You may find it helpful to use a flow chart in describing your production process.
Your costing must be right on before you can get a valid measure of your company’s profitability. Although some companies calculate their overall cost including their contribution to overheads, marginal production costs are far more important in defining profitability.
Raw materials and components cost money, and, for many small businesses, they eat up a big portion of their working capital. A reduction in stock requirements, will therefore improve your company’s financial position.
Many companies have adopted the Japanese just-in-time philosophy to manufacturing. Raw materials arrive only when and where they are needed in the production process, and not before.
Don’t feel compelled to manufacture your entire product. It may be cheaper and more efficient for you to have someone else do it. Whether you make or buy parts will depend on things like your inventory financing, labor skills, and production costs.
Avoid putting all your eggs in one basket by relying solely on one supplier. This makes you vulnerable to problems in quality control, price, and availability. Although there are definite advantages of convenience in dealing with one supplier, it may be that other firms can supply a better product at a more competitive price. Having three or four suppliers will guarantee you a constant supply of materials for your product.
Keep in mind that longer production runs have a lower percentage of start-up costs. In some industries, records for example, set-up costs make up the biggest chunk of the final cost, with raw materials being relatively insignificant. Long production runs, however, produce large quantities of stock which locks in your cash. They also reduce the variable production cost of each item, as more experience is gained in the production process. This is known as the learning curve, and it partly accounts for the continued dominance of mass production companies.
You may want to include a production plan in your proposal, showing cost-volume information at various sales levels of operation with breakdowns of applicable material, labor, purchased components and factory overhead. Discuss the inventory needed at various sales levels, and how any seasonal production loads will be handled without severe dislocation.
Evaluate your machine and plant performance in relation to your competitors’. Old or outdated machinery can be a big drain on your workers’ time if they constantly need repairing, as well as lowering your company’s productive capacity. It makes sense for you to analyze the costs and benefits of replacing your current machinery.
Most machinery you buy will have a fixed life span measured by the increasing likely repair costs and declining overall efficiency. Ask your supplier to mark out a replacement program based on the machines anticipated life span.
Don’t underestimate the importance of quality control. Your company’s long-term success depends on it. Quality control measures in manufacturing include laid-down sampling and testing procedures against performance guidelines. These may expose quirks in your production process, which can help you cut down on your wastage. Quality control also helps reduce your level of working capital. Returned products mean less money flowing through your company.
The footprint of the owner is the best manure. English proverb.