Managing Cost of Goods Sold in Hardware Companies

It’s no news that today’s world revolves around technology—from smartphones to smart homes. 

Hardware companies play a crucial role in developing the technology that drives every aspect of our daily lives. However, the rapid technological evolution brings both opportunities and challenges. As innovation accelerates, staying profitable and ensuring long-term success becomes a constant struggle.

In this article, we’ll explore how effectively managing the Cost of Goods Sold (COGS) is crucial for hardware companies, along with practical strategies you can implement to optimize COGS in your business.

Analyzing COGS in Hardware Companies

When looking at COGS in detail, it becomes apparent that several factors influence it.

Understanding these factors is essential for developing strategies to manage and reduce COGS effectively:

• Technological Advancements: The rapid pace of innovation means frequent updates to production processes and materials, which may lead to an increase in COGS.
• Component Obsolescence: As technology advances, components quickly become obsolete, leading to increased waste and higher COGS. 
• Supply Chain Dynamics: Fluctuations in the availability and cost of raw materials, along with disruptions like geopolitical events or natural disasters, can significantly impact COGS.
• Market volatility: Fluctuations in raw material prices and changes in consumer demand can impact COGS.
• Balancing Cost Reduction with Quality: Maintaining high product quality while reducing costs is a fine balance. Cutting costs too aggressively may compromise product quality and brand reputation.

Strategies for Managing and Reducing COGS

Just in Time Inventory System

Consider implementing the Just-in-Time (JIT) inventory system, where production is driven by consumer demand rather than forecasts.

Doing this keeps inventory levels at a minimum, lowers waste, and enhances the efficiency of your production line. By eliminating the need for large storage facilities, it cuts costs and lowers the risk of component obsolescence.

This strategy involves strong relationships with suppliers, though. Since you’re requesting materials on demand, you must be confident that your suppliers can deliver on time. Even small disruptions can cause real headaches in meeting consumer demand.

Vendor Managed Inventory

If the JIT system doesn’t suit your needs, another option is Vendor-Managed Inventory (VMI).

With VMI, your suppliers take responsibility for maintaining the agreed-upon inventory levels for your business. They will monitor stock levels, forecast demand, and plan replenishments accordingly.

VMI optimizes your inventory levels, reduces the need to carry a lot of stock, and streamlines your operations.

This strategy requires real-time data sharing with your supplier (usually via specific software). And, of course, a successful implementation also requires your supplier’s full cooperation. 

Strategic Sourcing and Procurement

Strategic sourcing involves several strategies at once:

• Negotiating favorable terms with your suppliers:  Secure better pricing, especially when purchasing in bulk.
• Diversifying suppliers: Reduce risks from reliance on a single source and potentially improve pricing and terms.
• Developing strong relationships: Ensure a steady flow of materials at competitive prices. A solid relationship may also give you priority access when supplies are limited. 

Choose these strategies wisely, as some may not always yield the desired outcomes. For example, purchasing in bulk increases the risk of carrying obsolete stock.

Value Stream Mapping

Value Stream Mapping (VSM) is a lean-management method used to analyze and design the flow of materials and information required to bring a product or service to a customer. 

Using VSM provides a visual representation of each workflow step. Once you understand your workflow, you can optimize it to streamline processes, identify and reduce waste, and improve overall efficiency.

This strategy not only reduces COGS, but it can increase satisfaction too!

Cost-effective Design and Engineering

Focusing on cost-effective design and engineering can also help you lower COGS. 

For example, modular design approaches allow for the use of standardized components across different products which reduces the need for multiple unique parts. 

This strategy not only lowers production costs but also streamlines inventory management, making it more efficient. 

Additionally, standard components are cost-effective and widely available, which helps prevent supply chain issues.

Effective Accounting and Financial Management

Many hardware companies overlook the importance of effective financial management for controlling COGS.

In reality, proper accounting is essential for all business aspects and provides you with the data and analytics required to make informed decisions. For example, an accountant will:

• Keep detailed records: Track production costs to manage spending more efficiently.
• Budget and forecast: Develop budgets and forecasts to predict future COGS with greater accuracy.
• Provide financial analysis: Use ratio and break-even analysis to assess production cost management and set pricing strategies. 
• Ensure compliance: Stay on top of regulatory changes and industry standards. 
• Determine inventory management: Advise on the best type of inventory management system for your business.
• Provide strategic decision support: Evaluate the potential return on investment (ROI) of new equipment or technologies and advise you on next steps.

Calculating COGS

With all necessary data in hand, accountants use the next formula to calculate COGS during a reporting period:

Beginning Inventory + Purchases – Ending Inventory = COGS

Leveraging Technology to Control COGS

Technology is crucial for streamlining processes and systems to reduce COGS:

• Enterprise Resource Planning (ERP): Integrates and automates information flow, helping track costs, manage resources, and optimize COGS.
• Artificial intelligence (AI): Automates processes, boosts efficiency, improves predictive maintenance, optimizes production, enhances quality control, and streamlines supply chain, reducing COGS.
• Data analytics: Offers insights into cost drivers, forecasts demand, optimizes inventory, and minimizes waste.

Additionally, using accounting software like QuickBooks can further simplify cost tracking and calculation. By automating the COGS formula and generating detailed reports, these tools help you calculate profit margins more accurately and forecast future costs with greater precision.

How Finvisor Can Help Manage COGS

Finvisor offers expert accounting services tailored to your needs. If you’re looking for assistance in managing and reducing your organization’s COGS, don’t hesitate to get in touch.

Whether you need assistance with accounting and bookkeeping, bill processing and invoice management, forecasting and analysis, or even fractional CFO services, Finvisor is your trusted and affordable solution.