The concept of COGS (Cost of Goods Sold) is simple. It refers to the direct costs that are involved with bringing a new product to market. (Direct costs include everything from raw materials and components to design and engineering to manufacturing and distribution.) Say, for example, that your COGS for bringing a new IoT device to market totaled $600K, your indirect costs (overhead, marketing, and so forth) totaled $200K, and your product sales totaled $1M. In this case, you’d subtract your COGS and indirect costs from this number, leaving you with $200K in profit.
Any business leader can see that this isn’t rocket science — there’s nothing complex about the concept of COGS. But what can become incredibly complex is devising strategic solutions for driving them down. This is a core challenge in developing any new product since the lower the COGS, the greater the potential for ROI.
At Pivot International, we’re a one-source global leader in the areas of product design, development, manufacturing, and distribution. With a half-century of DFM experience that spans fourteen industries, we help companies worldwide solve complex cost equations by taking a five-pronged approach to driving down COGS. Here’s how it works.
1. Begin With the End User in Mind
Strategically reducing COGS begins with a process of reverse engineering from an end-user perspective. This is necessary for establishing a clear product definition and an airtight use case. Without this approach, companies risk creating a product that appears to check all the right boxes but falls flat with its intended customer base.
Beginning the product development process without the end-user in mind is like beginning medical treatment on a patient without first taking a thorough case history and establishing a clear diagnosis. Without a clear diagnosis, it’s impossible to create an effective treatment plan. This is why the best, shortest, and most cost-effective path for successfully delivering a new product to market involves beginning with the end-user and working backward.
2. Make Strategic Trade-Offs Using a Big-Picture Perspective
Once our teams at Pivot begin the process of reverse-engineering the broader product development pathway from use-case, we must also identify opportunities to drive down COGS by making strategic trade-offs. (And this is where things become exponentially complex since we’re no longer dealing with a linear cost equation.) At this point in the process, considerations of speed, scope, and scale come into play. These considerations involve sourcing, materials, labor, production, distribution, and more. Strategic trade-offs must be undertaken with the certainty that they will not result in an unacceptable deviation from the established product definition, use case, and quality standards.
Working with a one-source partner that handles all aspects of product development under a single company umbrella dramatically increases the odds of meeting these goals. A partner whose business model integrates every aspect of the product development process is uniquely equipped to take a big-picture perspective. This is crucial because it ensures trade-offs are strategic. (Rather than an unwitting exercise in generating costly second-and third-order consequences.)
3. Leverage Diversified Sourcing Solutions
Diversified sourcing solutions play an essential role in solving your COGS equation. Even before the global supply chain began to fray under the tension of pandemic-driven disruption, it was never a good idea to have all your eggs in one basket. But as supply chain issues continue to pose steep challenges (think of the chip shortage and ongoing trade tensions with China), working with a partner with diversified sourcing solutions has become a non-negotiable.
This isn’t just to protect against shortages or procurement delays. It’s also part and parcel of what’s needed for driving down COGS by making strategic trade-offs. Having a wide range of well-vetted sourcing options and suppliers helps you get the most competitive price. At Pivot, our global sourcing network spans three continents to securely and cost-effectively serve U.S., European, and Asian markets.
4. Unleash the Power of Design For Manufacture
The purpose of DFM (Design for Manufacturing) is to ensure your product design is in sync with manufacturing considerations. This affords certainty early in the product development process that your innovation can be cost-effectively produced at scale. Too often, when design isn’t informed from the get-go by manufacturing and supply chain expertise, companies end up with a product that may be extraordinary in its own right but cost-prohibitive to mass-produce. (Which results in skyrocketing COGS.) At Pivot, we unleash the world’s top DFM talent to develop award-winning innovations for our clients that drive growth.
5. Unlock the Benefits of Flexible Manufacturing
With rare exceptions, high-volume production is significantly more cost-effective than low-volume production. This is why selecting a partner with large-scale production capacity is a key part of driving down COGS. But because an excessive surplus of inventory can contribute to COGS, you also need a partner with the flexibility to scale production to fluctuating demand. At Pivot, we bring 320,000 square feet of manufacturing capability and options for flexible production runs. And using our SMT digital twin technology, you can “toggle” your production between locations to reduce your distributions costs.
Many companies miss many valuable opportunities to drive down COGS by not understanding the multi-pronged approach required for doing so. At Pivot, we go to great lengths to identify every possible opportunity to reduce COGS and maximize your ROI. If you’d like to learn more about how we can help you launch a successful product, contact us today. We look forward to working with you.
