Why should new companies manufacture in low volume?
It’s common knowledge that if you purchase more of a product, then the unit price comes down. Economy of scale principles can be found in almost every industry and it is especially true when it comes to product manufacturing.
If making more parts means they’ll cost less, why would you make fewer parts?
Because in high volume manufacturing, almost all processes require a tooling, fixturing, or set up process in order to be able to produce parts at a cheaper price. And this means a big capital expense for your growing business at a time when cashflow may be critical.
Sometimes it makes sense to pursue other options that may cost more per unit but be more cashflow friendly and cost less overall in low volumes. This strategy is useful for companies who are still trying to gain market acceptance and the chance of pivoting is still somewhat high. If the initial consumer behavior means a change is needed, you haven’t committed a high amount of cash towards a manufacturing tool that is no longer useful.
Let’s look at a basic example:
Company 1 purchases injection mold tooling for $50,000 and orders 5,000 units at $10 per unit. Their total cash expense is $100,000. They begin selling their product and around 200 units sold, user feedback tells them they need to make an adjustment. They now have to waste $48,000 worth of inventory and potentially purchase up to another $50,000 in mold tooling and buy additional inventory. Their initial total cash expense is now approaching $200,000.
Company 2 purchases 200 units using low start up cost fabrication methods like CNC machining and urethane casting. They spend $10,000 on start up and then $100 per unit. Their initial total cash expense is $30,000. They begin selling their product and around 200 units sold, user feedback tells them they need to make an adjustment. After they make and validate the changes, they purchase injection mold tooling for $50,000 and 5,000 units at $10 per unit. This brings their initial total cash expense to around $130,000.
Company 2 saved 35% of their initial capital by testing the market with a low volume run even though that first run wasn’t profitable.