Product Design – Part 2

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Continuing on from the first product design post, we’ll follow up on our consumer based pricing model and dive into a product summary. This will be one of the first steps for solving a small business’s feasibility study. A feasibility study will tell us, before we waste time and money, if our one-in-a-million idea is actually worth pursuing.

Product Design

We need to determine if we can sell something at a profit that allows us to stay in business, pay ourselves and allow some cash for growth. As a manufacturer of specific goods that last a long time, I’ve got to pay attention that I am not selling my goods for less than it costs to make them. Obvious, right? In our consumer based pricing model we created an idea of what our product’s sell price should be but now we have to determine if our design can fit that model.

I do this by creating a product summary sheet. It’s a bad name but I like to say summary because it tells me everything I need to know about how much it costs to build a particular piece of furniture.

Bill of Materials

In a nutshell, my product summary is my bill of materials. It’s also the first step of determining the Cost of Goods Sold. COGS is just a net way to look at the real cost of selling a product. More on this later. Let’s look at a sample from an upcoming chair design.

Num. Item Description Manufacturer Part Number Quantity  Cost  Unit Net Cost  Percent  100 Unit Cost  100 Net Cost
1 Tape Rear/Back interface 3″x1.5″ 3M VHB 4929 2  $ 1.46  $ 2.92 1.9%  $ 1.29  $ 2.58
6 Bolt 1/4″-20 UNC, 1-1/4″ Length Black Oxide MC 92220A205 6  $ 0.33  $ 1.98 1.3%  $ 0.33  $ 1.98
9 Nut 1/4″-20 UNC Nut, Thin, Black Oxide MC 90475A110 12  $ 0.07  $ 0.84 0.5%  $ 0.07  $ 0.84
10 Wash 1/4″ Black Oxide SS Washer MC 96765A140 12  $ 0.06  $ 0.73 0.5%  $ 0.06  $ 0.73
11 Bag 4″x6″ 3 mil zip top bag TPBS PZIP3-4×6 1  $ 0.03  $ 0.03 0.0%  $ 0.03  $ 0.03

Easy right? After I’ve created the overall shapes and dialed in the design of a chair I start to add all of the pieces that hold it together and ship it. This includes plastic bags to hold small parts, the cardboard box and packing tapes and foams, down to the glue required for some pieces. This part isn’t fun but it’s crucial. If you’re needing inspiration and think you might have missed something, try looking at things you’ve recently bought. Look at what came in them and what was needed to bring the product to you.

Break it Down

I’ll talk about the columns from left to right. First is just a generic number. I  use this as an overall part number – Product Number – Num. Item is a short description for each part. I picked up the use of short and long descriptions back in my refinery building days while classifying piping components. You can later sort things by their short description if you stay consistent. Need to order bolts? Sort your master list by the short description.

Description is just a long description so you can easily look at your list and compare it to your inventory on hand. The manufacturer is just there so I have an idea of where I need to order from or look up product info. Part Number is the manufacturer or reseller’s actual part number. I hyperlink these in Excel so that I can easily place an order for more. The Quantity column indicates how many of each part are in that particular product.

The Cost column takes some calculation to create but is worth it. Most things like nuts and bolts are sold in gross. Therefore I take the package price (per 10 or 100 usually) and get the unit price, or price per item. I type that in and multiply by Quantity to get a Unit Net Cost. In this case, we are using 84 cents worth of black oxide nuts.

But what does that represent as a piece of the whole? Easy – 0.5% of the Bill of Material is used just for nuts. This is an easy way to visually see where your money is going in a design. Filter your list by the short descriptions and sum the values. You might be surprised to see that the gold plated unobtanium screws you are using really drive up the price of your hair dryer by accounting for 82% of its cost.

The next few columns are a way to future-proof your numbers. They account for any bulk material buying discounts you might get if you start producing products in larger batches of 100 (or more).

Sum it Up

The next step is to add all this data into some usable totals. I use a little bit of trickery to help. Just copy and paste the code directly into your spreadsheet – it should work with Excel and Google Spreadsheet.

After all of the rows I like to add a subtotal. The subtotal represents actual sums before you add anything. Most subtotals for dollar amounts can use a simple equation:

=SUM(cells)

Where “cells” is your column data, such as A9:A27. The sneaky trick I use for partial numbers (such as adding in glue which accounts for 0.84 pounds of liquid but still counts as one part) is:

=ROUNDUP(SUM(cells),0)

Where “cells” is again, your column data. The zero “0” tells the spreadsheet to just round to the nearest whole number.

After that I like to add a row that I call “Overhead”. This gives me some flex money to stock the shelves, order material on the internet and do any related paperwork. You don’t have to include this, but it’s easier than trying to figure out what it costs to pay yourself. I add 10% but have found that 15% is more common. Just type your percentage into the cell and in Excel, change the number format to “Percentage”. If you don’t have that option, for 10% type in “0.1” and for 15% type in “0.15”.

Product Design

Found in the toolbar.

Multiply the percentage with the Unit Net Cost subtotal to get your percentage in money terms.

Grand Total

Finally, sum together all of the subtotals for your Grand Total. The only really important column here is the Unit Net Cost. Don’t get this confused with the Cost of Goods Sold “COGS” that you’ll sometimes see in business literature. You will still have to add in things such as shipping and or credit card transaction fees before you have a true reckoning of per unit costs.

Next Time

Good luck setting up your product costs. Even something as simple as a cup of coffee can have a lot of costs: cream, the cup, the sleeve, the stir stick and more. The only thing I exclude in my analysis are fixed costs such as the building and (utilities). I get down to even factoring in replacement saw blades and bits. A little time here can save you a lot in the future. Keep at it and create a page for each of your products. You’ll always forget something but something is better than nothing.

If you missed it, check out Part 1 of the Product Design Series where we talk about creating a consumer based pricing model.

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