In every business there are costs that are directly associated with producing a product. These direct costs are items such as direct materials (the gold or gems you are purchasing to make your product), direct labor (the cost of the labor associated with producing the product), and direct overhead costs (such as factory supplies and electricity to operate factory machinery).
All of these costs are used to calculate the cost of goods sold and gross profit. But at the end of the day, you really need to be concerned about how much money you made, which also takes into consideration indirect costs.
Here are the top 5 indirect manufacturing costs to look out for:
This includes water and power costs, which you generally don’t have much negotiating power over. But don’t forget about your telephone expense. Remember that you can call your provider and request lower rates—and you’d be surprised how quickly they will lower your rate if you just ask.
Try to buy in bulk and shop online for better deals.
Postage and insurance
If you have a UPS or FedEx account, provide it to your suppliers. If your rate is lower than theirs, they can ship to you using your number and get the benefit of volume discount pricing. Also, if you are getting multiple packages from the same vendor on the same day, ask the vendor to consolidate. And make sure you are charging your customers for postage and insurance on the packages you ship to them.
Machinery Maintenance and Repairs
Always perform an annual checkup on all of your machinery to avoid costly repair fees and loss of production time due to equipment breakdown.
Remakes / Returns
There is no way to totally avoid remakes or returns—but you can do a lot to minimize them. To prevent remakes, which are the result of not filling an order to the customer’s specifications, monitor their frequency and find out the causes so you can nip any production problems in the bud. Remakes increase production costs and affect your bottom line, so you want to prevent them whenever possible.
If a customer has a return that is not a result of an error on your part, cover yourself for the additional labor. Either charge restocking fees for returns or non-refundable deposits for custom pieces.
Whether you have been manufacturing for a long time, you’re a designer just starting out, or you are a retailer looking to start custom manufacturing in-house, you must take care to manage and monitor all costs. Getting a handle on the expense side of your business allows you to increase the other side—the income.