11 Factors affecting manufacturing costs
There are many things that can influence your manufacturing costs. Here’s what they are – and how to mitigate them.
When you ask a manufacturer how much something is going to cost right at the start of a conversation with them, chances are they’ll not give you an answer. Or you’ll receive an estimated price that is very different to the final cost of production.
This can be frustrating.
All you want is a rough idea of your manufacturing costs so that you can budget and plan. Instead you come up against a manufacturer that won’t give you a straight answer.
You might think that they’re being difficult. Surely they know how much it costs to make a few T-Shirts? They’ve made tons of them before.
But the reality is, there are several factors affecting a final cost price, and the manufacturer needs to take all of these into account before they can give you a realistic price.
The good news is, with a little preparation in advance, and an understanding of what influences the production price, you can work with the manufacturer to get a price that you’re both happy with.
Here’s our handy checklist of the 11 factors likely to affect the manufacturing costs of your product, along with some tips on how to lower your final cost price:
When it comes to manufacturing a product the single biggest factor that can determine the cost price is the amount being made.
Economies of scale mean it’s much more efficient for a factory to make thousands of the same item as it is to make just one.
To understand why this is the case, you need to visit a factory and watch as the production takes place.
In big factories producing tens of thousands of units a week everything flows like clockwork. The staff get used to making one particular item and become quicker the more they make of it. Machines are continuously operating, and there is no downtime.
When just a few of each item is made the production process is slower. Staff are just getting used to making those initial pieces. Machines are stopping and starting, and there is downtime while the factory switches from making one type of product to another.
Take a clothing factory as an example; if they are making a few pieces of one style they will lay the pattern pieces on the fabric and cut it in a single layer. Whereas if they are making hundreds they will spread out several layers of the fabric and cut multiple pieces at the same time. It can often take not much longer to cut out the fabric for a thousand pieces as it does ten.
Cost-saving tip: Unless you can be sure that you’re going to be able to sell larger volumes, it is usual better to pay a higher cost price initially than be left with a lot of stock you’ve paid for but can’t sell.
Ask the manufacturer to give you a breakdown of the costs based on several different size orders so that you can see how volume affects the cost price
The next factor you need to take into account is the raw materials that the product will be made from.
The type of raw materials you select can affect your final price. Different materials can be easier or more difficult for a factory to handle. If it’s something tricky to sew, such as silk, it will slow down the production process and require a more skilled hand to work with it – all of which costs money.
The usage of the material, and how much goes to waste, can also make a big difference.
If you haven’t decided on the materials and you need the manufacturer to do that for you, there is also a cost implication. They may add on the cost of their time to source materials, and if they have to purchase them upfront, and warehouse them, the price of that will be spread over the cost of your production too.
Skimping on the cost of your raw materials can be a false economy, especially if you’re manufacturing in the UK. People pay a higher price for British-made goods for their quality and longevity. If they buy something from you and it doesn’t last they won’t repeat the purchase, and you’ll lose out in the long run.
It is often better to invest a little more in the quality of your raw materials to make the product more durable and last longer.
Cost-saving tip: A good manufacturer will be able to advise on the most economical use of the material, which may mean making the product in a slightly different way. So ask them if they have any suggestions.
The longer it takes to make something, the more it costs. Simple fact. So until a manufacturer has made a first sample for you, and worked out exactly how long it is going to take to make, they won’t be able to give you a final price.
Labour is often the most expensive part of the cost of a product, particularly when it is made in the UK where wages are higher than they are in somewhere like the Far East.
If you know how long something takes to make, and what the minimum wage is in the country you’re making in, it gives you a starting point to work out if you’re being realistic with the your target price. Don’t forget, the manufacturer needs to add their profit and overheads onto this price too!
Cost-saving tip: Ask a manufacturer for an open cost price showing how many minutes it takes to make your product. Then ask them if there is anything you can do to the design of the product to reduce the labour time.
It goes without saying, that the higher the quality of product that you require, the more it’s likely to cost you.
Anything that involves hand-finishing, extra strengthening, or fine details, can add a lot to the final cost price.
A factory that has good quality control will ensure that your product is made to the exact specifications you require, and that consistent standards are maintained throughout the order, but it will add to the final price.
Cost-saving tip: This is one area you shouldn’t scrimp on. Investing in quality will pay off in the long run as you’ll have less returns and a much happier customer.
Just like when you order a delivery from a store, how quickly you need to receive your order, the more you’ll pay.
Want a factory to rush an order through for you? That will mean they’ll most likely have to put other work aside and dedicate more staff to it. They may even have to pay staff overtime.
The longer you’re prepared to wait for your order, the more room you have to negotiate on how much you pay for it.
Cost-saving tip: If you leave everything until the last minute you’ll pay a premium for it, so this is where planning ahead can really pay off.
Location of Factory
Due to factors such as labour rates, energy costs and infrastructure, the location of your factory can make a big difference to your prices.
If you want to manufacture in the UK, the ex-factory cost is generally going to be higher than lower wage countries such as those in the Far East. But often the benefits of making locally outweigh the cost of importing a product.
Even within the British Isles certain regions will be cheaper to manufacture in than others. For instance, wages in cities such as London are higher, and your production price will reflect that.
Cost saving tip: Its worth looking outside of London if you want the best cost price.
Just as the location of a factory can dictate how much staff are paid, so does the skill of the workers.
The more skill required to complete a task, the higher the labour cost will be.
Hand-made products made by artisans that have spent years honing their craft will command a higher price than a product that can be produced on a machine manned by a less skilled worker.
The skill required is therefore an important aspect to consider when designing and developing your product.
Cost-saving tip: While it’s a very good idea to use skilled workers to make your initial samples and prototypes, you may be able to save on costs when you go to bulk production as less skilled operatives are required.
Supply and Demand
Supply and demand is often something that a manufacturer will take into account when it comes to costing your goods.
The fundamental principle of the more people want an item, the more it will cost to purchase it, does not only apply to the raw materials you require, but also to the cost of having your product manufactured.
If a factory is in high demand they may charge you more for the cost of production. Whereas, during their quiet periods there is more room to negotiate.
Most factories have peaks and troughs in production due to the flow of work from existing customers and orders following a seasonal pattern.
For instance, if you’re making knitwear in the period in the run up to the winter season you’ll need to join the queue with everyone else wanting their jumpers in stores for when it gets cold. Whereas, if you are prepared to make your Christmas jumpers in January you’ll be in a great place to get a better cost price.
By researching when the factories downtimes are, and by planning in advance to utilise this time rather than demanding production in peak time, you could negotiate significant savings.
Cost-saving tip: Don’t make your product in a manufacturer’s peak season – instead find out when their quiet period is and make the most of it.
Specialist Certifications and Audits
Sometimes products need special testing to get a certain certification, or you may want to use a factory that has been audited to reach a level of ethical or sustainability credentials.
Certifications and audits can be a lengthy and expensive process, especially if the factory hasn’t already been through the process, or doesn’t have any experience in this area.
If a certification or audit is absolutely essential for you it will be more cost efficient to use a manufacturer who already holds it or has experience of it.
However, do your research and find out if you really need it. For example a manufacture may not have been able to have a particular ethical audit carried out but a visit to their factory and talking to the staff could give you the information you need; is it neat and tidy and a safe and healthy place to work? Do the staff look happy? or harassed?
Cost saving tip: Don’t insist that a manufacturer has every single audit if it isn’t essential to your customer. Provided that it is a safe and ethical place the certificate on the wall might not be essential.
The machinery used to produce your product can have a big impact on the cost.
Manufacturing processes are being developed all the time with hi-tech machinery promising solutions to achieve better and faster results.
There are times when the latest hi-tech machine means that you can produce high volume at a faster rate, or digital solutions that allow you to produce customised items with minimal cost impact.
Hi-tech machinery is expensive and so the benefits of using it must outweigh the investment in the equipment. It’s not always necessary to have the latest equipment, it is dependant on what you are producing. Some factories have machinery that is decades old that is still producing reliable quality goods.
Cost saving tip: Don’t judge a factory just on the new, shiny machinery it has. If there is a way of making your product just as well without the latest high tech machinery then it may save you some money.
Your Risk Factor
A bit like when an insurance company quotes you to insure your car, like it or not, when a manufacturer quotes you a price, chances are they are factoring in how high risk you are.
Sadly, manufacturers get burnt all too often by orders that get made but don’t get paid for. Customers going out of business is a all too common, particularly in those industries related to retail.
This is particularly tough when you are a start-up and you have no previous track record for the manufacturer to go on.
But this doesn’t mean that factories won’t work with you because you’re a new business.
As your relationship with a factory grows, just like a car insurance no claims bonus, you will be able to negotiate your prices down if you have been a reliable customer.
Cost-saving tip: Help to mitigate the risk for a manufacturer, and therefore lower your cost prices, by paying a percentage of the order up front, and paying the remainder in a timely fashion.
Has this article changed your perception of the manufacturing costs?
Next time you ask a manufacturer for a cost price, or you wonder why your final production price is different from what you were originally quoted, consider the above list.
I’d love to hear your thoughts. Have we missed anything out? Are you a manufacturer? Do you agree with the above?
Let me know your thoughts on manufacturing costs in the comments below.