This is really interesting to hear from your perspective! It brought to mind John Sterman's writing on supply chains in his book Business Dynamics, which I'm working through with a friend. The different stakeholders, where to draw model boundaries, and delays in the process all are covered. Curious: have you encountered anyone using system dynamics to try to improve accuracy of the costing process?

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Thanks for the piece Tony!

Just a small edit: if a product costs $1.00 to make and that you price it at $1.30, that is a 30% markup but effectively a 23% Gross Margin.

I think your piece is a great segue into another very relevant topic which is pricing: it is for sure fundamental to understand your costs when thinking about the pricing of a product, however many companies use this bottom-up approach only, without taking into account what the customer would ultimately be willing to pay for it.

It is not because your product costs X to make that a customer would necessarily be willing to pay X + 30% : in some cases it could be X+ 15% and in some X + 80%, depending on how much is the perceived value of the product to the customer.

Having transparency and control over your cost base is therefore an imperative from an operational standpoint but COGS should never solely determine a company's pricing strategy, a top-down approach to pricing (i.e. value based pricing) should always be preferred.

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Oct 11, 2022Liked by Tony Maiorana

Cost is king, generally I’ve seen it more and more as a protection play but companies have backwards integrated a lot to protect versus shortages and to either buy open market or make internally themselves. As well as other companies have cut supply to raise prices because their expansion plans didn’t get the prices they thought it could.

By having the flexibility in inputs, it makes product management harder because you have one product but could be made two different ways but to the end user or sales person it’s the same. Internal vs open market just depends on the market pricing and where your production is located.

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I haven’t personally experienced it. Usually the heat costing experience I’ve had was one person (usually a product manager) willing to take the time and dive deep and figure it out.

Doesn’t mean other places aren’t doing it though

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COGS... There are many studies showing a $1 reduction in COGS (per unit) is far more important that $1 increase in price. Then again, you can't save your way to success. It is a race to the bottom, and that is no fun at all.

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