How to reduce product costs and increase profits.

Last week I had a discussion with a client about increasing their profitability without constantly generating new product solutions each year.  After all, product development can be expensive and carries a lot of risk and overheads . We discussed various options, with the bulk of the discussion focusing on methods by which unit costs could be reduced.  I wanted to share the key themes of that conversation as they may resonate with other business owners.

If you are a manufacturer that builds product on a large scale, reducing your unit cost can have a huge influence on your bottom line.  Make it for less, sell it for the same, if not more. It sounds simple doesn’t it? We think it is and here’s a couple of hints and tips.

 

Supplier relationships:

Start viewing your suppliers as partners and as an extension of your team, rather than another business that is trying to make money from you.

Instead of bluntly asking for a unit cost reduction, open a dialogue with them to see how both parties can work together to get costs down.  Prices might be artificially high if manufacturing processes are unnecessarily complex or if material selections aren’t justified and are over specified.  Get a better understanding of the problems that your suppliers go through to make the components that go into your products and help them fix them.

 

Ask questions like:

  • ‘The lead time on component X is too long, can we look at the manufacturing process together to see how we can improve it?’
  • ‘Component Y’s reject rate looks abnormally high, what is the cause and how can we reduce it?’
  • ‘If we modified the tooling for component Z could we save 50g of plastic on the part volume?’
  • ‘Could we use our 3D printer to make assembly jigs for you and speed up production?’
  • ‘If the packaging was changed could we fit more products on a pallet?’

 

They will in turn be able to pass on these savings to you in the form of reduced prices, shorter lead times and higher quality standards without having to reduce their own margin.  This way both businesses win and stronger links are made between your teams which will benefit every product development cycle. Get right down into the detail as small differences can make massive savings during mass production.

 

Rationalise Product features:

First generation products are often launched with features and components that turn out to be redundant or don’t offer the value that was originally intended.  These features might be adding cost to your product unnecessarily whilst at the same time providing no benefit to the end user.

A good way to check this is to make a table of all the key features of the product that you feel add benefit to the consumer.  Then rank them in order of most important to least important, giving them a score out of 10 (10 being high). If you have a complex product, you might have 50+ features at the end of the exercise.  If you can, add a cost for each feature so you can quickly see the financial impact of removing it. It would be best to have a selection of representatives from procurement, engineering, sales and production so that you cover your core departments.  

If you are the owner of the business, try and sit this one out and empower your team to do the activity.  They’ll be more open without you there, especially if your a SME as it’s likely you created the first generation product.  

Create an environment where you and your team can have an objective discussion about the features.  If one of your team was responsible for a particular feature, don’t let them feel like their idea was wrong, more that it was right at the time but now things have evolved.  See this as an opportunity to let everyone have their say and to promote a culture of continuous improvement within your business.

If you sell your products on Amazon, go through all the reviews and see what consumers are saying about your product.  Ultimately it is their opinion that counts the most so let go of your ego. Cross reference their opinions with your ranking table and see if there are any correlations.  If you rank something as being super important, but consumers don’t know it’s there or are having a negative experience with it, consider making a change to that feature or remove it all together.

Do the math and scale it up, would it be worth investing in the development to take out those features? If so then start the process sooner rather than later so you can start to see the financial benefit.

 

Points to consider…

A must though is you do not reduce your product quality as a result of reducing cost, as this will impact your brand’s reputation.  Consumers are savvy and news of poor quality quickly spreads. So whatever you choose to do, make sure that you don’t lose what made your product so successful in the first place, as that is worth more than saving a few pennies.

 

Always make a prototype to test out the changes too, especially if the changes are extensive.

 

 

 

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