Manufacturing Cost Estimates
Suppose you have an idea for a new product to sell in discount stores. You find two other products that contain a similar number, size and type of parts when you combine them. Their combined price is about $24 and the demand for these items is about what you are hoping yours will see. Therefore the cost to manufacture your product might be about $6 to $8 ($24÷4=$6 & $24÷3=$8). It would be more if your volume is less.
You will need to learn about the typical mark up in the distribution chain for products like yours. Each person in the chain will need to make the kind of profit they usually get or they won't be interested in handling your product.
The cost determined by the above method is useful, but deceptive. It ignores the investment needed before you can begin production. There are many start-up costs in manufacturing. Things like development, design, and tooling costs all need to be considered. However, the commitment you must make to your suppliers for your initial order is often one of the largest components of start-up cost. The manufacturing cost times the typical minimum order for each item needed will give a rough estimate of what kind of investment will be necessary.
Your minimum order quantity could easily be 50,000 to 100,000 units if you must order overseas to get the same pricing. That means the commitment to suppliers for an initial order could be $400,000 to $600,000. ($8x50,000 & $6x100,000). There are many other costs to consider, but this estimate would give you some idea of what it takes.
You must still add all the other costs of starting a business -- like offices, advertising, sales, adminsitration, etc. Not many people are willing to risk such an investment without credible proof that the product has a reasonable chance for success. Minimizing that risk is the purpose of the many intermediate steps and short-run production that is needed before going into full production.
Beginners have to work extra hard at making their case because they have no track record with new product introductions. Investors will be very interested seeing proof that you know what you're doing.
You will need a more detailed estimate if you believe you can get funding
for project of the magnitude estimated so far.
Manufacturing cost estimates can usually be organized as shown below.
Other items to consider are assembly tools and fixtures, assembly set up costs, waste, and freight. Of course, advertising, administrative overhead, etc. are not included in a manufacturing estimate.
The Development Guestimate involves the greatest uncertainty and everything else depends on it. When unproven technology is involved it isn't wise to invest much time fine tuning other components of the estimate. If the idea doesn't work, it doesn't matter exactly how much it would cost to make.
A separate estimate is needed for each production level to be considered. You might start by estimating the costs for full production since that is the most expensive level. However, it is very likely that you won't know what full production is until you test the market in limited areas. It's also likely that you won't know exactly what you want to make until you get enough feedback from users.
This is where your development strategy comes into play. In other words,
"How will you use your resources to reach your goals?" This always involves
taking small steps to learn about your product and the market before betting
everything on an unknown. Strategy will be discussed later. First you should
understand what must go into a detailed estimate so you will understand what
you can out of it.
More complete manufacturing cost estimates require more complete information. New product ideas usually need some basic engineering research and market studies before enough is known to do an accurate estimate. Your manufacturing consultant will have questions about basic information that may seem overwhelming.
To understand why you must answer so many questions to get a manufacturing estimate, consider this...
How much does a new suit cost? Would you expect a different price for custom tailored instead of "off-the-rack"? What if you order one hundred suits instead of one? How about if they were identical uniforms but needed custom, high quality material? Would you have to pay more if you need them delivered in one week? Of course the price will vary depending on your needs. The same is true of every part manufactured for a product.
Would you ask for a quote from a company that specialized in clown costumes if you needed band uniforms? You could unwittingly do something just as foolish if you don't understand the nuances of job shops and their specialties.
Most manufacturing is more complex than sewing. Tooling is often custom built and expensive. The cost of the tool depends on how many parts you expect it to make, how quickly you need them, and how precise the parts must be.
Beginners sometimes go directly to a manufacturer to get a price before
consulting an expert in production methodology and strategy. This is a mistake.
First because it ignores the intermediate steps needed to justify
investing in the project. Second because there's a good chance you
are approaching a manufacturer that is mismatched to the job you have in
mind. And, third because you may be considering the wrong production
process. You could waste a lot of time and money getting tooling quotes for
a part that an expert could tell you would be better suited to another method
that uses less costly tooling.
All of this information will help your expert recommend tooling and production options. It will be hard for any inventor to know the answers with much certainty at the start. However, just knowing that you need to think about these questions will help.
Other factors to consider are the budget and how much should be bet on your market predictions. Do you want the optimum tools and the most expensive options so that you will save money in the long run if you are right about exactly what the market will want? Or do you want to take a less risky approach with conservative options in case you learn that some changes would increase sales and profits?
|If you're a beginner and all of this sounds complex, we're not trying to make it sound that way. It is complex.|
If you don't have all of this information figured out, and most people don't,
you will need some help getting started and finding an appropriate strategy.
After some discussion a consultant can provide a range of typical costs for
each tool. This will allow you to consider what the budget might allow and
form a strategy.
As you can see, developing a product takes a lot of thought and planning. Inventors often ask, "What do I need to do to bring a product to market?" That's like a coach asking, "What do I need to do to win?" There is no simple step-by-step "sure fire" way to do it. There are many ways to win and many more ways to fail. Experts can give you advice, but you must make your own decisions. Success comes from good strategy.
Strategy is your plan -- and your method of planning -- for reaching a goal with the resources available. In other words, the "ways" to use the "means" to reach the "ends". Strategy also involves how you adapt as you learn and encounter the unexpected. Cost estimates change because strategy changes when dealing with the unknowns of inventing. Strategy starts out based on perception and adapts to reality. Monthly, and even weekly, changes are common with inventing.
For many novice inventors, the strategy seems simple: 1) get a patent, 2) build a prototype, and 3) license the patent to a manufacturer. That plan never works. Beginners believe that all patents are valuable and that manufacturers want them. That illusion should vanish when perception collides with reality. Those who can come to grips with the real world before losing all their money will have a radically different strategy if they continue.
When some of those beginners realize that step "3" isn't working and that licensing isn't easy, they try a new plan that's almost as bad. They decide to produce something, hope it will work and be legal, and then try to sell it nationwide through wholesalers and retailers they've never met. This is not a plan for a sane investor. An even worse strategy is hoping that someone else will do all of that for you.
Your production strategy must be interwoven with your overall business strategy including all the financing and patenting considerations. And, much of that strategy must be directed at getting more resources unless you have lots of money to risk.
If you applied for a patent BEFORE investigating the manufacturing issues, you will probably have a rude awakening when you do.
A patent attorney can tell you that you can't patent ideas. You can only patent their implementation. Beginners often rush into patenting before they understand how the invention will be manufactured.
Changes are often dictated by production considerations. If you haven't figured out how exactly how to implement an invention, it's unlikely that what you patent will cover what you eventually manufacture.
A good plan must not only address final production methods, but also the less costly, short-run production techniques needed when testing the product and the market something that investors will require before approving a product launch. An expert can help you decide where to begin as you study the basics.
The method of production changes as you make the transition from prototypes
into early production models and so on. Some general stages in this process
Each production level has it's own considerations and production techniques which require a separate study and estimate. You can see an example of this in "Typical cost to produce a one piece plastic toy". That example applies to most projects even though it is intended for injection molded plastic parts and the molds needed to make them. Producing any component progresses through methods having increasingly higher up front costs for tooling and incrementally lower production costs for parts. The incremental cost per item decreases rapidly as you move from one low production technique to the next. The change is smaller as you refine high production techniques, but the overall savings can be large because the volume of parts is high.
Finding someone to license your invention usually isn't very likely until you begin selling some of the product on your own. However, the more you advance through the prototype and the production stages, the more likely it is that others will see the project as a safe investment. How lucrative it will seem depends on how your projections hold up.
Make sure that anyone who gives you a manufacturing estimate understands your strategy and the accuracy you need. Otherwise you won't know whether they've calculated the cost to make a crude engineering prototype, a sophisticated production prototype, some of the very early production models, or if they've assumed you're only interested in mass production.
Estimates for each stage of this process start with a guess and a vague, blurry vision of what you'd like to do. They repeat with clearer and clearer views of the big picture until reasonable strategies appear. Zooming in and focussing on the best strategies requires a great deal of expertise and judgment. Assumptions must be tested and verified if you don't want to get lost while chasing a mirage.
Production will be eventually be determined by demand and how quickly you can capture market share. Beginners often make the mistake of estimating what the total market might be and taking a guess at what percentage might buy their product. Since this predicted demand hasn't been tested or proven, manufacturers and investors won't take it seriously. Besides, the size of the total market is much less important than what portion can be reached though the distribution channels available to you. Predictions of demand based on market tests after the technology has been proven and distribution analyzed are much more credible.
The work needed to prepare manufacturing estimates depends on the number of scenarios to be analyzed and how detailed and finely focused each estimate must be. This always involves an interactive and ongoing discussion. One approach is to give an expert a budget to work within and ask them to provide as much refinement and detail as the budget allows along with an opinion of what additional work should be considered.
O'Connor Technical Systems can get started on a manufacturing estimate when
you can define the production scenarios and provide the basic information
needed. You should consider a Preliminary Technical Evaluation of the project
if you are unsure which strategies may be workable.
A feasibility study is usually done for new ideas. A manufacturing estimate won't be of much use unless the product will work. This doesn't mean whether you can get a one of a kind prototype to function. It means that the concept is technically sound and reasonably safe and that a product can be developed, designed, manufactured, used, serviced, and recycled with technology that exists or can be developed within time and budget limitations.
Products should also be reviewed from a "design for manufacture" perspective. Even if you have a generally workable design, an expert will often spot several aspects that are much less costly to make using a different configuration. Doing this review before getting a detailed estimate can save time and money.
Of course, it is essential to prove that the product can be sold at a price and in sufficient quantities to justify the investment in time and money. Many items aren't in the marketplace simply because they can't be economically mass produced. Working models for such products may have been around for years.
To start a feasibility study you should consider the Preliminary Technical Evaluation described on the O'CTS Inventor Services page. This includes an overview of technical feasibility and manufacturing issues. Such a study can provide an idea of how much more work is needed to prepare you for manufacturing or for negotiations with manufacturers and investors. You will need to understand and appreciate all the issues they will be evaluating. After you have done this, you may be ready for the more detailed manufacturing estimate.
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