Life-Cycle Costing For Contract Manufacturers: Why It Matters

Posted by Leo Boon Yeow on Nov 20, 2020 1:49:00 PM
Leo Boon Yeow
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Life-Cycle Cost Analysis (LCCA), or Life-Cycle Costing (LCC), is a common concept in the world of procurement and manufacturing: It refers to the need to analyze "costs of production, installation, usage and disposal, aiming at the minimum of the total cost," as per a 1998 research paper, "Product Life Cycle Costing Applied to Manufacturing Systems".

Instead of focusing on the cheapest cost price, LCC looks at a material’s entire life cycle and the need to include installation, operational, maintenance, and end-of-life costs to the overall buying cost of a material.

 

For example, with raw material like steel, the initial purchase price can be higher than its alternatives. However, stainless steel is known for its corrosion resistance, low maintenance requirements, and recyclability. These attributes can make stainless steel a value-for-money choice in the long run.

Why Is Life-Cycle Cost Analysis Important Now?

There are three main reasons why LCCA has resurfaced as an important factor for contract manufacturers:

1. Price Wars Are Unreliable

Before the world was interconnected through the advent of the internet, manufacturers stayed within their comfort zone, making price wars a straightforward comparison between a few vendors. Most vendors ended up specializing in certain industries, leading to less competition as compared to current day.

Now, you can find almost anything on the internet. And with that, comes increasing buyer expectations. Contract manufacturers are now faced with global competitors can produce products cheaper and quicker. Even China, the “world’s factory” for more than 10 years, has recently started losing contract manufacturing jobs to other Asian countries like Vietnam and India which has lower wages and costs.

There’s a need for contract manufacturers to find another method to reduce costs without pushing their prices down to get the project.

 


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2. Low Prices Can Mean Low Quality

Besides the unreliable nature of price wars, competing based on price has also become undesirable for another reason. Consumers and businesses alike now associate low prices with poor quality.

When buyers find an abnormally low price point for a product, they now wonder if the producer is cutting corners in order to hit those numbers. There’s hence a stigma attached to certain materials that are priced too low.

The effect is that contract manufacturers have the power to quote more profitable prices, but they still have to balance that price with their costs, ensuring that quality fade doesn’t happen.  

3. Other Unseen Factors To Consider

The classic method of cost reduction is to cut head count. At the same time, in the age of Industry 4.0, there’s an expectation that automation will be used on the factory floor. Both these factors bring up the age-old panic that workers’ jobs will be lost, either due to cost-cutting or redundancy. And while we don’t think that automation in general will be a threat, we think differently about cutting head count.

In our interconnected world, these voices can band together and make a lot of noise. If contract manufacturers sacrifice talent for the bottom line, that can come back to bite them in the future. Reputation is key when it comes to business, and often, factory locations were built to foster local talent and provide local jobs. By cutting those jobs to reduce costs, contract manufacturers risk their long-term sustainability in the region.

That’s why LCCA has become popular again. With a focus on calculating the hidden costs behind product ownership, LCCA has become an attractive solution for the three issues above. It is cost-effective; as the cost-cutting happens in terms of the entire product life cycle, leading to long-term benefits for the business.

How To Implement LCCA: Department Collaboration

Implementing Life-Cycle Cost Analysis can be tough, as it requires buy-in and time investment from each stakeholder. LCCA is a complex process, with the need to project and include factors such as:

  • Material costs
  • Tooling / Fabrication costs
  • Installation Costs
  • Labor costs
  • Inventory costs
  • Maintenance costs
  • Depreciation over time
  • Warranty / Replacement costs
  • Scrap value
  • Plant decommissioning costs

That will call for input from departments such as purchasing, accounting, production, and more. To sell the product, contract manufacturers will also have to include their sales teams, who will have to help inform stakeholders on the maximum price that customers are willing to pay, as well as the engineering teams, who will have to figure out the optimal configuration for product quality and low costs.

Manage the complex LLCA with a digital solution

In the end, the aim of Life-Cycle Cost Analysis is to help choose the most economical materials to produce the most cost-effective product, and in the end, reduce costs as much as possible in the long term.

With LCCA, there will be more accurate and realistic costing and pricing calculations, which will help contract manufacturers to be more profitable (and competitive) in the long run.

However, managing LLCA is easier said than done. Manufacturers need to consider a huge number of variables. Each variable is constantly changing, making price or costing accuracy a never-ending pursuit. 

In this case, a digital sales platform can help. Leading platforms have dynamic price management features embedded into the system. It removes the need for manual tracking, and can ensure that your prices and costs are always accurate--and that your margins are well-balanced and healthy.

 

 

A digital sales platform can automate cost and price management for maximum margins. Download our new guide, "Accelerate Manufacturing Sales" to find out how!

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Leo Boon Yeow

Written by Leo Boon Yeow

Boon Yeow – is passionate about all things tech. His background as a journalist helps him understand complex B2B technology. His mission is to translate it into fact-based, comprehensible stories that help manufacturers improve their businesses.

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