The market value of things often fluctuates, and it’s hard to pinpoint this change in price to just one thing. It can be because of the spikes and availability of raw materials required to create the finished product. It can also be because of other things, such as high fuel prices affecting logistics and delivery costs.
Often, the price variance starts at the manufacturing phase. Let’s take a look at some of the most common factors that impact manufacturing, and the subsequent cost of the finished product.
Cost of Labor and Manpower
This cost is normally dependent on the location of the factory. Different countries have different wage requirements, something that will significantly impact the expenses of a manufacturer. And being that different governments often impose different tax regulations, what may seem like a low cost of labor might be harboring other expensive fees.
Another factor that affects the cost of labor is the complex positions often required for manufacturing. Trained technicians and operators in high-skilled positions usually have a base price that needs to be met- and they can’t be avoided as their skill and expertise significantly add to the end product. It’s significantly more cost-efficient to hire skilled workers with a high guarantee for quality than getting cheap labor that results in a poor-quality product. That’s why the cost of labor is something that many experts believe is among the most critical to invest in, especially if you’re looking to create a product that will satisfy customers.
Raw Materials and Goods
The raw materials intended for manufacturing use is another one of the most important expenses a manufacturer needs to prepare for. It will directly impact the quality of the final product and plays a direct role in the success of the manufacturing process. Different materials often have different properties and qualities, with price differences according to rarity and accessibility.
The positive thing, however, is that the price of these materials can be predicted, thus allowing manufacturers to respond to price changes. Raw materials count as commodities, and they’re regularly traded worldwide. The volume in which raw materials are either produced, harvested, or made affects the price (often regardless of origin), and the prices are regularly updated and sent to potential customers. Developers and manufacturers are regularly being updated with the changes in value, so they can account for these changes accordingly.
Specialized Tools and Equipment
The entire manufacturing process isn’t done by hand- at least not anymore. We’ve entered the age of technology, with high-powered and highly intelligent machines that make the job easier for us. Of course, human interference and quality analysis are still necessary, but for the most part, machines can do a lot more of the “making” process faster and more effectively than humans can.
However, it is in these tools and equipment where another major expense lies. Manufacturers need to invest in their own tools should they want to be cost-effective. And these types of equipment do not go cheap. Process air heating systems, cooling, autonomous robot that assemble products from parts, and other manufacturing-specific tools require a significant amount of financial investment- not to mention the amount of money it requires to maintain them. The cost of equipment (and its efficiency) ultimately affects output, which can then affect the final price of a product.
Volume of Production
The cost per part goes up as you move towards higher volumes of production and lower prices per part can be achieved by increasing productivity (the number of parts produced per unit time). Unfortunately, even though greater productivity can improve quality and reduce costs, it also increases costs because labor costs increase proportionally with productivity — sometimes doubling, tripling, or quadrupling — when comparing similar projects between companies.
Therefore, when considering volume pricing for a given project, determine what your level of service is capable of producing before making any decisions on volume pricing models to use in your business model or cost structure decision-making process. In addition, if you are using fixed-price contracts, keep in mind that many other variables could influence how much of a discount will be provided for increasing volumes that are not related to the basic fixed price contract terms that were negotiated at the beginning of the project.
There are other, subtler yet impactful factors that affect manufacturing costs and the final price of a finished product. However, the ones mentioned here are among the most prominent- thus requiring more attention. Ultimately, being able to read market movements and employ efficient and productive practices can improve manufacturing.