Costing Tips And Tricks

[BDAZ]

I am in the process of launching the wholesale side of the business and consequently need to sharpen my pencil and make sure my costing is as accurate as possible. I have included every aspect of producing each item in it's costing model including finish, oils, masking tape, paper, thread, hardware and all other consumables.

The only problem I have is leather, which I obtain from a few different sources at differing prices. I know how many square inches each product takes but I have no idea how to cost the actual yield from a hide, nor which are the most economical cuts in terms of best yield.

Are there any rules of thumb or other tricks that can be used to obtain the maximum yield from a hide and then determine the resulting cost per square inch of the usable pieces.

I need to make sure my wholesale pricing is keen but profitable and I cant do that without accurate leather costs..

Thanks!

Bob

[DavidL]

I don't have anything for sale yet so take my words with a grain of salt. My opinion is I would calculate average amount of product X that can be cut from a 20 foot hide ($90). Take the total and divide by Quantity of product X. Do the same for thread and dye the same way as it is done for leather and you can find out how much it truly cost for each product. Take into account the percentage paypal takes and the websites slice of your sales. Then include the mark up which should be at minimum 100 percent to recover costs of leather thread and supplies you had to bulk up on to get discounts. After you break even its up to you to decided if you want to go higher volume at 75 percent mark up and so on.

90 dollars divided by 20 wallets= $4.5 wallet cost

15 dollar thread divided by 250 completed wallets = 7.5 cents

28 dollar dye divided by 100 = 28 cents

Shipping packages, bubble wrap also should be calculated

= 4.85 total cost plus mark up 4.85 = $10.7 selling price can be tweaked to 15, 20, 25 depending on how good the end product will be

If your start up is $2000. Divided 2000 by 10.7 to find your break even point - 197 wallets to break even.

Whole sides are always good or single bends(only the back, not the shoulder or belly)

Your tools and machinery(if any) and maybe your supplies can be put on your business tax return if you are registered as a business owner.

If you already know this then I suppose its good review. Good luck.

Edited May 8, 2014 by DavidL

[BDAZ]

I have been manufacturing scuba products for many years and also produce wide format graphics in another business, and soy based solvents in another, so I didn't just fall off the turnip truck.

The problem is that when I buy a 55 gallon drum of chemicals, I know that I'll have 3% wastage and the net amount will yield x products and x cost per bottle. The problem with leather is that each hide is different and with the range of products required, I am not really sure how many of each product I can get from a hide. If I had an order for 500 widgets, then I could probably use a greater percentage of the hide, but having an order for 5 or ten at a time, I'm guessing I have a 20% to 25% waste. For example I needed a 9" x 20" piece but was only able to get 9x19 so that almost piece is waste. I may eventually be able to use a part of it but chances are 50% of that piece would end up in the scrap heap.

For example, I can buy a side from Tandy at $6 a square foot. Assume 20% waste, it's now up to $8 IF I can get 100% use of the remaining leather. So that wasted piece was 1.25 square feet and cost me $10.

Surely there are some basic guidelines for costing leather commercial without getting into the world of computer controlled laser cutters?

And I am not concerned about retail as there is a lot more wiggle room for margins and I am not sure I am even interested in retail, but when my wholesale customers mark up the product 60% -100% then I have to have solid numbers to establish the lowest possible price while still remaining viable.

Cya!

Bob

[RavenAus]

One figure I saw was to allow 15% per hide as wastage so for your 20ft hide you'd have a working size of 17ft

[BDAZ]

This system may result in 15% waste:

http://www.expertsystemtechnik.de/reduce-material-waste-significantly-using-the-expert-scanning-method

Great video!

I'm way higher than that, in terms of the pieces I need for my products. I read a UN report on the shoe industry that stated the minimum wastage was 18% and often exceeds 25% and as high as 60% for premium products.

Cya!

Bob

[RiverCity]

On the cases I make, I can get 2 sets of blanks out of a back. I dont even figure the waste, I split the cost of the leather ( a back costs me about 150-160, so I figure the leather cost per case at half of that), add other materials, hardware, and packaging materials etc and that is the product cost. From there I roughly estimate the time it takes me to produce it and do the math with an hourly rate I have set for myself. Add the labor on and that is my retail.

I dont know exactly how many wallets you can cut from a side, so my example is for explanation purposes only. Say you buy a back of veg tan, and a big piece of lining/pocket leather. Total cost is say 200. You have enough leather to produce say 20 wallets with scraps left over. Your leather cost is 10 dollars per wallet. That should be the figure you use in your cost of materials. Not the .50 a square inch or whatever, yada yada yada.

IMO after 25 years of working in retail management, you can worry about shrink as much as you want. But is you consider shrink as a percent of sales, the best way to manage your shrink dollars is to increase your sales. As long as you are not being purposely wasteful, you should be fine. Then every so often, go through the scrap bin, and see if you can make any additional sales from the leather thats there. One of my biggest shrink busters is dog collars. Quick and easy for a basic collar. Dont jump over dollars to save nickels.

Chuck

[BDAZ]

Do you sell wholesale? Assuming $80 a case fr leather and another $20 for other consumables plus $80 labor and $20 overheads your wholesale would be $400 resulting is a retail of +-$800.

From your website (beautiful cases, lovely work) I see your retail price is around what the wholesale price would be thus either your retail pricing is way low based on the market, or you would be priced out of three tier distribution.

After checking pool cue distributors, the highest price I can find is $499, clearly well below the $800 your products would have to sell for to achieve your formula.

Thanks!

Cya!

Bob

Edited May 8, 2014 by BDAZ

[cgleathercraft]

Dont jump over dollars to save nickels.

This is probably the best bit of lots of really good advice I've seen here on pricing/costing.

I tend to worry about scrap and loss, but i'm just a hobbyist right now. I pull from the scrap pile if a piece suits the need before I make a fresh cut into a side or shoulder. If your concerned with scrap losing you money then put it up for sale here or on ebay. Someone will take it off your hands for the right price and will help the bottom line a lot.

I'm a programmer and have 3 years of background in supply chain from a previous job. Many thousands of dollars in scrap are wasted by large companies. I've considered putting together a calculator of sorts to handle inventory similar to what I programmed before. Just haven't got around to it yet. If there is some interest in it i'll start developing it.

[BDAZ]

There seems to be a dearth of folks that actually run some form of leather business where they sell multiple copies of an item to a distributor that resells to the end user. It seems that most of the folks here are on Etsy or have a retail operation where they are dealing directly with the public, either in person or online. Lots of wiggle room when dealing direct with the consumer. Issues like making sure the picture in the catalog matches the item you deliver 6 months later don't apply. Also one has to be more efficient in time and materials to allow for the re-seller's margin.

So I guess I'll using some templates, try to estimate how many items I can produce for a side and then figure the cost per square inch. (Each case requires around 2 ft2) or simply use a thumbsuck 25% waste to determine the approximate cost per square inch and run from there.

I was hoping there was some rule of thumb, but I guess the great variation in leather production, from shoes and wallets to auto upholstery makes that impossible and other than spending $350,000 on a full hide scanner and laser cutter, I'll just use my pencil.

Thanks,

Bob

Thanks!

Bob

[RiverCity]

Do you sell wholesale? Assuming $80 a case fr leather and another $20 for other consumables plus $80 labor and $20 overheads your wholesale would be $400 resulting is a retail of +-$800.

From your website (beautiful cases, lovely work) I see your retail price is around what the wholesale price would be thus either your retail pricing is way low based on the market, or you would be priced out of three tier distribution.

After checking pool cue distributors, the highest price I can find is $499, clearly well below the $800 your products would have to sell for to achieve your formula.

Thanks!

Cya!

Bob

No, I dont wholesale, and Im not sure where you are getting your made up numbers about what my wholesale and retail SHOULD be, youre wrong though.

Tried to help you figure your cost, but you seem to know it all, so good luck in your ventures.

Chuck

[BDAZ]

You stated you get two sets of blanks for $160 which is $80 a case for leather. I am guessing at an additional $20 for dyes, oils, hardware, etc. I was assuming 2 hours labor at $40 an hour to make $80 and an additional $20 (just a guess) for lights, rent, etc., even if you are working from home. Your cost would be +- $200. Then a typical manufacture margin would 100% resulting in a wholesale price of $400. From a few calls I have made, the retailer is looking to double his cost so the final cost to the end user is $800.

Scenario 2, also plausible: Your costs remain about the same at $200 and you mark it up 1/3 resulting in a wholesale price of $266. The retailer (maybe online with lower margins) only marks it up 1/3 as well resulting in a retail of 353, which would be in line with some of the prices I have seen. These are NOT the percentages I have encountered but maybe in the pool que industry they would work?

If I have made some wrong assumptions, please let me know where I have erred.

Thanks,

Bob

[RiverCity]

You stated you get two sets of blanks for $160 which is $80 a case for leather. I am guessing at an additional $20 for dyes, oils, hardware, etc. I was assuming 2 hours labor at $40 an hour to make $80 and an additional $20 (just a guess) for lights, rent, etc., even if you are working from home. Your cost would be +- $200. Then a typical manufacture margin would 100% resulting in a wholesale price of $400. From a few calls I have made, the retailer is looking to double his cost so the final cost to the end user is $800.

Scenario 2, also plausible: Your costs remain about the same at $200 and you mark it up 1/3 resulting in a wholesale price of $266. The retailer (maybe online with lower margins) only marks it up 1/3 as well resulting in a retail of 353, which would be in line with some of the prices I have seen. These are NOT the percentages I have encountered but maybe in the pool que industry they would work?

If I have made some wrong assumptions, please let me know where I have erred.

Thanks,

Bob

At this point I don't know if you're trying to insult me or you have NO clue about leather work and what it takes to actually produce something. If you think a case can be made in 2 hours you're off base. If I could make a case in 2 hours a wallet should take what? 5-10 minutes start to finish?

I have about 100 material cost in a case depending on options. The rest of my retail is my labor cost. And it is fair pricing for the market which you have no clue about other than looking at a website or 2 with factory made cases.

You like to over think and over analyze things. That much is obvious. So enjoy your economics class formulas, I'm speaking from 25 years experience in retail and working with product production and buying wholesale from vendors.

Chuck

[BDAZ]

I did go back and look at your products extensively and as I mentioned earlier they are beautifully made and I am absolutely not trying to offend you. I figured $80 for labor whether it's 4 hours at $20 or 6 1/2 at $15. Just a guess as I have no clue how you value your time. No need to get upset. And let's not confuse thinking with over thinking. All I am interested in finding is how to cost the leather accurately so I can establish wholesale prices. Buying wholesale is a bit different from selling wholesale, and I have been doing the later for more than 35years. So what seems like over thinking to a retailer is just SOP for a manufacturer who has to worry about every additional cost being magnified up the distribution chain.

One of my businesses uses three tier distribution. I sell to my master wholesalers, they sell to their dealers and the dealers to the customer. Add $.10 to the cost and it's $.50 or more at the register.

Thanks RC for your help but so far I really haven't got anything I can use other than you turn your scrap into dog collars.

I thought there might be some more commercial leather manufacturers that have distribution experience, that could point me in the right direction.

Cya!

Bob

Edited May 9, 2014 by BDAZ

[DavidL]

you could cut off the shoulder and belly and sell those for a price. Maybe wholesale bracelets or something that can be made several times easily with a die on the belly or shoulders.

[BDAZ]

I have stated buying drum dyed veg tan so I can produce consistent product and have been buying double shoulders and double bends but it's still problematic because i need continuous pieces up to 30" cut length ways so I need to come up with a smart way to cut as well as costing to allow for waste so I can keep my prices as low as possible to get volumes up while still making a profit.

I am looking at a clicker press and dies to make some form of small item that would turn scrap into profits, but it will be a different market.

Thanks for the suggestions.

Cya!

Bob

[stelmackr]

<<<snip>>...The only problem I have is leather, which I obtain from a few different sources at differing prices. I know how many square inches each product takes but I have no idea how to cost the actual yield from a hide...<<<snip>>>

This many be off the track of what you are asking, but I assume that you are anticipating figuring the COGS (Cost of Goods Sold) for the Schedule C of the IRS 1040.

Each side of leather I receive, I record the cost (including shipping), the square footage and I actually weigh the leather (in ounces, not the thickness in ounces). Then at the end of the year I weigh the what is left from the side and a simple spread sheet yields the leather used and takes into account whatever waste occurred.

Hope that helps.

Bob Stelmack

Edited May 9, 2014 by stelmackr

[BDAZ]

Brilliant idea! All component purchases, in this case, leather, thread, dyes and other consumables are allocated to COGS so from an accounting stand point it's all a wash at the end of the year. Once sales and overheads are allocated then I have an accurate accounting of P&L but that doesn't help me, at this stage, with initial costing.

Again, I do like your idea of weighing the scraps from a piece after it's used and comparing it with the original weight. Probably the bsts method to compute waste percentage.

Thanks!!

Bob

[NVLeatherWorx]

There is a highly recommended percentage to use when trying to calculate your overall USEABLE materials and that is 15%, it is considered to be the industry accepted standard for what WE do, not those big sweatshop factories. This percentage can be applied to any bulk materials such as leather, fabrics, snaps/rivets/eyelets, threads, lace, liquids such as dyes/stains/Antique and then the remaining items are just consumed. Anyone who wants to try and calculate out the amount of adhesive that they use on any one item is thinking way too deep into the equation. These items are just simple incidentals and that is it.

To calculate out your true cost of goods you need to know how much any given unit of a material cost you based on the USEABLE amount. For leather, take your known square footage and multiply by .85 to get your final amount that can actually be used. If you pay for your leather by the piece then you first have calculate how much you pay per square foot by taking the purchase price (plus any charges such as shipping, taxes, etc.) and divide by your known square footage. Then you can calculate the remaining costs from there. For calculating your threads/lace you take your known length of the full spool and divide that by .85, then you take your useable material number and divide that into the price you paid (all inclusive) for that spool. The same goes for every bulk material item that you purchase. When it comes to calculating your dyes/stains/Antiques it gets a bit trickier but you can do it if it is really that important. I tend not to waste my time on the liquids side of the equation as I don't feel like acting like a Chemist and portioning out every little drop to get a cost number.

To ensure that I get my liquids and other consumed incidentals covered, I add 15% to my overall materials cost and that more than covers it. I don't do wholesale because there is always a huge issue when trying to deal with these retailers that want to help you get your stuff in their customers hands. Their intentions are rarely to help you as much as they want to help themselves even more. I also do not do consignment for much the same reason. The comments provided regarding the waste bin are the best thing out there though and that is because, you have already made your money on that material as it has been factored in to the costs of the other items that have been made from it. Anything made from scrap bin material is pretty much pure profit if you did your math correctly on everything else and that is a beautiful thing.

[BDAZ]

I was thinking of this very issue as a pulled out a new side and started cutting. I was thinking +- 20% but 15% is close enough. I weighed the hide and will weigh all the scraps on completion. Wholesaling is not a problem in my market because I am dealing with the manufacturer of the product I am making the cases for. I have limited my color choices to what is available in drum dyed veg tan..more expensive but cheaper when time, consistency and cost of dyes is factored in.

I have always been thrilled when my wholesale customers (in other businesses) make lots of money selling my products!

Thanks!

Bob