Commercial Production (IB)
While inventory creates a safety net for companies, maintenance and potential waste of resources can have significant implications for companies and the environment. Manufacturers must evaluate and analyze each market and determine whether a JIT or JIC strategy is the best to follow.
JIT and JIC are two production strategies used by manufacturers that have both advantages and disadvantages to them. A manufacturing company will choose one of these strategies to follow for many reasons that include the products they are producing, the nature of the market and the nature of the economy.
A situation where a company does not allocate space to the storage of components or completed items,
Instead orders or manufactures them when required.
Large storage areas are not needed
Items that are not ordered by customers are not made.
JIT aims to reduce inventory costs and increase efficiency by receiving goods only as they are needed in the production process.
Advantages
Storage – no space required thus reducing costs
Efficiency – Highly flexible, easy set-up for short runs (because of cell production)
Stock control – extensive inventory management systems are not necessary, as inventory levels are kept to a minimum.
Waste – elimination of waste due to overproduction, left over stock, idle time, product defects and material processing.
Traditions – Factory organized in cells/modules instead of departments based on function
Disadvantages
Reliability – Part will need to be made, things could go wrong, delay in manufacture and transport to consumer
Capital investment – high but machinery could be used for a variety of products
Distribution – small delay as consumer waits for the manufacture and distribution.
any disruption in the supply chain can halt production, making it crucial to have reliable suppliers.
JIT | A comparison |
A company produces a small stock of components or products and stores them as inventory.
This is Just-Incase a rush order comes they have ready supply.
Some products included may be products or components that take a long time to produce therefore reducing customer wait time.
JIC can serve as a buffer against unforeseen demand spikes or supply chain disruptions.
Advantages
Distribution – no delay as parts are available.
Reliability – Part is ready to be sent and probably has passed quality control.
Market demand – manufacturer is able to keep up with a change in market demand
it can lead to better customer service as products are readily available
Disadvantages
Efficiency – Not as efficient as it is organized in departments often offsite.
Capital investment – high but machinery could be used for a variety of products
Storage – space required thus increasing costs
Waste -some waste due to overproduction, left over stock, product defects and material processing.
Traditions – Factory organized in departments based on function usually offsite bringing about added costs and transportation time
Stock control – required also, may left over stock once the product becomes obsolete or market direction changes.
Effective business processes and practices developed in some countries have been exported successfully.
Manufacturers decide whether to pursue JIT or JIC as a production strategy depending on their perception of where the market is going. To what extent do different areas of knowledge incorporate doubt as a part of their methods?
Lean production considers product and process design as an ongoing activity and not a one-off task, and should be viewed as a long-term strategy.
The role of the workforce in lean production is paramount, relying on their wisdom and experience to improve the process, reducing waste, cost and production time. Recognizing this results in motivated workforces whose interests are in the success of the product.
Lean production considers product and process design as an ongoing activity and not a one-off task.
It should be viewed as a long-term strategy that focuses on continual feedback and incremental improvement.
JIT supplies/system
a highly trained, multi-skilled workforce
quality control and continuous improvement
zero defects
zero inventory
emphasizes reducing lead times and fostering a culture of continuous improvement.
There are several key principles of lean production. If any of these principles are not met this could result in failure or a lack of commitment. Without commitment the process becomes ineffective.
Eliminate waste in all areas by focusing on doing tasks right the first time.
Minimizing inventory
Maximizing production flow and designing for rapid production changeover
Kaizan – Continuous Improvement from everyone – from management to workers. Without continuous improvement your progress will cease.
Respect for workers or empowering workers (Humans, most reliable and valuable resource to any company)
Pulling production from customer demand or meeting customer requirements
Designing for rapid changeover
Creating a reliable partnership with suppliers
Meeting customer requirements
Doing it right the first time
Advantages
Increase consumer satisfaction due to cost reduction
Productivity has increased because of focus improvements and reduction in waste
Quality of product improvement and continuous improvement
Waste reduction
Reduced impact on the environment
Adapt to market pull
Increase in profits
Improved work conditions for employees
Competitive advantage
Disadvantages
Change in worker and management attitude can be difficult to manage or to gain complete buy in
Delivery times – since no inventory is held in storage and breakdown in the system will cause delays
Supply problems
High initial capital costs
Value stream mapping is a lean production management tool used to analyze current and future processes for the production of a product through to delivery to the consumer.
helps to identify Value and Waste in production
Workflow analysis is the review of processes in a workflow, for example, a production line, in order to identify potential improvements.
Value stream mapping and workflow analysis contribute to the design of an effective lean production method through:
Value stream mapping provides the big picture of the manufacturing process
Where as workflow analysis is concerned with the production lines
This image shows a workflow analysis by using a flow chart through certain questions and criterions.
A group of products having common classification criteria.
Members of a product family have many common parts and assemblies and production processes.
members of a product family often share similar production processes, which can lead to economies of scale.
Investopedia on Product Family
Advantages include:
Cost-effective due to – reduced manufacturing costs, similar manufacturing techniques, similar supply chain, reduced R&D,
Allows companies to attract new customers to their brand though an array of products that are similar but meet slightly different needs.
Customers as they can rely on their positive experience with an existing brand.
Adapt easily to market demand such as the iPhone 5SE (shows and example of market pull)
Training
The development of a highly skilled workforce can build deep understanding of how the production process works and allow workers at all levels to identify areas of the workflow to be improved.
This leads to the devolution of power
Devolution in power relating to process improvement
Understanding that the best people to identify improvements of a product or system are those who use it, companies striving for a lean production system ensure that all members of the workforce are able to contribute to the design of the system.
This benefits the company, which is able to streamline processes and reduce costs and also empowers the workforce and gives them a sense of ownership and loyalty to the company.
Kaizen
A philosophy and commitment to continuous process and product improvement
It is considered an important aspect of an organization’s long-term strategy.
This has been central to the success of many Japanese companies such as Toyota.
It originated in Japan
Lead time refers to the time quoted to customers (usually in days or weeks) between the date of purchase and the date of delivery.
It is basically the time frame it takes from the order of a product to its manufacture until it is delivered to the customer. This can be days or weeks in duration. This includes the production, set-up etc times.
The business dictionary has a bit more
Sorting
Stabilizing
Shining
Standardizing
Sustaining the practice
Overproduction
Waiting
Transporting
Inappropriate processing
Unnecessary inventory
Unnecessary/excess motion
Defects.
The importance of the individual is recognized in design processes. Is this the case in other areas of knowledge?
The implementation of lean production has benefits for the global environment.
When considering design for manufacture (DfM), designers should be able to integrate computers from the earliest stage of design. This requires knowledge and experience of the manufacturing processes available to ensure integration is efficient and effective. Through the integration of computers, the rate of production can be increased and errors in manufacturing can be reduced or eliminated, although the main advantage is the ability to create automated manufacturing processes.
The integration of computer control into manufacturing can streamline systems, negating the need for time-consuming activities, such as stocktaking, but also reducing the size of the workforce.
A system of manufacturing that uses computers to integrate the processing of production, business and manufacturing in order to create more efficient production lines.
Programmable computer based manufacturing system
Typically, it relies on closed-loop control processes, based on real-time input from sensors
Design (CAD) – the product is designed within the CAD software, tested and the necessary G-Code, materials, and other data is generated.
Planning – the computer system and database (contains design and production data) helps to plan the most efficient production process.
Purchasing – with the design and production the computer system can employ a JIT approach in purchasing the necessary materials.
Cost accounting – is the budgeting of the production process, receipts, and all things financial.
Inventory control – responsible for tracking the materials, products, again JIT can be employed.
Distribution – is receiving materials and the distribution of products to warehouse or vendors.
It is costly to set up
Therefore it is better suited for large scale production such as batch, volume or mass
Advantages and disadvantages of CIM in relation to different production systems
Scale of Production | Advantage | Disadvantage |
One – off or small scale |
| |
Batch, Volume or Mass |
|
|
Mass Customization |
|
|
Advantages and disadvantages of CIM in relation to initial investment and maintenance
Advantages:
System is constantly monitored so if there is a breakdown: the type and location of breakdown is easily identified making maintenance easier
reduces cost of maintenance
After the high initial greater profits will be achieved
Disadvantage:
high initial capital costs/investments due to computers, robots, training of personnel
maintenance is complex, requires highly skilled employees
A CIM system allows for efficient global workflow and distribution.
Technology has a profound influence in design. How have other areas of knowledge been influenced by technology?
Designers should ensure that the quality of products
is consistent through development of detailed manufacturing requirements. They also need to focus on the means to achieve it. The importance of quality management through quality control (QC), statistical process control (SPC) and quality assurance (QA) reduces the potential waste of resources.
The implementation of quality management strategies requires a critical and complete understanding of the needs of a product. To ensure efficiency and efficacy, these measures need to be designed into the product and its production system.
Tolerances are defined at the design stage of the machinery. Parts not within tolerance need to be reworked or scrapped.
Continuous monitoring ensures that the machines perform to the predetermined standard/quality.
Ensures that process inputs, such as speed, temperature, pressure, etc, are monitored and adjusted.
Quality control at the source eliminates waste from defects as workers are responsible for the quality of the work they do.
Able to get the same results over time
This covers all activities from design to documentation.
It also includes the regulation of the quality of raw materials, assemblies, products and components, services related to production, and management and inspection processes.
It is the maintenance of the entire system from design to purchasing to packaging that meets quality requirements.
QA | Process orientated | Pro-active | Prevent defects |
QC | Product orientated | Reactive | Find defects |
This is a quality control tool that uses statistical methods to ensure that a process operates at its most efficient.
This is achieved through measuring aspects of a component to ensure that it meets the required standard throughout its production in order to eliminate waste.
Effective quality management can have major benefits for the environment.
There are commonly accepted ways of assuring quality in design. How do other areas of knowledge ensure the quality of their outputs?
Designers need to consider how the costs of materials, manufacturing processes, scale of production and labor contribute to the retail cost of a product. Strategies for minimizing these costs at the design stage are most effective to ensure that a product is affordable and can gain a financial return.
The economic viability of a product is paramount for designers if they are to get their product into production. Understanding how to design a product to specification, at lowest cost and to the appropriate quality while giving added value, can determine the relationship between what a product is worth and how much it costs.
The most efficient way of designing and producing a product from the manufacturer’s point of view.
Costs that the manufacture is likely to incur, such as, capital costs (machinery and factory), R&D, Marketing, energy, overheads, taxes, profits, storage etc
The relationship between what something, for example a product, is worth and the cash amount spent on it
The consumer decides if it was well worth spending the money on something.
It is an individual judgement and different people will value something differently.
In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something.
Pricing is the process of determining what a company will receive in exchange for its product or service. The potential profit.
More examples include labor, manufacturing costs, costs relating to availability and procurement of materials, profits and taxes, size and weight of product for storage and distribution, resources, distribution and sales.
The costs that must be paid out before production starts, for example, machinery. These costs do not change with the level of production.
Fixed costs, indirect costs or overheads are business expenses that are not dependent on the level of goods or services produced by the business, i.e., not reliant on output.
More examples include, scale of production, complexity of product, skills, quality control, type of advertising and marketing, R&D, capital costs, overheads, labor (directly related to production output).
Variable costs are costs that change in proportion to the goods or service that a business produces, i.e. reliant on output.
These costs are incurred once production starts.
These include, materials (processed and raw), utilities (electricity, water etc), wages, storage, distribution.
Fixed costs and variable costs make up the two components of total cost.
Costs
It is a tool used to determine the potential risks and gains of producing a product.
It is used by manufacturers to determine the break-even point for a product and can be used to create multiple scenarios for a product.
It allows the feasibility of a product to be established.
It is the point of balance between profit and loss. It represents the number of sales of a product required to cover the total costs (fixed and variable).
The break-even level or break-even point (BEP) represents the sales amount—in either unit or revenue terms—that is required to cover total costs (both fixed and variable). Total profit at the break-even point is zero. Break-even is only possible if a firm’s prices are higher than its variable costs per unit.
Break Even Point
Designers must consider encomium feasibility of their designs.
When companies calculate the price of their products they use Pricing Strategies described below.
Often more than one strategy would be used.
The below strategies can be used in conjunction with the Price Setting Strategies listed in topic 9.3: Marketing mix.
Price Setting Strategies include: cost-plus pricing, demand pricing, competitor-based pricing, product line pricing, psychological pricing.
Price-minus
The market demand determines the product pricing (selling price) before manufacturing begins.
Then all commercial costs (manufacture, profits, etc) are determined and the company works within these constraints.
Retail price
It is the recommended retail price (RRP) suggested by the manufacturer (MSRP) that the retailer should sell the product for.
It is to standardize prices
Some retailers will sell below the RRP to lure customers.
Wholesale price
The cost of a product sold by the wholesaler.
The product costs more than the manufacturer but less than the retailer.
Typical manufacturing price
It is the total costs (variable and fixed) to manufacture the product. Divide the total manufacturing/product costs by the total products/items produced to get the average cost/price per unit.
Once total costs are determined then a profit margin is added.
The goal is to maximize profit.
Target cost
It is desired final cost of a product is determined before manufacturing begins.
This is based on the competing pricing.
Profit is then removed to determine initial cost.
The product is design or designed to meet it
Wikipedia on target costing
Return on investment (ROI)
Receiving a profit (return) on money invested into the product or service.
Usually expressed as a percentage.
The higher the ROI the better return
Unit cost
The costs a company incurs to produce store and sell one product (item).
This is calculated as an average cost.
These include fixed and variable costs
Sales volume
It is the amount of products sold in a specified time period during regular working operations of a company.
They can be annual, quarterly, etc sales
Can also be based on demographics, geographic regions, etc
Financial return
It is the profits generated from a sale or investment into a company.
Activity: Calculation of prices based on the listed pricing strategies.
The cost effectiveness of a product can determine whether it can enter economically diverse national and international markets.
The retail price of a product is partly based on evidence of its potential position in the market. What counts as evidence in various areas of knowledge?
While inventory creates a safety net for companies, maintenance and potential waste of resources can have significant implications for companies and the environment. Manufacturers must evaluate and analyze each market and determine whether a JIT or JIC strategy is the best to follow.
JIT and JIC are two production strategies used by manufacturers that have both advantages and disadvantages to them. A manufacturing company will choose one of these strategies to follow for many reasons that include the products they are producing, the nature of the market and the nature of the economy.
A situation where a company does not allocate space to the storage of components or completed items,
Instead orders or manufactures them when required.
Large storage areas are not needed
Items that are not ordered by customers are not made.
JIT aims to reduce inventory costs and increase efficiency by receiving goods only as they are needed in the production process.
Advantages
Storage – no space required thus reducing costs
Efficiency – Highly flexible, easy set-up for short runs (because of cell production)
Stock control – extensive inventory management systems are not necessary, as inventory levels are kept to a minimum.
Waste – elimination of waste due to overproduction, left over stock, idle time, product defects and material processing.
Traditions – Factory organized in cells/modules instead of departments based on function
Disadvantages
Reliability – Part will need to be made, things could go wrong, delay in manufacture and transport to consumer
Capital investment – high but machinery could be used for a variety of products
Distribution – small delay as consumer waits for the manufacture and distribution.
any disruption in the supply chain can halt production, making it crucial to have reliable suppliers.
JIT | A comparison |
A company produces a small stock of components or products and stores them as inventory.
This is Just-Incase a rush order comes they have ready supply.
Some products included may be products or components that take a long time to produce therefore reducing customer wait time.
JIC can serve as a buffer against unforeseen demand spikes or supply chain disruptions.
Advantages
Distribution – no delay as parts are available.
Reliability – Part is ready to be sent and probably has passed quality control.
Market demand – manufacturer is able to keep up with a change in market demand
it can lead to better customer service as products are readily available
Disadvantages
Efficiency – Not as efficient as it is organized in departments often offsite.
Capital investment – high but machinery could be used for a variety of products
Storage – space required thus increasing costs
Waste -some waste due to overproduction, left over stock, product defects and material processing.
Traditions – Factory organized in departments based on function usually offsite bringing about added costs and transportation time
Stock control – required also, may left over stock once the product becomes obsolete or market direction changes.
Effective business processes and practices developed in some countries have been exported successfully.
Manufacturers decide whether to pursue JIT or JIC as a production strategy depending on their perception of where the market is going. To what extent do different areas of knowledge incorporate doubt as a part of their methods?
Lean production considers product and process design as an ongoing activity and not a one-off task, and should be viewed as a long-term strategy.
The role of the workforce in lean production is paramount, relying on their wisdom and experience to improve the process, reducing waste, cost and production time. Recognizing this results in motivated workforces whose interests are in the success of the product.
Lean production considers product and process design as an ongoing activity and not a one-off task.
It should be viewed as a long-term strategy that focuses on continual feedback and incremental improvement.
JIT supplies/system
a highly trained, multi-skilled workforce
quality control and continuous improvement
zero defects
zero inventory
emphasizes reducing lead times and fostering a culture of continuous improvement.
There are several key principles of lean production. If any of these principles are not met this could result in failure or a lack of commitment. Without commitment the process becomes ineffective.
Eliminate waste in all areas by focusing on doing tasks right the first time.
Minimizing inventory
Maximizing production flow and designing for rapid production changeover
Kaizan – Continuous Improvement from everyone – from management to workers. Without continuous improvement your progress will cease.
Respect for workers or empowering workers (Humans, most reliable and valuable resource to any company)
Pulling production from customer demand or meeting customer requirements
Designing for rapid changeover
Creating a reliable partnership with suppliers
Meeting customer requirements
Doing it right the first time
Advantages
Increase consumer satisfaction due to cost reduction
Productivity has increased because of focus improvements and reduction in waste
Quality of product improvement and continuous improvement
Waste reduction
Reduced impact on the environment
Adapt to market pull
Increase in profits
Improved work conditions for employees
Competitive advantage
Disadvantages
Change in worker and management attitude can be difficult to manage or to gain complete buy in
Delivery times – since no inventory is held in storage and breakdown in the system will cause delays
Supply problems
High initial capital costs
Value stream mapping is a lean production management tool used to analyze current and future processes for the production of a product through to delivery to the consumer.
helps to identify Value and Waste in production
Workflow analysis is the review of processes in a workflow, for example, a production line, in order to identify potential improvements.
Value stream mapping and workflow analysis contribute to the design of an effective lean production method through:
Value stream mapping provides the big picture of the manufacturing process
Where as workflow analysis is concerned with the production lines
This image shows a workflow analysis by using a flow chart through certain questions and criterions.
A group of products having common classification criteria.
Members of a product family have many common parts and assemblies and production processes.
members of a product family often share similar production processes, which can lead to economies of scale.
Investopedia on Product Family
Advantages include:
Cost-effective due to – reduced manufacturing costs, similar manufacturing techniques, similar supply chain, reduced R&D,
Allows companies to attract new customers to their brand though an array of products that are similar but meet slightly different needs.
Customers as they can rely on their positive experience with an existing brand.
Adapt easily to market demand such as the iPhone 5SE (shows and example of market pull)
Training
The development of a highly skilled workforce can build deep understanding of how the production process works and allow workers at all levels to identify areas of the workflow to be improved.
This leads to the devolution of power
Devolution in power relating to process improvement
Understanding that the best people to identify improvements of a product or system are those who use it, companies striving for a lean production system ensure that all members of the workforce are able to contribute to the design of the system.
This benefits the company, which is able to streamline processes and reduce costs and also empowers the workforce and gives them a sense of ownership and loyalty to the company.
Kaizen
A philosophy and commitment to continuous process and product improvement
It is considered an important aspect of an organization’s long-term strategy.
This has been central to the success of many Japanese companies such as Toyota.
It originated in Japan
Lead time refers to the time quoted to customers (usually in days or weeks) between the date of purchase and the date of delivery.
It is basically the time frame it takes from the order of a product to its manufacture until it is delivered to the customer. This can be days or weeks in duration. This includes the production, set-up etc times.
The business dictionary has a bit more
Sorting
Stabilizing
Shining
Standardizing
Sustaining the practice
Overproduction
Waiting
Transporting
Inappropriate processing
Unnecessary inventory
Unnecessary/excess motion
Defects.
The importance of the individual is recognized in design processes. Is this the case in other areas of knowledge?
The implementation of lean production has benefits for the global environment.
When considering design for manufacture (DfM), designers should be able to integrate computers from the earliest stage of design. This requires knowledge and experience of the manufacturing processes available to ensure integration is efficient and effective. Through the integration of computers, the rate of production can be increased and errors in manufacturing can be reduced or eliminated, although the main advantage is the ability to create automated manufacturing processes.
The integration of computer control into manufacturing can streamline systems, negating the need for time-consuming activities, such as stocktaking, but also reducing the size of the workforce.
A system of manufacturing that uses computers to integrate the processing of production, business and manufacturing in order to create more efficient production lines.
Programmable computer based manufacturing system
Typically, it relies on closed-loop control processes, based on real-time input from sensors
Design (CAD) – the product is designed within the CAD software, tested and the necessary G-Code, materials, and other data is generated.
Planning – the computer system and database (contains design and production data) helps to plan the most efficient production process.
Purchasing – with the design and production the computer system can employ a JIT approach in purchasing the necessary materials.
Cost accounting – is the budgeting of the production process, receipts, and all things financial.
Inventory control – responsible for tracking the materials, products, again JIT can be employed.
Distribution – is receiving materials and the distribution of products to warehouse or vendors.
It is costly to set up
Therefore it is better suited for large scale production such as batch, volume or mass
Advantages and disadvantages of CIM in relation to different production systems
Scale of Production | Advantage | Disadvantage |
One – off or small scale |
| |
Batch, Volume or Mass |
|
|
Mass Customization |
|
|
Advantages and disadvantages of CIM in relation to initial investment and maintenance
Advantages:
System is constantly monitored so if there is a breakdown: the type and location of breakdown is easily identified making maintenance easier
reduces cost of maintenance
After the high initial greater profits will be achieved
Disadvantage:
high initial capital costs/investments due to computers, robots, training of personnel
maintenance is complex, requires highly skilled employees
A CIM system allows for efficient global workflow and distribution.
Technology has a profound influence in design. How have other areas of knowledge been influenced by technology?
Designers should ensure that the quality of products
is consistent through development of detailed manufacturing requirements. They also need to focus on the means to achieve it. The importance of quality management through quality control (QC), statistical process control (SPC) and quality assurance (QA) reduces the potential waste of resources.
The implementation of quality management strategies requires a critical and complete understanding of the needs of a product. To ensure efficiency and efficacy, these measures need to be designed into the product and its production system.
Tolerances are defined at the design stage of the machinery. Parts not within tolerance need to be reworked or scrapped.
Continuous monitoring ensures that the machines perform to the predetermined standard/quality.
Ensures that process inputs, such as speed, temperature, pressure, etc, are monitored and adjusted.
Quality control at the source eliminates waste from defects as workers are responsible for the quality of the work they do.
Able to get the same results over time
This covers all activities from design to documentation.
It also includes the regulation of the quality of raw materials, assemblies, products and components, services related to production, and management and inspection processes.
It is the maintenance of the entire system from design to purchasing to packaging that meets quality requirements.
QA | Process orientated | Pro-active | Prevent defects |
QC | Product orientated | Reactive | Find defects |
This is a quality control tool that uses statistical methods to ensure that a process operates at its most efficient.
This is achieved through measuring aspects of a component to ensure that it meets the required standard throughout its production in order to eliminate waste.
Effective quality management can have major benefits for the environment.
There are commonly accepted ways of assuring quality in design. How do other areas of knowledge ensure the quality of their outputs?
Designers need to consider how the costs of materials, manufacturing processes, scale of production and labor contribute to the retail cost of a product. Strategies for minimizing these costs at the design stage are most effective to ensure that a product is affordable and can gain a financial return.
The economic viability of a product is paramount for designers if they are to get their product into production. Understanding how to design a product to specification, at lowest cost and to the appropriate quality while giving added value, can determine the relationship between what a product is worth and how much it costs.
The most efficient way of designing and producing a product from the manufacturer’s point of view.
Costs that the manufacture is likely to incur, such as, capital costs (machinery and factory), R&D, Marketing, energy, overheads, taxes, profits, storage etc
The relationship between what something, for example a product, is worth and the cash amount spent on it
The consumer decides if it was well worth spending the money on something.
It is an individual judgement and different people will value something differently.
In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something.
Pricing is the process of determining what a company will receive in exchange for its product or service. The potential profit.
More examples include labor, manufacturing costs, costs relating to availability and procurement of materials, profits and taxes, size and weight of product for storage and distribution, resources, distribution and sales.
The costs that must be paid out before production starts, for example, machinery. These costs do not change with the level of production.
Fixed costs, indirect costs or overheads are business expenses that are not dependent on the level of goods or services produced by the business, i.e., not reliant on output.
More examples include, scale of production, complexity of product, skills, quality control, type of advertising and marketing, R&D, capital costs, overheads, labor (directly related to production output).
Variable costs are costs that change in proportion to the goods or service that a business produces, i.e. reliant on output.
These costs are incurred once production starts.
These include, materials (processed and raw), utilities (electricity, water etc), wages, storage, distribution.
Fixed costs and variable costs make up the two components of total cost.
Costs
It is a tool used to determine the potential risks and gains of producing a product.
It is used by manufacturers to determine the break-even point for a product and can be used to create multiple scenarios for a product.
It allows the feasibility of a product to be established.
It is the point of balance between profit and loss. It represents the number of sales of a product required to cover the total costs (fixed and variable).
The break-even level or break-even point (BEP) represents the sales amount—in either unit or revenue terms—that is required to cover total costs (both fixed and variable). Total profit at the break-even point is zero. Break-even is only possible if a firm’s prices are higher than its variable costs per unit.
Break Even Point
Designers must consider encomium feasibility of their designs.
When companies calculate the price of their products they use Pricing Strategies described below.
Often more than one strategy would be used.
The below strategies can be used in conjunction with the Price Setting Strategies listed in topic 9.3: Marketing mix.
Price Setting Strategies include: cost-plus pricing, demand pricing, competitor-based pricing, product line pricing, psychological pricing.
Price-minus
The market demand determines the product pricing (selling price) before manufacturing begins.
Then all commercial costs (manufacture, profits, etc) are determined and the company works within these constraints.
Retail price
It is the recommended retail price (RRP) suggested by the manufacturer (MSRP) that the retailer should sell the product for.
It is to standardize prices
Some retailers will sell below the RRP to lure customers.
Wholesale price
The cost of a product sold by the wholesaler.
The product costs more than the manufacturer but less than the retailer.
Typical manufacturing price
It is the total costs (variable and fixed) to manufacture the product. Divide the total manufacturing/product costs by the total products/items produced to get the average cost/price per unit.
Once total costs are determined then a profit margin is added.
The goal is to maximize profit.
Target cost
It is desired final cost of a product is determined before manufacturing begins.
This is based on the competing pricing.
Profit is then removed to determine initial cost.
The product is design or designed to meet it
Wikipedia on target costing
Return on investment (ROI)
Receiving a profit (return) on money invested into the product or service.
Usually expressed as a percentage.
The higher the ROI the better return
Unit cost
The costs a company incurs to produce store and sell one product (item).
This is calculated as an average cost.
These include fixed and variable costs
Sales volume
It is the amount of products sold in a specified time period during regular working operations of a company.
They can be annual, quarterly, etc sales
Can also be based on demographics, geographic regions, etc
Financial return
It is the profits generated from a sale or investment into a company.
Activity: Calculation of prices based on the listed pricing strategies.
The cost effectiveness of a product can determine whether it can enter economically diverse national and international markets.
The retail price of a product is partly based on evidence of its potential position in the market. What counts as evidence in various areas of knowledge?
