Cost of goods sold, also known as COGS, is one of the most important elements of your business to understand. COGS can be defined as: “The direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good.” This article will show you three effective strategies to reduce your business’ COGS, directly impacting your business’ bottom line.
Buy in Bulk and Receive Discounts
When you buy in larger quantities you will often be able to take advantage of quantity discounts. You may also benefit from shipping discounts; it is cheaper per unit to ship a container full of product than it is to ship a pallet full of product. Ask your suppliers what sort of discounts you could benefit from if your business were to purchase in larger quantities.
Substitute Lower Cost Materials Where Possible
Products can usually be manufactured utilising a variety of different materials, depending on marketplace requirements and the practices of the manufacturers. Technology is constantly improving older materials and creating new ones, prices move up and down due to supply and demand, and processing methods change. However, when considering a change in the materials used in your products, be sure to recognise all factors involved. For example, substituting some materials may result in an inferior product. Moreover, different materials may require changing your method of manufacture by increasing cycle times, as well as labour costs. And in some cases, changing the composition of a product may be worthwhile, even when the material costs are higher due to a simplified production process. Be sure to research well.
In many cases, a little research will turn up alternative suppliers of similar products available to you. Determine whether there are any different features between suppliers and whether these differentiating features benefit you or your customers. Is it worthwhile, for example, to have a faster delivery time or favourable financing at a slightly higher price? If not, purchase from the supplier offering the product at the lowest cost.
For each job that you can replace with a machine, your cost of goods sold can decrease drastically. For example, machines do not form unions, they do not go on strike, they do not need health insurance, and they get to work on time. If you do not automate in the areas that you can, your competitors will, and you will ultimately lose out on business because you simply will not be able to compete with your competitor’s prices.
Move Manufacturing Offshore
Another possible way to reduce the COGS for your business is to outsource manufacturing to a country where material and labour costs are cheaper than at home. In recent years, for example, China has become a favourite offshoring destination for western business owners, although today its popularity may be decreasing as Chinese labour costs have been increasing fairly dramatically. However, the principles remain the same whichever off-shore region is chosen for manufacture.
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.