To reduce the production cost here is the most important thing you have to keep in mind: “A penny saved is a penny earned”.
Mostly in electronics, products are often sold for 3 to 5 times the cost to make them. Every 1 penny you can save on cost, will make your product up to 5 pennies more affordable for the end-user.
In this article, I will show you how to reduce production costs, mostly for electronics, through better engineering, without sacrificing quality.
4 Ways to make your company more profitable
Profitability is the primary concern for any business. Simply put, there are 4 ways you can increase your profitability.
- Sell more products
- Reduce production costs
- Increase product price
- Lower overhead
Selling more and raising prices are marketing and sales-related. The lower overhead depends for a large part on your head-count. But reducing costs is something where we as engineers can really contribute especially when it comes to electronics.
If you are short on time, here is a video summary. You can find more details and examples in the article!
- 1. USE OFF THE SHELF (OTS) COMPONENTS TO DESIGN YOUR PRODUCT
- 2. “SAME NEED; SAME SOLUTION”
- 3. THE MATERIAL MAKES UP 60% OF YOUR PRODUCT COST
- 4. REMOVE OR DON’T DESIGN NOT DESIRED FEATURES
- 5. REDUCING PRODUCT COMPLEXITY MEANS REDUCING PRODUCT COST
- 6. REDUCE YOUR PRODUCT COST BY DEVELOPING TRUST-BASED RELATIONSHIPS WITH YOUR SUPPLIERS
- 7. TRY TO FIND BARGAINS:
- 8-14. OTHER GENERAL ADVICE TO REDUCE YOUR PRODUCTION COST (mostly in electronics)
- HOW TO REDUCE YOUR PRODUCTION COST – CONCLUSION
1. USE OFF THE SHELF (OTS) COMPONENTS TO DESIGN YOUR PRODUCT
If you want to reduce your product cost, don’t ever think about designing your own ball bearing, brushless motor, or microcontroller, they’re complicated to design and need specific expertise.
On the contrary, to reduce your product cost, it is better to design your product with already manufactured, inexpensive, and reliable components such as SMT32 microprocessor or a 2.4G wireless module.
The price of components that are already manufactured by factories will be competitive; their mold investment will be already cushioned for, and therefore it won’t be passed onto the component price.
They will already have had plenty of time time to make the components reliable and create an exhaustive datasheet.
When you’re in the hardware industry, remember, you are a component assembler, not a component creator.
If you want to be competitive against your rivals, it is crucial to find already existing, mass-manufactured, and as much as possible certified modules.
In large companies, there are pre-project teams dedicated to finding already existing components to reduce their production costs., and not only for expensive parts but also wires, connectors, pre-certified electronic modules, etc.
For small to medium companies, it is imperative to take some time and make the effort of finding existing components like gears, brackets, connectors, etc., before entering in the hardware and software development process.
Even a single part can be a money-saving source, mainly when you produce 50,000 products a year.
2. “SAME NEED; SAME SOLUTION”
“Same need same solution” means there is absolutely no reason to use a different component to perform the same task. If the tasks are not the same, then try to find a way to make it so. We have examples below.
This strategy is known as common platform architecture.
This will help you save on warehousing (less SKU’s to keep en risk going obsolete), service (easier to train technicians, fewer parts to bring on a service call), product development time, manufacturing process and on your production cost reducing your unit cost (larger volume).
When you’re making watches, for example, you want the most affordable way to expand your range to cater to different age groups, genders, style preferences, etc.
The most affordable way by far to do this is to change… the color. The same mold, the same material, and the same electronics inside, but it’s not the same model.
The next step can be to change the shape. Ikea sells many different models of wall clocks, made of plastic, metal, and wood. But they all use the exact same $0.40 battery powered clock mechanism.
There are two ways to construct a platform architecture strategy to reduce your product costs:
- In the same product, try to use the same components as much as possible. Example:
In your PCB, avoid implementing a specific component in different packages and tolerances, try to optimize the pull-down and pull-up resistors, the capacitors, transistors, etc.
As much as possible, use uniform component sizes and tolerances.
Sometimes selecting a product with a higher tolerance can be more expensive, but the simple fact of doubling the purchase volume reduces the product cost per unit.
You are using screws to fasten your PCB on the housing, a different screw type to attach a sensor on your electronic product, and another kind to fix a heatsink to a transistor.
If the task is the same in all aspects: same weight, same material, same vibration, etc, then use the same screws. It matters.
If the task is not the same, find a way so it is, or find a screw able to perform all of them.
Instead of having 5 type-A screws and 7 type-B, and 3 type-C, you will have 15 screws, but all of them type-D, improving your volume effect, your manufacturing logistic, etc…. And then reducing your product cost!
I didn’t choose this example randomly; visit a car, computer, gaming console, or smartphone factory such as Samsung; they mostly use only one type of screws.
- For different products or variants of the same product, try to use the same PCB or at least a part of its architecture. Example:
Another example, taken from the automotive industry: The Renault-Nissan-Mitsubishi Alliance produces 49 different vehicle models.
All their electronics, such as the displays, the radios, the safety devices, HVAC, etc., are 99% the same, the only difference is the logo, and sometimes a part of the housing and the firmware.
They do so to save NRE cost by integrating only one electronic device instead of 49. Also, they have a considerable volume effect by doing it, aiming at a significant product cost reduction.
Sometimes, because it is more appealing to benefit from the volume effect, some brands install the same components for products of different tiers but restrict the lower tier ones by firmwaring it differently.
This is the case of some smartphones: In a mid-range smartphone, you can have the same camera as the high-end model, but its poorer firmware will limit the quality of its use. But both need cameras; then both use the same camera. “same need; same solution.”
As an illustration of a platform architecture in electronics, we can see below two development boards from Microchip.
Starting with the bord itself, the architecture is made around an Atmega microcontroller.
The purpose of both cards are not the same, but as much as possible they installed common components and if possible at the same place because this way they can reduce their production cost and manufacturing process, and then being more affordable for the users:
3. THE MATERIAL MAKES UP 60% OF YOUR PRODUCT COST
There’s a direct link between the size, volume, and weight of your product and its cost.
This variance will depend on technology maturity, product complexity, and materials. But basically, as soon as you can economize on materials, do it.
Moreover, less volume, weight, or size means smaller packaging, cheaper shipping, and warehousing cost. Even your PCB thickness is an important characteristic to take care of because it influencing your final product cost.
Besides the surface-saving, you can also change your product materials for lower ones such as steel or inferior plastic, depending on factories and the market, as long as your product features are not degraded you will be fine.
New materials are created every day, and the technologies to produce them are continually improving, making the price of materials fluctuate, so you better check.
4. REMOVE OR DON’T DESIGN NOT DESIRED FEATURES
In industry, and mostly in electronics, over-quality is the enemy of quality.
Design your product close to your users. Any feature you can remove, or you don’t have to design in the first place, is a reducing factor for your NRE and product cost.
In the electronic industry, more features aim at more components or at least more expensive ones. Moreover, your manufacturing process is always highly impacted.
Fewer components for your products translates into a more affordable BOM. Moreover, it may be possible also to reduce your product size and then the material price. Less hardware complexity for your PCB equals cheaper electronic components.
For example, in mass manufacturing:
- For the same characteristics, a monochrome LED can be until 90% more affordable than an RGB LED
- A 2.4G module transmits data at lower speeds than a 5G module but is 70% cheaper
- For the same main characteristics, the SMT32H7 microcontroller is faster than the SMT32F7 microcontroller but is around 30% more costly. If speed is not a required feature, there are no reasons to pay more
- Not desired features lead to more PCB complexity. For the same PCB surface, a four layers board is almost twice as expensive as the two layers board and the six layers nearly three times more costly than the two layers.
- For the same functionalities, the price for an electronic component reliable for a 0°C to 70°C temperature range is more competitive than for a -55°C to 125°C range.
This paragraph leads us to the next point:
5. REDUCING PRODUCT COMPLEXITY MEANS REDUCING PRODUCT COST
In engineering, complexity means not affordable. From a project point of view, you’ll need to spend more time developing your product, and manufacturing will require more time and precision. You might even end up requiring different tooling for the same component; this will lead to higher costs.
Simple hardware product design is key to lowering your costs.
Sophisticated features can lead to a complex PCB with multiple layers needed. The manufacturing cost is higher and can potentially take longer manufacturing time.
Also, your product structure complexity will have an impact on the mold expense. Remember, if it is not a customer priority, don’t try having the best surface finish for your product, this is a costly feature, and it is bound to be reflected in your production cost, a standard finish can be good enough.
6. REDUCE YOUR PRODUCT COST BY DEVELOPING TRUST-BASED RELATIONSHIPS WITH YOUR SUPPLIERS
It is essential to maintain a good relationship with your suppliers. The better this relationship, the more profitable your business will be.
Your suppliers will be prone to give you a better price for high orders or offer you alternatives if a component doesn’t exactly suit your needs or your budget. In the end, it can be a significant production cost reduction.
Also, they can prioritize orders for right B2B customers and then provide you shorter lead times, improving your electronic product’s Time to Market.
Also, it is preferable to make a big annual order than two small orders a year, your investment will be higher, but in the end, it’s worth the risk.
7. TRY TO FIND BARGAINS:
Sometimes when electronic factories have financial issues, law troubles, or simply when they want to exit the industry, they sell their component stocks at meager prices.
You can get components for half the market price or even less. These kinds of bargains are rare and fade away quickly, but can be nice opportunities to catch if you want to reduce your production cost.
I’m talking about this solution for the sake of completeness because it is an effective existing product cost reduction strategy.
However, at Titoma, this is not the way we work. We favor a 10-year B2B life plan over short-term solutions.
8-14. OTHER GENERAL ADVICE TO REDUCE YOUR PRODUCTION COST (mostly in electronics)
- When designing your PCB, as much as possible, try to integrate your electronics components on the same side of the printed board. It is a time-saving manufacturing process and it prevents component failures by hitting the workshop bench.
- If your electronics have a standard size, don’t try to design the enclosure by yourself, it is a costly and time-consuming process.
- The more different components you have in your Bill of material, the more expensive your warehousing and shipping cost will be. Reducing the bill of material means reducing your product cost and your manufacturing process.
- Start talking to your factory as soon as you have your first BOM so they see and validate your component selection.
- Maximize ease of assembly. It is a question of simplifying the manufacturing assembly process, shortening component’s picking process, standardizing its orientation, or its insertion in the product. The simpler it is, the easier to automate.
- Purchase ten or more competitor products and learn from their design decision, architecture, materials, etc. Competitive benchmarking is a good way to find solutions to reduce your production cost and study how your competitors answered this production cost reduction challenge.
- Call on hardware experts because designing the most affordable PCB needs a lot of expertise.
HOW TO REDUCE YOUR PRODUCTION COST – CONCLUSION
As you could see, there is no miracle recipe to reduce your production cost. It is an addition of small dots that put end to end represents a cost reduction that can be important. Every detail counts and is a possible source of profit.
In my opinion and through my experience, the most important, and by the way, the most difficult part, is to perform all those solutions without decreasing your product quality and reliability.
It needs time, expertise, and investment. Also, even if the price is an important parameter, at Titoma we favor lead time, warranty, or reliability as essential production criteria.
Moreover, the more competitive your production cost, the more difficult reducing it will be.
If at the beginning spending 10 development hours can save 50% of your product cost, in the end, 10 000 hours will not be enough to save 1%. The expertise of your engineers will be even more crucial.
What is the difference between product cost and a product price?
The product cost is how much you have to pay to get each one of your products manufactured. The price is how much your customer will buy it. For example, you might want to improve your benefits by reducing your product cost and keeping your product price as it is.
What is included in the production cost?
The production cost includes:
- The Bill of Materials (BOM) cost: The price of all the components composing your product – Electronic component, housing, PCB, battery, etc. Even the packaging and instruction manual should be included in the BOM if you sell them in a whole package.
- The labor cost: assembly workers but also the logistics people who come to supply the production lines, the production supervisor, and the packager.
- The consumable production supplies cost, if needed: Basic chemicals, gloves, Personal Protective Equipment (PPE), glue, etc.
- The factory overhead: It represents all the other manufacturing costs, the margin that allows the factory to operate. The rent and the different taxes, employees responsible for the repair and maintenance of manufacturing facilities, electricity and gas needed to operate machines and production lines, etc.
What is included in the production cost?
To calculate the unit basis production cost, you must compile the various costs described above (BOM, labor cost, consumable production supplies cost, factory overhead) required to produce a batch and divide it by the number of products comprising the batch.
In the electronic industry of consumer goods, I advise you to have a minimum batch of 5,000 pieces to have a competitive production cost.
What is included in the production cost?
According to us, there are 3 topics allowing to reduce the cost of sales:
- Sell more products: Selling more products is a marketing-related way of success. It may seem a tautologic explanation but it is not: indeed, by increasing your sales volume, and then your product volume, your product cost is going to decrease, so as your cost of sales. Ot do so, you have to target a bigger audience: Age, genre, style, environment, behavior, etc. Also, having the shortest Time to Market is another excellent way to increase your sales volumes.
- Lower overheads: Overheads are defrayed by a part of your profits. For the same final benefit, reducing it means reducing the cost of sales also.
- Reduce production cost: In our opinion, it is the most efficient and durable cost of sales reduction strategy. We apply this strategy through 7 different ways: Only use off-the-shelf components and modules, adopt a common platform architecture, reduce the used material, reduce the product complexity, remove the non desired features, develop a trust-based relationship with our suppliers and try when possible to find bargains only if your product reliability is not impacted.