Cost Of Materials Is A Product Manager’s New Friend

by drjim on July 15, 2009

The Cost Of What Goes Into Your Product Needs To Be Managed (c) 2006 - urbangarden/flickr

The Cost Of What Goes Into Your Product Needs To Be Managed (c) 2006 – urbangarden/flickr

In the current tough economic times we are all feeling the pressure to keep sales of our product either at current levels or to boost them in order to make up for shortfalls in other parts of the company. When  you step back for a moment and realize that our customers, both current and potential, are also feeling the squeeze of tight times, how will a product manager pull off this magic trick?

How To Reduce Your Product’s Costs

This is going to be a very simple lesson (with a lot of explanations to follow): use less costly materials to reduce the cost of your product. We all realize that the cost of one of our products is heavily dependent on what it took to build it; however, sometimes we’re too close to the product to be able to see how these costs can be reduced.

As they teach us in product manager school (you did go to that, didn’t you?) there are two types of costs that go in each unit of your product that is created. Note that this applies to both “real” (you can touch ’em) and “service” products. The first type of cost is called a “fixed” cost – it doesn’t matter if you manufacture one or a million units your fixed costs will always remain the same. We’re talking about things like salaries for managers, lighting, air conditioning for plants and warehouses, etc. Then there are “variable” costs which are the cost of producing one more unit. This would be the cost of plastic, or a circuit board, or a nice steak (if you were running a restaurant & selling meals).

To cut your costs, you need to find ways to reduce both your fixed and variable costs.

About Those Fixed Costs

The tricky thing about a product’s fixed costs is that all too often we take a quick look at them, shrug our shoulders, and say that there’s nothing that we can do about them. It turns out that this isn’t true.

Fixed costs are often established when we first start to make and sell a product. Rarely do we go back and revisit them when everything is humming along nicely. Have you looked at the economy lately? There are three fixed cost factors that you need to be revisiting right now:

  • Manufacturing – Site: where does your product product get created? Does it need to be made there – are there less expensive alternatives? Now may be a good time to renegotiate your site costs.
  • Manufacturing – Tools: how does your product get made? No matter if it’s being done by people or machines, looking for ways to use fewer of either can be a big bottom line savings technique.
  • Storage: where do you put your manufactured products after they’ve been created and before they’ve been sold? How much is this costing you? Once again this is a great time to renegotiate these types of contracts.

They’re Called Variable Costs For A Reason

The real savings in making a product generally comes from finding ways to reduce your variable costs. This makes sense because every penny you can shave off of a variable cost will be saved over and over again each time you make another unit. Things you should be looking at to reduce variable costs include:

  • Housings: most products are enclosed in some sort of housing. This can often be one of your most significant product production costs. Often this component has been over-engineered. Can you make it thinner or make it out of different materials while still keeping acceptable product quality?
  • Packing Material: when you ship / deliver your product how do you pack it? Once again, packing solutions are often designed once and then not revisited as improvements in shipping materials and methods are developed. This is a good time to take another look at this area.
  • Rework: One of the most expensive parts of any manufacturing process is the extra level of effort that is required to solve special issues that occur while the product is being manufactured. Spending some time to reduce the amount of rework can pay huge dividends.

Final Thoughts

Tough times offer product managers the excuse that they may have been looking for to revisit both the fixed and variable costs associated with their product. However, cutting costs is not all that a product manager needs to do.

In order to maintain profits, product managers also need to find ways to increase their sales. If you can reduce your product’s costs, then you’ll have more pricing flexibility and that will allow you to boost your sales. This is how great product managers make their product(s) fantastically successful.

Questions For You

Are you starting to get pressure to reduce the cost of making your product? Have you started to take a look at your product’s fixed costs? How about its variable costs? Do you have a plan for boosting sales while you trim costs? Leave me a comment and let me know what you are thinking.

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What We’ll Be Talking About Next Time

If product managers ran the world, we’d be able to sell our products to everyone at a very high price. However, since we don’t run the world (yet), we need to adjust and adapt in order to sell our products to as many people as possible for as high a price as is possible. However, when the global economy tanks, we’ve got a whole new set of challenges that we’ve got to deal with…

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{ 2 comments… read them below or add one }

Beth Robinson July 17, 2009 at 10:52 am

How much control and incentive you have to trim costs as a product manager will depend on how your internal costing is structured.

In the company where I work formulating adhesives the product manager can only ask for direct changes in the packaging and in the cost of the actual adhesive. We’ve done multiple reformulations for cost targets! Although there was the time that the R&D Manager insisted that the Product Manager figure out how much the pretty foil cartridge was costing compared to a plainer one before he devoted hours of research time to reducing the chemical cost….

Those raw material costs are also the only things that margin is calculated on – and margin/sales are what PMs are rewarded on. There’s not a lot of incentive (as I understand it) to look at the bigger picture or support incentives to reduce fixed costs that help the profitability of the business as a whole.

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Dr. Jim Anderson July 23, 2009 at 5:09 pm

Beth: good points all around. This is where the whole product manger role gets interesting. Often a company continues to do things the way that they have always done them – even when the product manager knows that they are wrong! In the case of trying to get some support to look into ways to lower fixed costs, the finance department is often a sleeping ally. Having a talk with them and letting them know what might be possible can awaken then and provide you with a powerful supporter that will enable you to spend more time looking at this critical component of your product’s price…!

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