Reduce COGS to quickly increase profits

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 R&D costs, we're still under $4M total R&D 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 R&D 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. 

2 views0 comments