Revealing The Hidden Costs Of Manufacturing
March 14, 2012 3 Comments
I recently wrote a blog article about achieving a target product cost through design and process improvements. A fellow colleague wrote a great comment regarding total cost vs. unit cost as a method for supply chain decisions.
Yes, total cost is different from unit cost. This begs the questions: what is total cost? An economic definition includes variable cost, fixed cost, capital expended and the total opportunity costs of each production input. While this definition is accurate and makes sense in theoretical economics, it is not very helpful to those of us charged with making complex supply chain decisions.
To unravel the more essential question: “what are the components of total cost relative to my product, my company, my manufacturing facility?”, me and my team, have created the following model:
This model, revealing the total cost of manufacturing, can seem overwhelming. However, studying the model does give us an insight into just how complex costing can be. And while there are barriers to accurate information, the model can be used as a begining point to drill down into each component and then re-assemble or roll up into a total cost, creating a more robust decision making platform.
What have been your challenges in determining total and unit costs?
Damaged product is simply not acceptable. Whether our products are OEM or retail, customer interaction with product packaging and the product is critical. Retail customers, like you and me, do not buy products that have dents, broken shrink-wrap, or torn labels. Likewise, OEM customers do not want to deal with fallen over pallets, banged-up outer cartons or ripped open bags. This kind of damage greatly reduces an OEM’s ability to be efficient and creates questions about the quality of the goods received.
Yes, yes and yes, lean manufacturing principles do apply to new product launches. In our journey to launch new products, how many times have we faced one or more of the seven wastes identified in Lean Manufacturing such as:
Information sharing within the supply chain is a great strategy for cost savings. Often, organizations working with one another have redundant systems creating double entries of the same information, duplicate paper work and double handling of the product.
Bringing a new product to market is a storied journey with many roadblocks along the path from ideation to product launch. As the launch date approaches, more and more resources are invested. Meeting critical launch dates becomes increasingly important in achieving revenue and return on investment objectives.
