In our last blog we discussed the importance of setting a realistic budget in creating effective POP display programs. In this blog, we will discuss the importance of understanding the economics of your display program.
Maximizing Your Return Means Knowing Your Economics
Developing a thorough understanding of the economics of your POP display program will help to maximize the success of your program. To begin, it is important to consider the total delivered cost of a display rather than just the quoted manufacturing cost per unit. A lot of manufacturers quote FOB their location so it is important to factor in shipping cost when comparing quotes. Some of our customers have us ship their POP displays to their warehouse, and then they ship to their customers’ stores or distribution centers. There may be some good reasons for doing this, but savings are often possible by having the display manufacturer drop ship to stores or ship directly to a retailer’s distribution center. Likewise, some of our retail customers only focus on the cost of the fixture without regard to transportation costs since in some cases freight falls into a different budget and is outside of their area of accountability. However, this approach generally does not yield the best results when measuring total delivered display cost.
Consider the Full Range of Costs
Just as it is important to understand shipping costs, other costs related to fixture storage, assembly, fulfillment and installation also make sense to consider in developing a complete picture of the economics of a display. It is important for the company providing the display to understand a particular retailer’s tolerance for assembling a display. If the retailer is equipped to handle in-store assembly, if the assembly is not too difficult, and if the retailer does not charge back for assembly services, then it almost always makes sense to ship the display fixture knock-down and have it assembled in the field, unless the fixture is very large. Some customers think they can save money by having us ship displays to them without signs so they can print and add signs themselves. These customers typically underestimate the true cost of labor in printing and adding signs to each box.
The Relationship Between Material Weight and Cost
Understanding material costs and economics is also important. In considering overseas material costs, it is helpful to know that for most materials like metal and plastic, there is a very strong economic relationship between the weight of the material and the cost of the display. So, for example, a metal display that weighs twice as much as another metal display will likely cost about twice as much. Likewise, an acrylic counter display made of 3MM acrylic is likely to cost about half as much the same display made of 6MM acrylic. While the relationship between overseas material weight and cost is not perfect, the correlation is high. That relationship is much stronger for overseas materials than materials in the U.S. because labor costs tend to play a bigger role in determining overall display costs in the U.S. than for displays manufactured overseas where labor costs are lower. Despite overseas wage inflation in recent years, the relationship between material weight and cost still largely holds.
Checking Material Weights
One way to hold an overseas manufacturer accountable is by weighing the display to ensure they are not lightening up some of the materials to save money. Several years ago we noticed a discrepancy in the weight of boxes of the same style hooks between two different POs. We discovered that our factory had used lighter gauge wire on one of the POs as a way to squeeze out a little more profit margin. Monitoring weight fluctuations for items that are ordered on a repeated basis is one important element of an enlightened quality assurance process. In the event that material thicknesses are not thoroughly specified, it is equally important for a customer who is comparing quotes from different POP display companies to check the weight of the display being quoted since companies utilizing lighter gauge materials may be able to offer a lower price.
Applying the Law of Supply and Demand
In specifying materials, it is important to keep in mind another key economic principle which relates to the law of supply and demand. We are referring to the difference between scarcity and utility. Water, for example, has extremely high utility. It is extremely valuable and essential for life. However, because it is plentiful it is cheap relative to its value. In contrast, beachfront property is lower in utility, but because of its relative scarcity, it commands higher prices. The same is true for materials used in POP displays. Whenever possible, try to specify common materials that are readily available in the market. Create uniqueness and value in your displays by combining readily available materials in new and interesting ways rather than trying to differentiate your display by specifying some obscure laminate or exotic wood that is in short supply.
How Quantity Affects Costs
Aside from material costs, perhaps the biggest lever in managing per unit display costs is volume. Given that manufacturing most displays requires tooling and set-up time, the longer the manufacturing run, the more units that can be used to spread tooling and set-up costs. With smaller runs of let’s say fewer than 100 units, all of the upfront development costs, tooling costs, and set-up cost can only be spread across a very limited number of units, resulting in higher per unit manufacturing costs. When set-up time is high as a percentage of overall production time, unit costs are likely to be higher. Similarly, when the quantity is high, the set-up costs tend to be low relative to total production time, thereby resulting in lower unit costs.
Many customers do not understand the difference between ordering 1000 units to be produced at the same time and placing 5 orders of 200 units each of which is produced two months apart. Although both quantities are 1000 units, the material purchasing economies of scale and the lower total set-up time of the single large order explain why the single order of 1000 units would deserve better pricing. The difference between the economics of short runs and long runs helps to explain in part why custom POP displays may not necessarily be more expensive than stock displays. That is, because custom displays typically have higher minimums than stock displays, the volume discount built into custom display pricing is often more than enough to cover the expense associated with designing and creating special tooling for a custom display.
The Role of Manufacturing Processes and Productivity
Two other important considerations in understanding the economics related to manufacturing costs relate to manufacturing processes and productivity. With respect to manufacturing processes, customers should understand that each additional step in the manufacturing process generally has an associated cost. For example, MDF with a laminated finish is typically less expensive than MDF with a high-gloss polyurethane (PU) finish. The reason is PU-coated MDF takes approximately 9 coats to create a durable high-gloss finish so the labor costs are significantly higher than the labor required to stick laminate to MDF. The reverse is also true. Reducing the number of welds required to fabricate a wire rack, for example, can reduce labor costs and per unit manufacturing costs.
Productivity is also a key factor in understanding manufacturing costs. Most articles in the popular press focus on the changes in worldwide labor rates and the continued wage inflation in countries like China. The changes, they claim, are creating a manufacturing resurgence in the U.S., more “near-shoring” opportunities in Mexico, and growth in manufacturing activity in smaller Asian countries like Vietnam and Cambodia. While it is true that wages in China have accelerated in recent years, most of these analyses fail to consider the impact of productivity on overall manufacturing costs. For example, although wage rates in Vietnam are roughly half of those in China, Vietnam has a far less mature manufacturing infrastructure, a less well developed supply chain, and a less sophisticated national transportation and logistics system. These shortcomings, coupled with China’s strength in mass production and domestic raw material production capabilities, largely erode Vietnam’s labor advantage, thereby creating much greater manufacturing cost parity.