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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