What Does It Mean?
Production costs refer to all the expenses you must incur when manufacturing a unit of your product. This includes the various components that go into production such as labor, raw materials, supplies, and other business overheads. Generally, it also includes the costs added by taxes and other fees such as royalties owed.
Why Does it Matter?
Understanding the costs your business encounters to produce a single unit is vital for improving operations and lowering overheads. In your manufacturing analytics dashboard, production cost KPIs focus on establishing areas that are too costly and understanding how costs change over time (especially in cases where production and resources are seasonal).
Additionally, production cost KPIs can also be granular, focusing on the cost of components for individual products. Comprehending your costs is a fundamental aspect of reducing them and discovering ways to optimize production.
How Do you Measure the KPI?
Production costs on a broad level are measured by comparing the aggregate amount of all the costs that accompany production against the revenue generated from the sale of a product. This can include costs such as raw materials, labor, taxes, and business overheads. On a product-by-product basis, it can also include the cost of each component that comprises a finished product.
What Sources Would You Use to Measure the KPI?
To track production costs, you can collect data from employee salaries, purchasing costs for raw materials and components, legal and tax expenditures, and other overheads. Additionally, you should also monitor per-product revenues and aggregate revenues.
Give me an Example…
Let’s say your factory has been producing the same items for several years, but margins have recently been narrowing despite production processes and demand remaining relatively stable. One of the first areas to examine your diminishing returns is the cost of materials. Costs of components and raw materials may shift depending on scarcity, seasonal changes, or external economic forces. You could discover that the same supplier that has provided you with components may have recently upped their prices, or that making a specific product may simply no longer be profitable. Comprehending these costs informs smarter decisions about how to adjust your manufacturing operations and prepare for future shifts.
What Benchmark/Indicators Should I Use?
Some useful indicators include: