No matter what good a company is producing, the cost of the materials needed to produce that product directly impact profits. Cost of goods sold, otherwise known as COGS, is simply the costs of the products produced and sold, or purchased and sold again by a company. The cost of goods can include the cost of raw materials that go into manufacturing a product, as well as the cost of items that are bought to be resold. Additionally, it includes the cost of parts used in the actual construction of a product.
When a company is looking to reduce costs, there are numerous cost-saving strategies that can be applied to the COGS.
Buy in Bulk
When you are purchasing raw materials from a supplier, the ordering cost on a shipment can vary. If you order one pallet full of materials, the chances are that the ordering cost will be much higher than buying in bulk and filling a whole truckload full of necessary materials. Suppliers are often willing to give quantity discounts when a manufacturing company places a large-scale order. It pays to ask and negotiate the ordering cost of materials to see if you can reduce your COGS. Transportation also plays an important role in keeping costs low.
Secure a Long-term Price
By locking in a long-term price on raw materials, this can benefit a company’s bottom line in the long run. If the price of a specific raw material rises, you will have an advantage of enjoying a steady price while your competitors are subject to the higher prices. However, it should be noted that this can be a risky manoeuvre. If prices crash and your company is locked into a higher price with a supplier then the agreement might not be as beneficial.
Remove Unnecessary Features
Custom designed products generally costs more to make than kit-set or mass-manufactured products. When a product has unique or custom features it adds additional steps to the manufacturing process. With each additional step, it adds costs to the bottom line. If there are certain features that can be eliminated, this will be advantageous. It can streamline production and reduce costs while still satisfying customers. By looking closer at customers’ motivations and demands, you can design products that meet those needs without incurring extra cost.
Decrease Production Waste
When a product is designed, it is rarely created to leave minimal waste on the production line. The production process usually creates excess material or scraps. In the long run however, the excess material shed off at the production line can really add up. The cost of the scraps can increase even further if the actual cost of raw materials goes up as well. Small changes can be made to product designs or how a product is produced to use the raw materials more effectively. This can decrease production waste and decrease costs.
By stepping back and analysing the current state of your COGS, there is undoubtedly numerous ways to cut back costs. Once those costs are reduced, you will realise bigger financial profits in your company.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.