The first question that a new entrepreneur analyzes before he sets up shop is on what the cost of manufacture and labor is going to be. Before the analysis, he also has to comprehend that production estimates are not one time events. Even decades after they are in business, companies continue to find new ways to refine production methods, labor dependencies and reduce costs.
Rough Estimates
You can get a fair idea about the cost to manufacture a product by comparing it to other products that are similar to yours. The products need not be similar in function. The method of production needs to be similar. Typically, the manufacturing cost will be similar for similar production methods produced in similar quantities, similar size, complexity, labor intensity and quality. You can also come to a conclusion on manufacturing cost if you know the retail price and the mark up of the distribution chain for such products. While estimating the typical mark up in the distribution chain, you will also have to factor the cost of distribution chains.
Spade Work
Getting rough estimations is undeniably useful, but it can also be deceptive at times. Initial investment cost the previous year Vs. This year could be majorly different. Hiring processes come with a cost. And there is the labor standard of yesterday vs that of today. A startup needs to build the cost of development, design, and tooling into its production cost. A detailed estimate aids you in case you are looking at external sources for capital. Most startups choose to optimize labor, multitask amidst existing employees and find freelancers.
Upfront Costs
This includes foreseeable cost estimates- development guesstimate, product design cost, design and fabrication.
Production Setup Costs and Production Costs
This is the cost to set a production run which also includes some amount for the waste generated while tuning and testing the process. But, it is often impractical to do this for less than ten or twenty thousand units with mass production techniques.
Production costs includes Component Production Cost (the incremental cost to produce “one more item” after it is in production- raw material, machine time cost, machine operator cost, supplies & post production), Assembly Setup & Assembly Cost, Quality Control cost.
Here is more on cost basics.
Information Required to arrive at a detailed estimate of Production and Labor Cost:
- Materials required and their costs.
- Production Levels.
- Peak capacity
- Reaction Time to changes in demand
- Labor Cost
General Considerations
Estimation of production, manufacture and labor cost depends on the number of scenarios to be analyzed and how detailed and finely focused each estimate must be. This is done with an interactive and ongoing discussion. A good approach here is to bring in an expert and submit a budget for him to work within. You can ask them to provide as much refinement and detail as the budget allows along with an opinion of what additional work should be considered.
Here is more on start up basics.
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