👉 tl/dr; Lower the BOM only to the point where you have a comfortable profit margin. Going lower than that is probably not worth it because of low production volumes, higher burn and longer time to market. 👈
When looking at your Bill of Materials (BOM), I believe it's best to always put it into comparison with your profit margins. This will help you establish a "Max BOM" line. The number depends on a lot of different things like your business model and price, but rule of thumb for non-subscriptions models is at least: Price > 2x BOM
If you're above that "Max BOM" line, you'll need to figure out a way to either raise the price or lower your BOM. But we're going to focus on why it's not worth to go lower, with a small back of the envelope calculation:
Assume you are are startup close to start production of your first batch, and then someone proposes to replace a few parts and save some money!
Production Volume: 5k pcs
BOM reduction: 10 EUR / piece
=>💰💰💰 50k EUR savings! 💰💰💰
Now that's a lot of money for a startup! ..... Except when you take implementation effort into account. Last minute HW changes can easily delay the timeline for 2 months, because you'll need
~1 month to implement the new changes
~1 month to build new prototypes and make sure everything still works
If you take your burn rate into account, it could easily be that you burn >25k EUR per Month in salaries, tools, prototypes etc.
Compare this with your potential savings of 50k and you'll lose money in the end! Not to mention the 2 months sales revenue you miss out on! 😉
Therefore cost saving projects only start paying off when you've reached higher production volumes.
So, be careful when implementing cost saving projects early in your companies life. Most of the time your resources are better spent focusing on growing your revenue. 📈
How do you manage your BOM and cost-cutting initiatives?
Image Credits: NathanMinnick58