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Reduce COGS to quickly increase profits

Updated: Apr 8, 2021

How do companies decide to have their devices manufactured overseas?

Most of the time, the COGs (Cost of Goods Sold) is the deciding factor. 

Here's a mock business case:

Let's say Company A has sales of $12M on a single product each year, with a COGs of $9M. 

The profit is $3M (not counting marketing and business overhead).

This assumes full capitalization of any tooling or setup costs. 

If it's is a new product, it's quite feasible that a redesign could net the business owner a 20% reduction in COGs.

This is because new products generally are not optimized for manufacturing. 

In this case, the value of this redesign effort is estimated at $2.4M /year in increased profits.

The costs for this redesign should be targeted around 10% of this amount to ensure a positive ROI for the business owner. 

This means that the business owner could feasibly spend $240k in labor on a redesign. 

For complex electro-mechanical devices, they should also expect to spend at least 400-700k on high-quality production tools, which brings the investment to $740-940k.

There may be some ancillary costs that come up during development, changing marketing strategy, hiring staff to assist in change, changing production volumes and inventory levels, etc. 

WAG estimate of $3M extra Research and Development costs, we're still under $4M total Research and Development investment to go from Gen1 to Gen2 device.

This business owner can recognize a fully redesigned product (and paid for) in 2-3 years.

This mock business case is a good lesson in forecasting the true value of the Research and Development effort. 

There's a lot to learn in product design and development. 

I'd love to talk to you about your device redesign opportunity. 

Call us for a free consultation. 


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