When businesses are getting ready to launch a new product, we often see them overrun their headlights on the amount of money spent purchasing materials. By overrunning their headlights, I’m referring to the fact that people will focus on the unit price alone, and ignore the total amount of money required to purchase all of the materials needed to build their product.
Two aspects to consider when purchasing materials for production:
- Materials Unit Price – This is the amount of material that goes into producing one single unit of your product.
- Total Cost of Materials Purchased – This is the total dollar amount of ALL the materials for the entire production run.
The catch here is that people will focus on driving down the Materials Unit Price by buying in larger quantities (higher volume=lower price). Many times people spend more money than is necessary because they perceive a lower unit price, but end up purchasing more material than required.
There are times that it makes sense to purchase ahead of production, but a lot of that depends on how stable your design is, how much cash you have available, and the accuracy of your forecasts.
Here are three areas you should consider when purchasing materials for your production run:
- How much do you want to invest in the total buy? Another way to ask that is, how much do you have to invest? If you do not have the funds available to back up the total dollar amount purchased, the result could be devastating for your company.
- Does the component need to be there at all? Can the designed be made simpler? Can the component be eliminated from the design or can its function be incorporated in another module?
- What is the downside of ordering larger quantities to get better pricing? Consider availability, return policies, shelf life, and impact to the unit price should some of the material not be used, or if a redesign of the product is required.
While there often is no 100% right answer to any of these questions, the main point is to get you thinking. There are many individual factors with every startup that need to be taken into account, there is no such thing as a one-size-fits-all when it comes to setting up a supply chain.