Manufacturing Cost of Product

Technical Terms to not be Translated -

Supply Chain, Manufacturing Cost, Direct Materials, Direct Labour, Manufacturing Overhead, Manufacturer, Distributor, Wholesaler, Direct Materials,

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Friends, you surely would have set up at least some price of your product.

And you would have set it by looking at the market and by looking at the previous experience, doesn’t matter how you set it.

Today we are going to see how a small or a big business sets up their price & what is its value in E-Commerce, okay?

It is very necessary to understand this price because in the previous session, I had told you that marketing mix is very important, yes!

It’s right proportion is very important - that we have to sell the right product, at the right place, at the right price & with the right promotion.

So if you are launching your product for the first time in the market, you will need to understand the price.

Although all four of them are important, very important, there will be a step when you become a massive business like Apple, Windows, etc.

There are many more examples in the world.

When the bigger businesses started, they focused on the pricing at first.

Yes! They focused on pricing & today, they have become a huge brand so they don’t focus much on the pricing, meaning the prices will be more because they have reached a higher level.

They are now reaching high class customers so they will focus more on product quality & keep increasing & decreasing the price.

You might have seen many products whose cost will be higher only compared to the normal market.

Let’s take a shirt brand as an example. If it’s a new brand, then you will find its costing less only but if it’s a brand like Pepe Jeans or Levi’s Jeans or if it is some other brand, you will see that their costing is high because they are pitching for high class.

And the new business, the budding entrepreneur focuses first on the lower & middle class & then focuses on the high class.

Yes! That’s how we move upwards.

Yes friends! So you will have to understand where your target audience is - is it high class, mid class, lower class.

I’m talking about the budget classes.

If your budget is less, then you belong to low or mid and if your budget is high, you belong to high class.

You may belong to one of these 3 classes, if you consider yourself budget friendly or high budget.

So it is defined in a market, that I am going to sell this.
Let’s take another example -

You want to buy a helicopter. Can you buy it? Do you have the budget for it?

If it is, you will surely buy it.

But if it’s not in my budget, my budget is enough for a bike or cycle, then I belong to lower or mid class.

If your budget is enough for a helicopter, then you belong to the high class.

Alright? So if you understand these classes, then let’s move forward.

In this series, it is important to know that price is very important.

Let me give you one more example to explain price to you as it is very much important.

You would have visited a mall, right?

If you go to your city, state or country’s famous mall & you saw a poster saying ‘Sale 50%’ & you told your friends about it.

What was the motto of giving 50% off?

The motto was to attract people and you got attracted, because it was 50% off.

That means you would have to pay only 50% of the original price.

When you go, you will see that it is 50% off on a particular item, like in this image, it is shirts or T- shirts.
So what I mean to say is, price attracts the most.

That is why in all the E-Commerce platforms, there will be a lot of people over there.

Or if you have your own website, then too there will be a lot of people in the competition & you will have to attract through price.

If you are in the starting phase of E-Commerce, then you will have to attract through price, okay?

-5:50

Now let’s try to understand why pricing is necessary in a little more detail.

This video is a neutral video for everybody.

I don’t know if your business is set up wholly, or you are just beginning or if you are watching it just for knowledge, I don’t know.

But my main aspect is that you get to know the basics, okay?

I’ll give one more example for a clear understanding.

See, I am taking many examples for your better understanding.

If you go to paan shops or vendor carts or tea vendors, they make amazing tea.

In the same way, you will get the tea if you go to Taj Hotel or Oberoi Hotel.

It may be of the same quality or maybe a better quality.

Now, I have a question!

Can the vendors make the business so big that they can bring their business to the stock market?

It sounds a little bit tricky.

I am not at all demotivating them, but I am trying to tell you that when a survey was being carried out, when an education society was in the making, for small business, big business, and how to increase business, many hurdles were faced.

That is why, in graduation, in MBA, what is pricing, management, manufacturing, retailing, product sale, product chain, marketing mix is taught & why is it important.

The world has done a lot of research, people have spent their whole lives in marketing to know how to do proper marketing, there are many books in the world which will tell you how to apply proper price, what should be the right place, how it should be rightly promoted.

That is why the education society is working right now, so that you are highly informed.

If you have a normal business, see, even before education, businesses used to run.

But due to education, you got a step up. Yes! You got a step up.

If we had not made this E-Commerce video, do you think you wouldn’t have been able to do E-Commerce?

Yes! You certainly would have but not like how you will be able to do after this training program.

I promise if you understood this strategic training program properly & if you used the tips & tricks which I’ll give you in this session, then you will be joining one of the leading brands

You will be joining the ruling leading brands of the world.

Yes friends! So my motive for saying this is to kindly grasp the information we give in this session because you must have kept the price of your product, but I’m going to tell you something very basic but important, so try to understand it.

So see, Supply Chain. It is important to understand Supply Chain, if you want to understand the pricing.

What is Supply Chain?

For instance, if you have joined this program from a computer, then there will be many people who made the computer.

There are many things in the computer, such as mouse, keyboard, screen.

If it’s a laptop, then there are other minute things in it.

If it is a computer system, you will see a keyboard separately, a mouse separately but they are attached together, and the laptop is at one place only.

-9:45

Now if any product is in the making, its raw material is very necessary.

For a computer, the raw material is the keyboard, in the keyboard, there are keys which are made of plastic.

Plastic will be raw material for making the keys, okay?

Then the raw material reaches the manufacturer.

To make this computer, the manufacturer has made a lot of effort.

After putting a lot of effort, all of it was assembled, moulding the plastic into a key, keys form the keyboard, there are a lot of things required for making a mouse, nowadays there are mouse which have lights.

Before there were mechanical mouse with which we used to play in our childhood.

It’s just an example to make you understand.

So what do manufacturing people do?

They ensemble these raw materials via suppliers, you get the raw material, it reaches the manufacturer, they assemble it, then he sends it to the distributor.

The distributor then sends it to the retailer and the customer process is after the retailer.

Now look, what has happened because of E-Commerce.

Because of E-Commerce, sometimes there is a differentiation in pricing.

Why does that happen?

If you understand this structure, there are a lot of people who make raw materials.

There is a logistics expense.

Means they have sent via truck, or the supplier has sent the raw material to the manufacturer via some vehicle.

Hence, he will add some logistic expenses as well as his own profit.

After the manufacturer has made the whole product, assembled the whole item, he will send it from the logistics to distributors or to wholesalers, then they will add their profit, and then the retailer will add his profit and at last it reaches the customer.

For instance, a computer is made in 5000.

We will see this small example as of now, if the product is made in 5000, then it reaches the customer at 10,000.

Why? Because this supply chain containing distributor, retailer right from the product to the customer is between you, okay?

Because of E-Commerce, the E-Commerce website provides the products from the manufacturer to the customer.

12:33

products meaning goods, items etc. many e-commerce websites ensure that the item reaches directly to the consumers  from the manufacturer.

That is why, you would have seen that there’s always a little bit of variation in the pricing.

Why does that happen?

Because we stopped the chain a bit or we directly delivered the product from the manufacturer to the customer.

Therefore, understanding the supply chain is very necessary as there are a lot of variations in the pricing because of it.

So let’s understand the pricing first, if you want to understand the pricing, then first of all, you need to understand the manufacturing cost.

If you want to make a product, if you yourself are making it, then you need to understand the total manufacturing cost.

If you are making it yourself, then you have to calculate it and if you are not making it but are taking a product from someone, you have to understand what is the manufacturing cost & by adding a little more cost, you have to decide the value of your product, okay?

If you have to calculate the manufacturing cost,

‘Total manufacturing cost is an essential metric for understanding the productivity and profitability of a business’.

Yes! If you want to understand the profit & productivity, through which you can differentiate the pricing & understand it better, then it is very necessary to understand the manufacturing cost as it is very essential.

For that, you will need to understand the ‘Manufacturing Cost Formula’.

There is a general formula which you will find online also,

‘Total Manufacturing Cost = Direct Materials + Direct Labour + Manufacturing Overhead’.

If you add all the three, then you will get Manufacturing Cost.

Look, I have taken the computer as an example.

So Direct Material. Direct Material means the finished goods, the mouse of the computer, keyboard, CPU, monitor screen.

By combining the 4, a product is made.

Direct Material is nothing but the physical items built into a product.

Your product perhaps can belong to the Food Sector.

Then you will need salt, sugar, and many more products, what is its costing, manufacturing.

You will need to calculate how much it costs for manufacturing this one product.

You might think this is a difficult task but look, if you do even this much, that you get to know the manufacturing cost of your business, then you can increase or decrease the price.

You can understand that if the competitor is selling it for 2 Rs, then how you can sell it for 1.5 Rs.

Once you understand that if you are selling the product at 1.5 Rs and you are not finding any problem in that.

What problems? That you are not facing a loss by making extra expenses.

If you are understanding at least this much, then you can gain more profit side by side in E-Commerce.

So this is very interesting, friends.

We have direct material that is the raw material required for making a product, we have to decide what the cost is, then Direct labour such as an engineer etc will be needed to join the computer parts into one, then Manufacturing Overhead, that is extra cost.

Okay, let’s understand it in detail.

What is Direct Material?

Direct Materials are mouse, keyboard, CPU.

‘Direct Materials are the actual physical materials that need to be purchased, refined and consumed in order to make the product’.

-17:00

Direct materials are involved in making this product and then only it has become a finished product.

Be it any product, raw material, direct material is definitely needed.

No matter what you are making - food, table, chair, light, computer, watch, tshirt, you will need direct material and what is its cost?

Do you know what the final cost is?

If you know it, then well and good. And if you don’t know it, then you need to calculate it today only.

Then ‘Direct Labour Cost’.

You have got the raw material, then you have to mix it properly so that we get finished goods.

‘Products are more than just the raw material.’

‘Manufacturing company’s resources are allocated towards the labour and they turn the direct materials into finished goods’.

‘Engineers, Quality Check staff, etc’ are the main people because of who you are watching this on the computer.

If you are watching it on a mobile, then to make the mobile too, a lot many tools & techniques are required.

To collect it at one place, an engineer quality checks it.

I am taking an example of a computer here, but try to relate it with whatever your category is, okay?

Then ‘Manufacturing Overhead’. What is ‘Manufacturing Overhead’?

‘Electric Bill, Water, Rent.’

Wherever you are working, there must be a shop, if you’re not, you must be working from home & if you are working from home, then you must need electricity, water, rent.

‘The last piece of the puzzle is overhead cost’.

‘This compromises everything from the electricity used to the maintenance and the depreciation cost of the equipment’.

You have to pay to the cleaners working with you, which comes under extra added value, everything which indirectly comes under manufacturing, is called manufacturing overhead.

If you assemble all of the 3 things, if you join all the 3 things, you will get ‘Total Manufacturing Cost’.

We will once again see it with the example of a computer.

Suppose I want to make 50 computers, okay?

Direct Material Cost will approximately be Rs. 1 lakh which contains mouse, keyboard, CPU, includes processor also, fan, wires and many more things required for making the computer.

If you want to make a laptop, then the laptop has ICs, how will I install the keyboard, how will I install the touch mouse, how will I connect it, how will I solder it.

Inshort, we have approximated 1 lakh for the Direct Material.

And to join them, the labour cost Rs. 50,000.

Let’s say it took me 5 to 10 people to make 50 computers.

We have to pay them so that is a direct labour cost.

Then Manufacturing Overhead.

For that month, electricity, rent is used.

Even though I’m making only 50 computers, I’ll have to pay the Manufacturing Overhead such as rent, electricity, water, or any other things due to which Direct Labour & Direct Material has made that product into finished goods.

So if you calculate all the 3, my total Manufacturing Cost comes to Rs. 2 lakh.

Okay so if you divide the 2 lakhs by 50 computers, you will find that each computer approximately costs you 4 or 5000.

So for example, if a computer is costing around 4 to 5000, it’s just an example, if you want to know the real price, you need to do research.

I have taken this just as an example so it’s easier for you to understand the numbers.

I have just taken it as an example that a computer will be made in 5 to 10,000.

Then if you understood Manufacturing Costing, what will be the cost of finished goods?

To understand that, we will have to go back to the Supply Chain.

We were still at the Manufacturer yet.

From the Manufacturer, the finished goods will go to the Distributor.

Now the distributor, logistics will take the products in a truck.

How long will the trip be?

Suppose a truck is going from Mumbai to Delhi, it’s a long route.

And in that, there is petrol expense, driver expense, logistic expense,  so add that and add profit also.

So the computer which used to be 4 to 5000, or 5 to 10,000, that computer is now costing 8000.

The Distributor, the main wholesaler who sells this in bulk, then the retailer will add his logistics, his profit and then the 8000 product will be of 15,000.

And later when it reaches the customer, GST, Taxes, Rent, Electric Bill, etc will be added and will conclude at 15 to 20,000.

Indeed, one computer will cost upto 15 to 20,000 depending on the technology.

If you add more technology then it will cost more, there are certain computers which cost 1-2 lakhs also, it depends which product do you want & what is in demand.

-23:36

Now Raw Materials or supplier.

See, this Supply Chain doesn't stop at customers.

It increases the demand depending on the market.

If extra things are needed, then the demand increases and then the raw material increases.

Then again there’s Supply, then Manufacture, then Distributor, then Retailer and then it reaches the customer.

What do you have to understand in this whole supply chain?

You need to understand that there are many people except you.

There are many people who manufacture, distribute, retail & deliver the product to the customer.

You have to gain the confidence of the customer, for that understanding Pricing is very important.

In this session, I gave an idea about what Manufacturing Cost is.

If you have any queries or comments, click the discussion button below the video and post there. This way, you will be able to connect to fellow learners and discuss the course. Also, Our Team will try to solve your query.

Thank you very much. See you in the next video.