Cost of Goods Sold (COGS) is the cost associated with the manufacture of your inventory stock, which incorporates both the raw materials cost and the labour costs. For the business to profit, the cost of production needs to decrease as the sale price increases. However, reducing production cost cannot come at the expense of quality. If a company can find a way to reduce COGS, maintain quality and increase sales, they would indeed be on the road to success. Consider the following points as methods to reduce COGS.
Buy in Bulk
Buying in bulk is a significant way to save money. This is in part due to the running costs of the supplier; the more units they make, the lower the production cost is of each unit. Additionally, when it comes time to ship, the cost of shipping is divided by the number of units. So, for example, if one pallet is ordered and must be delivered by truck, the petrol, driving time and mileage are all attributable to that one pallet. However, if 15 pallets are ordered, then those same set costs are divided 15 ways.
There are some risks associated with bulk buying, namely the cost of storage of the extra materials, however it very well may be that these costs would be offset by the savings of bulk buying. It can be worth considering joining or forming a buying cooperative with others in the industry where all your orders are added together as one to take advantage of bulk discounts and shipping costs.
Computerise and Automate
The more tasks that can be completed automatically by a machine or computer the more you’ll see a decrease in COGS. This is because, although machinery costs a lot up front, it saves on on-going labour costs and can be run a lot more efficiently and continuously. Uniquely, the cost of machinery depreciates over time whereas labour costs increase over time. Even though automation is at odds with many workforce unions who support job preservation, it can be exceedingly helpful to a company in reducing COGS.
Seek Out Deals
Your business can snag real savings by locking in long-term low material costs. If a price of raw materials is low, then businesses can seek to lock-in that price on a long-term agreed order frequency. The real benefit of this practice lies in the eventuality that prices increase after you sign the deal and therefore you can maintain your materials bill for a period of time. There is, however, a danger associated with this in that particularly with basic raw materials like milk, fuel or water, where prices fluctuate frequently, there could be an unexpected price crash. If this is after you have signed, then you could have taken advantage of an even better deal if you were not already committed. A lot of business is about intricate understanding of the product, market and risks involved, and in some instances, being willing to take those risks.
A big part of reducing costs in any situation is achieved by finding areas to tighten the belt and eliminate areas where money is wasted. In business, this is termed lean manufacturing and refers to an in-depth analysis of the manufacturing processes with an eye for detail and areas prone to wastage. This could be in the form of wasted materials, wasted machine-operating time or wasted labour. This method of reducing COGS by decreasing wastage and increasing efficiency can be very effective indeed.
We have looked at four ways in which the COGS of a business can be minimised or reduced, however, there are several more which just require some attention to detail to uncover. When it comes to controlling inventory stock in manufacturing and ascertaining what stock is surplus to requirements (representing waste) or what stock can be bought in bulk and stored appropriately so as to reduce costs, inventory management software is worth its weight in gold.
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.