Making successful hardware merchandise is difficult nowadays. With global supply chain challenges, rising lead times, and growing component and labor costs, we must also consider taxes. The survival of various hardware businesses depends on their expertise in BOM (Bill of Materials) cost reduction. This article focuses on effective strategies to decrease manufacturing costs.

Checking for Mistakes

Product BOMs can be complicated, and errors from CMs (contract manufacturers) are common, especially with initial quotations. These quotations are often put together quickly to meet deadlines, which can result in mistakes. Common errors include incorrect quantities, duplicate or missing items, or wrong specifications.

Many factory quotations still rely on Excel files. The first task is to ensure everything has been accurately estimated. Start by working backward from the final cost to verify that all fields are properly filled, and all components, profit margins, and scrap values are correctly calculated.

It's essential to conduct a sanity check to ensure the quantity of items in the BOM matches the quantities in the reference document given to the company. If discrepancies exist, review and resolve them, especially when dealing with consumer electronics and varying specifications.

Cost Overview

Next, create a report to analyze the major cost categories (e.g., plastic, components, labor, packaging, etc.). Many factory prices now offer a solid overview, but you might need something more customized. For example, separate labor costs into key processes or distinguish unit packaging costs from the primary packaging.

If comparing quotes from different CMs, this analysis can help identify areas where companies may be inflating costs. Also, check if the ratios of costs are consistent across similar products to highlight potential areas for BOM cost reduction.

For quicker results, focus on reviewing the most significant cost domains first. In electronics, this often means focusing on the electrical components. Sorting by price and scanning for discrepancies will help streamline the process.

Drop-in Replacement Components

When it comes to electronic components, many affordable drop-in replacements are available locally. Ideal candidates for replacement include passive components and dynamic components requiring little or no firmware changes. However, components like MCUs (Microcontroller Units) and principal ICs (Integrated Circuits) are usually not suitable for replacement, though exceptions can be made depending on the circumstances.

The best way to source regional components is through your corporation’s network, but third-party suppliers are also a viable option. Be careful not to fully disclose your BOM to third parties, as it’s easy for them to learn your product's design.

Battery

Batteries are often a major cost driver in consumer electronics. It’s worth sourcing from multiple suppliers to get the best prices. Ensure the suppliers you approach have all necessary certifications and agreements in place to avoid wasting time later.

Also, make sure to visit suppliers onsite to confirm that they have the necessary inspection equipment and procedures in place. If there are no in-house specialists, your CM can often assist with conducting a review.

Packaging

Packaging is one of the best areas for cost reduction, as it doesn’t require changes to long-lead-time components or firmware tooling. Set a target price in mind before asking packaging suppliers for alternative suggestions on cost-saving options.

Minimum Order Quantities (MOQs)

It’s important to negotiate MOQs with suppliers to optimize costs. Start with the most expensive components, and if any elements are used in other products, you can order in bulk to reduce unit prices. However, larger MOQs can impact your warehousing costs and cash flow, so balance carefully.

Labor

Labor costs are often not fully broken down in factory quotations, with many manufacturers offering a labor charge for major processes like assembly, molding, and decoration. Labor pricing can be tricky, as unknowns may arise as the product line ramps up. The best approach is to categorize labor-intensive processes and work with your CM to make these operations more efficient, while also negotiating new quotes as necessary.

Final Considerations

Sometimes, the only way to reduce BOM costs is to consider cutting certain features. To facilitate this discussion, review the stock specifications and evaluate the associated costs for each major feature. You may be surprised to find that some features add more cost than value to the customer experience. Be open to scaling back on non-essential features to make the product more cost-effective.