase costs at this stage is also important. Nobody likes cost surprises later in the development, and it’s good to start building trust early with your manufacturer.
The next step is to create a summary table to understand the significant cost categories (e.g. plastic, components, labor, packaging, etc). Many factory quotations will already give a pretty good summary, but you may want to spend a little time creating something more custom. For example, separating labor into key operations, breaking out unit packaging costs from outer master cartons, etc. If you are quoting your product at multiple CMs, this summary provides a quick way to compare quotations and see areas where factories may be overcharging. If this is the product’s first quotation look at other similar products, you have made and see if ratios are similar. This may give hints about where to look first for savings.
BOMs can be overwhelming with several pages of parts. To have a quicker impact on the final price, examine the most expensive areas from your summary table first. For most consumer electronic products, this means the electrical components. Sort descending by cost and do an initial scan of the components to make sure the quantities and prices make sense.
For electronic components, there are often many locally sourced cheaper drop-in replacements that are available in China. Ideal parts for replacements are passive components and active components that require very little or no firmware changes. Typically, key components like the MCU and other main ICs don’t make good candidates; however, it’s not always the case, so it’s worth checking with your Engineers. The easiest way to source local components is to ask your manufacturer. However, you can source yourself by reaching out to 3rd party component suppliers such as Arrow, Avnet, WPG Holdings, etc. Before contacting them, make a list of components to quote with estimated order quantities. Be careful about sending your complete BOM to 3rd parties because it’s not difficult for people to work out what your company plans to make.
In addition to reducing cost having multiple sources and potential drop-in replacements will reduce supply chain risk if a supplier has delays or issues and help to manage any unfortunate market price increases.
For many consumer electronics, the battery is one of the main drivers of cost in the electronics BOM. There are many battery manufacturers in China, so it’s well worth quoting around. When contacting new factories, make sure to check they have all required certifications and compliance documents upfront, so you don’t waste time finding out later their battery isn’t compliant. In addition, as with any key supplier, make sure to conduct an onsite visit to make sure they have all the necessary procedures and test equipment in place. If you don’t have specialists in-house, your CM most likely has the experience and can help you to perform an on-site inspection. Even if you do have specialists in-house, it’s a good idea to invite your CM’s team along as well.
Packaging is often the most straightforward area to cut cost as it doesn’t require changes in firmware or long lead-time tooling. Have a target price in mind and ask for suggestions from your packaging supplier for options on how to achieve it. If you aren’t committed to your supplier quote around.
Discuss increasing the minimum order quantities with suppliers. Start with the most expensive components first. If some parts are used in other products, group them in one order and negotiate a lower price. It’s always a balance — larger MOQs will reduce unit cost; however, it comes at a cash-flow and potentially warehousing cost.
Many factories will not give you a detailed breakdown of labor hours/rates choosing instead to provide a labor cost for main areas such as molding, electronic assembly, and some specific operations such as decoration. Negotiating on labor cost is often tricky because until the production line is up and running, there are many unknowns. The best strategy is to wait for the design to be mature then identify some of the major labor areas and work with your manufacturer to make them more efficient and ask them to be re-quoted.
For certain parts, especially those made outside of China, your company may be able to negotiate a better price or payment terms working directly with a supplier than the CM can get. In this case, it’s better to purchase them directly and consign to the factory. There are several reasons why working with a supplier directly may give you better terms, including you’re able to provide more transparent forecasts, possible co-branding opportunities, component is used in multiple products, etc. Also, depending on your Manufacturing Agreement, consigned components are often marked up less by the CM. Ideal components for consignment are imported, have long standard order lead times, high demand volume, high dollar value, a long shelf life, are shared across multiple products, do not require special incoming inspection and storage environment upon arrival at your manufacturer.
Most manufacturers have many, many years of experience and will most likely be more knowledgeable than your team on how to reduce manufacturing cost and improve manufacturability. Work with them. Have a direct conversation and tell them the price isn’t where it needs to be for the product to be successful. Providing a target cost to hit is more effective than just saying it needs to be cheaper. You may find, however, that they lack the incentive to drive costs down so you may need to find ways to motivate them. An excellent first step is to make sure the factory’s top management is aware of and excited about your product.
Finally, there are times when it’s simply not possible to reduce the BOM further without eliminating a feature. To help facilitate a proactive conversation about what to cut, review the product specification, and for each major feature, estimate the associated cost. You may be surprised to find a feature that has ended up costing a lot more than you thought, but it isn’t adding a lot to the customer’s experience.
A practical guide to reducing your product’s manufacturing cost
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