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SAMPLE BUDGET ESTIMATE:
Information Needed for a Detailed Estimate for a new household cleaning product
Calculating a complete manufacturing cost estimate requires complete information. New product ideas usually need some basic engineering research and market studies before enough is known to do an accurate estimate. Your may have questions about basic information that seem overwhelming.
Try this on for size…
To understand why it takes so many questions to get a manufacturing estimate, consider…
How much does a new business suit cost? Is the price different for custom tailored rather than “off-the-rack”? What if you order ten suits instead of one? What about 100 identical uniforms – but with custom, high quality material? Would the cost be the same if you need them delivered in one week? Prices would likely be different in each scenario and this is true of every part manufactured for a product.
New businesses sometimes go directly to a manufacturer to get a price on equipment before consulting an expert in production methodology and strategy. This is a mistake because it ignores the intermediate steps needed to justify investing in the project. It also means there’s a chance you are approaching a manufacturer that is not best suited to the job or you may not be considering the best production process. Time and money could be wasted getting estimates for the wrong production equipment.
Basic Information for estimates
- A Parts List (often called a “Bill of Materials”) with the quantities of materials of each product needed. Group this by the product styles and variations you want studied. Don’t forget to consider packaging and containers. (Sometimes the box is the most expensive single component.) Group the materials as follows:
- Off-the-shelf – provide as much detail as you now know – i.e. make & model. Even if you don’t know the manufacturer, list the retailers you know.
- Custom designed and/or manufactured – provide a sketch and describe as much as you can about the part including how you think it might be made and from what materials.
- Concepts (anything not completely tested and proven) – describe and sketch how you envision the materials production process might work. Elaborate regarding any tests that have been done to verify that it will work that way.
- Production levels (“units per year”) to consider for each style. Indicate where common parts may be used between styles and variations. This will increase the production volume for those parts which will decrease their cost. Describe the intended use for the items made at each level – i.e. – non-working models, engineering tests, in-house product tests, market tests, initial sales, and low-level, mid-range, or full production.
- Peak capacity (“units per day”) desired. Will your production be steady and predictable? Or, like some seasonal products, will a large number of units need to be produced in a short time?
- Reaction Time to Changes in Demand – How quickly should production increase if demand is greater than capacity? This may be closely related to peak capacity, but there are other considerations. Would you invest more in tooling that can be quickly modified to produce more parts? Or, do you want to gamble that you can obtain new, higher capacity tooling in time to meet demand and avoid losing market share? Tool delivery time can often be many months.
- Labor Cost – Automated equipment can reduce handling and packing labor. You will need to know what labor cost to consider to recommend Machinery cost vs. labor trade-offs.
All of this information will help you recommend production options. It will be hard for any inventor to know the answers with much certainty at the start. However, just knowing that you need to think about these questions will help.
Other factors to consider are the budget and how much should be bet on your market predictions. Do you want the optimum Machinery and the most expensive options so that you will save money in the long run if you are right about exactly what the market will want? Or do you want to take a less risky approach with conservative options in case you learn that some changes would increase sales and profits?
If This Sounds Complicated…
If you’re a beginner and all of this sounds complex, we’re not trying to make it sound that way. It is complex.
If you don’t have all of this information figured out, and most people don’t, you will need some help getting started and identifying an appropriate strategy. After some discussion with your team, you can provide a range of typical costs for each tool. This will allow you to consider what the budget might allow and form a strategy.
Cost is dependent on strategy. Strategy depends on cost
Developing a product from concept to market takes significant thought and planning. Inventors ask, “What steps do I take to bring a product to market?” That’s like an athlete asking, “What do I need to do to win?” There is no single “guaranteed” answer – it does not depend just on your actions, but also those of the consumer and the competition. But it is safe to say that frequently, success comes from good strategy.
Strategy is your plan — and budgeting your method of planning — for reaching a goal with the resources that are available. Strategy also involves how a company will adapt as it encounters the unexpected. Cost estimates change because strategy changes when dealing with the unknowns of innovation. Strategy starts out founded on perception and adapts to reality. Monthly, and even weekly, changes are common while going through innovation.
For many novice inventors, the strategy seems simple: 1) protect your idea (patent if possible), 2) build a prototype, and 3) license the patent to a manufacturer. That plan almost never works. Beginners believe that all new ideas are valuable and that manufacturers want them.
When some of those beginners realize that step “3” isn’t working and that licensing isn’t easy, they try a new plan that’s almost as bad. They decide to produce something, hope it will work and be legal, and then try to sell it nationwide through wholesalers and retailers they’ve never met. This is not a plan for a sane investor. An even worse strategy is hoping that someone else will do all of that for you.
Your production strategy must be interwoven with your overall business strategy including all the financing and patenting considerations. And, much of that strategy must be directed at getting more resources unless you have lots of money to risk.
Did you patent too soon?
If you applied for a patent BEFORE investigating the manufacturing issues, you will probably have a rude awakening when you do.
A patent attorney can tell you that you can’t patent ideas. You can only patent their implementation. Beginners often rush into patenting before they understand how the invention will be manufactured.
Changes are often dictated by production considerations. If you haven’t figured out how exactly how to implement an invention, it’s unlikely that what you patent will cover what you eventually manufacture.
TIP: A feasibility study is usually done for new ideas.
A good plan must not only address final production methods, but also the less costly, short-run production techniques needed when testing the product and the market – something that investors will require before approving a product launch. An expert can help you decide where to begin as you study the basics.
The method of production changes as you make the transition from prototypes into early production models and so on. Some general stages in this process are:
- In-house testing – Used by employees who are closely controlled, monitored and studied.
- Consumer testing – Used by consumers who are invited to try the product while being closely monitored and studied.
- Demonstration or sample units – Used to promote the product and get the first orders. These should look and work like what you intend to sell.
- Initial Sales – Sold through a few outlets in a small geographical area. The idea is not to make money. Rather it is mainly to prove that enough people are willing to purchase the product at the planned sales price.
- Low, mid, and high-level production – Sold through more channels in more and more outlets in increasingly larger geographical areas. You should start to see a profit at this level.
That example applies to most projects even though it is intended for injection molded plastic parts and the molds needed to make them.
Producing any product progresses through methods having increasingly higher upfront set up costs and lower production costs. The incremental cost per item decreases rapidly as you move from one low production technique to the next. The change is smaller as you refine high production techniques, but the overall savings can be large because the volume of parts is high. Finding someone to license your invention usually isn’t very likely until you begin selling some of the product on your own. However, the more you advance through the prototype and the production stages, the more likely it is that others will see the project as a safe investment. How lucrative it will seem depends on how your projections hold up.
Make sure that anyone who gives you a manufacturing estimate understands the business strategy and the degree of accuracy you need. Otherwise you won’t know whether they’ve calculated the cost to make a crude engineering prototype, a sophisticated production prototype, some of the very early production models, or if they’ve assumed you’re only interested in mass production. Estimates for each stage of this process start with a guess and a vague, blurry vision of what you’d like to do. They repeat with clearer and clearer views of the big picture until reasonable strategies appear. Zooming in and focusing on the best strategies requires a great deal of expertise and judgment. Assumptions must be tested and verified if you don’t want to get lost while chasing a mirage.
Production will be eventually be determined by consumer demand and how quickly you can capture market share. New companies often make the mistake of estimating what the total market might be and simply taking a guess at what percentage might buy their product. Keep in mind that the size of the total market is less important than the portion that will be reached though your available distribution channels. Predictions of demand based on market results following product introduction hold greater credibility.
The work needed to prepare production estimates depends on the number of scenarios to be analyzed and how detailed and finely focused each estimate must be. This involves an interactive and ongoing discussion by all stakeholders and some external experts. One approach is take a proposed and try to provide as much refinement and detail as possible for additional work to be considered.
This doesn’t mean whether you can get a one of a kind prototype to function. It means that the concept is technically sound and reasonably safe and that a product can be developed, designed, manufactured, used, serviced, and recycled with technology that exists or can be developed within time and budget limitations.
Products should also be reviewed from a “design for manufacture” perspective. Even if you have a generally workable design, an expert will often spot several aspects that are much less costly to make using a different configuration. Doing this review before getting a detailed estimate can save time and money.Of course, it is essential to prove that the product can be sold at a price and in sufficient quantities to justify the investment in time and money. Many items aren’t in the marketplace simply because they can’t be economically mass produced. Working models for such products may have been around for years.
To start a feasibility study you should consider a Preliminary Technical Evaluation. This includes an overview of technical feasibility and manufacturing issues. Such a study can provide an idea of how much more work is needed to prepare you for manufacturing or for negotiations with manufacturers and investors. You will need to understand and appreciate all the issues they will be evaluating. After you have done this, you may be ready for the more detailed manufacturing estimate.