Launching a Product - How do I reduce product costs?

Hello, my name is Ian Peterman. I'm CEO and founder of Peterman Design Firm, and today I'm going to answer the question, how do I reduce my product costs? Now, every customer, every client, every company I've ever worked with or at has always asked the question, how do I reduce the cost of my product? It's obviously— it affects your bottom line. It sometimes can affect whether you can take a product to market. So there's 4 areas that I'm going to talk about in this episode around how to reduce the cost of product, and they're labor, off-shelf parts, material, and logistics. Now for the first part, labor, we're going to talk about how to reduce labor in a product. And obviously, reducing labor reduces cost. So labor involves any time that there is a human involved with actually producing the product. So that's if you have an assembly and there's a person actually assembling it. It's the time that a person has to sit, even if machines are doing the work, but a person has to watch those machines or be around to make sure those machines are functioning. That's all labor. Obviously, handcrafted products, they are very labor-intensive. There's no machine that's doing 90% of the work for them. It's hand-built products. And so reducing labor and reducing the amount of time someone has to spend in producing it and quality controlling it and assembling it, packaging it, boxing it, All of those things, those are all areas that you can reduce. So anytime that you can make it easier for someone to assemble it, or make it so a machine can assemble it, or make it easier for a machine to assemble or manufacture any of those areas, you're going to reduce your labor costs. And labor cost isn't usually the largest factor in production costs. There's a lot of other things that go into it. However, it can be a huge cost savings if you do it right. And even with crafted products, you can find ways to help whoever's making the product work more efficiently. Basically, it comes down to efficiency on the human end of producing your product. So things like making sure that your product is easy to assemble, it has fewer parts in it that actually need to be put together. So anything you can do to decrease the amount of time spent in actually putting it together or creating the part, if it can be, you know, maybe you figure out how to have the part made on one tool rather than going through a multi-step process that involves taking the part, putting on a different tool. Working on it, putting on a separate tool, working on it again. If you can reduce that, instead of maybe 5 machines working on one part, you reduce it to 3, you're going to reduce a lot of the other hard costs that come with it, but also the labor part, because that part has to be transferred from one machine to another, or guided or quality checked in between, things like that. So things like that will reduce the cost of labor. Now, for off-shelf parts, they are a huge saver in terms of cost for product development as well as time. So obviously, your product development time can be cut if you can use an off-shelf part. That means you don't have to design a custom part, but it also means that you can buy something that is already made en masse. And so you get to benefit from factors of scale, where maybe you are making only a couple hundred of your product a year, but the screw that you use is used by hundreds, if not thousands, of different people, and they're making millions of screws every single year. That means you can buy that screw at a very cheap price compared to other components, or if you were to make it yourself. Obviously, there's times, and I've developed custom screws for products because it was needed for the application, just something custom was needed, and then you'll find that you're in those places where you need a custom part. But wherever you can, you reduce your cost and your time to market and your investment upfront in finding off-shelf solutions for products. And in fact, a lot of startups that I've worked with, you start out with more off-shelf components than you normally would if you were at a larger company, just because it reduces some of the cost. And then eventually, you know, down the road a couple years, you redesign the product to have more custom parts in it because it will work better or improve the customer experience and things like that. But you can reduce that cost initially by using off-shelf parts and then always redesign it later when you have the scale where you are producing enough parts to make it worth— the volume is there to be worth developing custom parts and it fits within your margin. So off-shelf parts are always part of the strategy in how to reduce costs in products that we develop. The next section I want to talk about is material. So there's 2 areas to this. There is the raw material itself, and there is the process that you use in order to process that material into a part. So you have to look at both because sometimes you'll have a material that, while the raw cost is cheap, cheaper than another material, its processing in order to get it into the shape that you need to is too high, a lot higher. And those 2 costs put together is actually more than using a higher raw but lower manufacturing process cost. And so these 2 costs are really intertwined in terms of your material. You can't just look at the raw material cost. You You have to look at what is it going to take to turn that raw material into your actual part and the manufacturing process that it's going to take. By doing so, you can figure out, is there— is the cheapest raw material that will work for this product actually going to be a good solution? Or maybe aluminum makes sense, but because of how you are using it or how you have to process it in order to get a product, you actually Can use something else, say stainless steel. In this made-up example here, use stainless steel because you're able to use a different manufacturing process that is cheaper to do, much cheaper to do, and offsets the material costs so much that it's actually cheaper to use a higher raw cost material. So you want to look at the material as a holistic part. You got to look at Also things like shipping weight, which we'll get into logistics, but the weight of the material, how is it going to get to you? What does that cost look like? You know, how, how does that look? Who is going to be paying for that? What does the company that you're, you know, wherever it is manufacturing it, what materials do they have on hand? So if they already get a constant supply, say a truck drops off X number of pounds of this raw material daily because they use so much of it. And you're wanting something that they don't have on site, well, it's going to cost more to get something special just because it's not something that they usually order. They don't have a standing order. They aren't able to get quantity discount on it. And so you want to look at what is available at the location that you're actually going to manufacture and what's going to be easily available. And you may tweak— if you're able to, you can tweak your material choice to match what's And maybe they have one type of stainless steel and you need a slight— you designed to a slightly different one, but they're close enough that your application isn't going to be harmed by using this other material. But the cost is much cheaper because they have it in stock constantly. It's what they have delivered every single day. And so looking at that will also help reduce your material cost. Because again, it's the economy of scale. You may have selected a material that is lower cost, but because they order so much of this slightly more expensive material that their discount on it is enough that it actually is cheaper than trying to get this other material you selected. So there's a lot of factors that go into material selection and how to make it cost-effective for the project. The last area that I want to talk about is logistics. I mentioned a little bit in the last section, but it's really— you have to look at every single component of logistics. And that is everything from raw material, where does it come from, how is it transported to every step of the process, all the way to you sending it to the customer. So a really great example that I share with people that I had experienced in my own career, I was designing a product. They're speakers. They're big monitor speakers that are for recording studios. And when we designed it, we had to be aware of the weight limit of when you shifted over from just regular shipping that you think of for UPS and FedEx, just put it in a box and a guy comes, picks it up, it away, no problem. And the shift into freight, I believe it was about 50 pounds, was the point where it switched. And if you— we were designing a product and we were right on the line. Sometimes we were a little bit over, sometimes we were a little bit under, just with design changes. And as soon as we figured out that this line existed, we immediately redesigned everything to go under that weight limit. And there's reason is because it just so happened that at the top of that, at, you know, 49 pounds, it was pretty cost effective. And as soon as you switched over to 51 pounds though, and you're in this other category, the pricing doesn't— isn't as efficient. It's a much higher cost per pound in the low region of that type of shipping. And so in order to keep us from going over that limit and entering into this much more expensive— I think it was about 5x more expensive, that, that's a lot of money when you're shipping a 50-pound item. That's not cheap to do by itself, but at 51, it became 5 times more expensive. And so in order to keep our logistics costs down and save quite a bit of money, we designed the product in order to fit under that. And so we ended up— I think we went around 48 pounds, 49 pounds for the actual product, half a pound for packaging, and we were right under. And it was— we made sure that no matter what, no matter what, what manufacturer manufacturing, minor changes might happen. We were under that mark and we were able to save a lot of money for us and eventually at the customer level too, because they're going to end up— if they were shipping it their own way, then they'd have to pay for their own shipping. And nobody wants to ship freight if you're not actually shipping a whole bunch of things. So those things, looking at what is the cost of delivering to your customer, what's the cost of delivering between your manufacturing plants, What is the price difference between getting a pallet? So is it cheaper and better to store the material on site and order 5 pallets at a time, put it on a boat and sail it across to wherever you need, need to get it from? Is that cheaper and better, or using trucking rather than buying a smaller quantity and having it more quickly shipped? And trying to keep, you know, just-in-time. You have to balance what is the logistical cost of the system that you're using, whether it's just-in-time or you do hold a large backstock. You got to think about things like how much does it cost to store the material? Yeah, you might, you might have a factory floor and you have plenty of space, but you're paying for that space. You're at least paying taxes and power and lighting and Everything else that goes into a space, and there's a square foot cost. So how much does that cost? What does that break down? And so you can optimize your supply chain through looking at the logistics side and make sure that you're able to actually reduce costs in the most effective way. And it's really all about efficiency. So hope this answers your questions about some ways to reduce product costs. We talked about labor, we've talked about off-shelf parts. We've talked about material, and we talked about logistics. In each of those 4 areas, by focusing on them, we help reduce the cost of our clients' products, and we'll— it'll help you reduce costs in your own product development as well. Thank you. Hey, thanks for watching. We really appreciate our viewers, and if you haven't subscribed yet, please do subscribe to our channel so you can get more great videos like this in your feed and like the video. If you want to learn more about the Peterman Design Firm, please check us out on our website, petermanfirm.com. You'll find link and information in the description. And of course, we're on all social media as well. So check us out there. All right. Thank you.