How much is the unit price?
How manufacturing calculates for a start-up.
I get asked this question more than anything else when it comes to unit cost and why the “big China suppliers” are so much cheaper than anyone else they have quoted their start-up product – or, is China really that much cheaper?
We will push this through in a simple scenario – Bob. Bob has a a cell phone case; there are some cool features but to most it’s a cell phone case. First things first, Bob has to decide where he wants this manufactured. Let’s take US vs China; assuming most technology or machinery is the same, the labor time to manufacture a cell phone is the same, after all humans are running the machinery, regardless of their location on the globe.
The labor cost plays into the cost of the unit. It is simply a Shop Rate (the base per hour cost of the supplier’s operation, including overhead, wages, etc.) divided by the number of units the supplier can produce per hour. So, an operation such as injection molding can produce 60 parts per hour with a shop rate of $60 then the Labor cost would be $1 per unit. Adding in material cost and profit and you have the unit price. This is why MOQ, or minimum order quantity, exist; the supplier must meet the overhead cost and profit to run a purchase order.
Now US Vs China
First understand, quality does exist in Chin; the idea that China is cheap and lack quality, simply is not true and shows the lack of experience in this given topic. Tooling cost typically are 40% cheaper in China and Shop Rates run about 30% what they are in the US. In the US a shop rate could be in the $50-$100 per hour depending on the trade. China is between $15-$35, again depending on the trade. With that said, back to Bob’s Cell phone. With all other variables the same two shops, one China ($35 per hour) and one US ($50 per hour), both will produce the same number of units per hour. If Bob orders 5,000 and each can produce 240 per hour; the China supplier will have a labor cost of .14 per unit where US will have .40 per unit. Now you will need to add in material cost; note many US suppliers still purchase raw materials from China suppliers which will incur the shipping and import cost depending on the material.
Now the next step is to find a supplier that will take on Bob’s production. Many cell phone suppliers are producing 20,00-50,000 units per day. Now comes Bob and you can imagine how excited they are to stop their money making production of 50,000 per day to work on Bob’s 5,000 total order with no re-order in sight. This brings up the next issue which we will talk about next time on Supply chain econ 101 - check back next week.