Your Budget... where art thou
By: Zach Hegde
What is the your true cost?
The project management triangle, also known as the triple constraints or the iron triangle, consists of cost, time and quality, and achieving all three of them together is nearly impossible. Just like when you are trying to find a partner, you can have rich, good looking or loyal; you can only choose two, you can’t have all three!
I will go through each of these areas independently, but in this article, let me touch upon the first of the three: cost. Now that you’ve figured out how much exactly you have to spend, you need to make sure you understand where your budget is going.
Have you ever purchased an airline ticket on special and then when you are at the check out the price seems to have doubled? It’s weird right, even after saying no to health insurance, date change insurance, your-plane-might-crash insurance and even the save-the-earth carbon offset surcharge, you have to pay extra for using a credit card! No wait, you’re using a debit card, but you still have to pay a fee and don’t forget the “service” fee too! The price of the actual flight is only a fraction of what you actually end up paying for.
It’s a similar situation when you order an item. There are varied costs involved beyond the cost of the actual item, and I refer this as the true cost vs the real cost. Both are same you might say, isn’t it just semantics, true, real? However, they are completely different terms and critical to understand.
Real cost is often referred to as landed cost and the concept has been around for some time. Landed Unit Cost (LUC) is a very commonly used term in the field. When you give a budget of say $10, as you must understand that here are many hands trying to get a piece of that pie. Although you are paying $10 for each unit, the item you get will not actually be worth this. To break down the costs adding up to the landed unit cost:
- The true cost of the item is what the factory charges you for producing the actual unit
- Add 2% to 10% to customise the item to your brand
- Shipping skins 10% to 15% of your budget (often said in abbreviations you’ve never even heard of! Check out Incoterms on https://en.wikipedia.org/wiki/Incoterms)
- Customs and excise are waiting at your doorstep to welcome your goods with a duty you cannot argue
As you can see, the landed unit cost is shared between the agency who design, source, manage production and assure quality and many other unavoidable costs.
The above cost is only good for existing promotional items or items off-the-shelf, but when you want bespoke custom-made items, the ones Merch & Effect specialise in, the cost and time involved are significantly and substantially different. In many instances getting the new product development (NPD) takes multiple attempts and cost. Creating a detailed Technical Spec Sheet (TSS) takes a day, and each time there is custom sampling there are costs involved. If a mould is needed, the time factor also comes in, anywhere from 15 to 45 days. That same cost repeated few times does eat into chunks of your budget.
Quality control, a very crucial element of any production has to be brought in at various steps to ensure that the acceptable quality level (AQL) has been met. Many times various elements of a single unit are produced at various different factories and put together: items have to be consolidated, repacked and certificates obtained. This involves local labour cost and time and when the timeline is short, staff overtime has to be paid to ensure products are finished on time to meet the deadline.
We, as your brand custodians, also have to be very careful to not supplying you with items that do not match your brand standards and could possibly damage your brand reputation, and for that we have to ensure that we have various levels of quality checks. On top of this, we also check if there are any legal requirements in the country the products are being used.
Depending on the size of your order and the economies of scale, where you decide to produce your item will also reveal your savings or your losses. In general, for larger orders of US $8k to $10k, it is commercially viable to use agencies to source merchandise globally. For smaller orders under US $5k, it is better to use local promotional product companies who can quickly and cheaply provide non-customised products. There is no point using overseas producers as too much of the budget is chewed up on shipping costs and agency fees to be worthwhile.
It’s critical to understand not only the difference between the real cost and the true cost, but also what makes up the real cost so that you can budget accordingly and decide the best way to source your item.
- Understand what you are paying for.
- Get your agency to quote ex-works or freight on board (FOB) price, so there is a clarity on the item cost
- Ask your agency to provide the shipping cost separately so you can compare
- Make sure the agency confirms that the item will land at your doorstep with all charges paid