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How Much Does It Cost to Setup your Factory?[Cost Calculator]

August 8, 2022

 by David Collins III

factory costs

Simple answer: depends on what you are going to manufacture. Factory building costs can vary from $15B to $20B for a semiconductor fabricator to under a million dollars for a simple assembly operation.

The Real Answer

The real answer is more complex. It is not only a matter of what you are going to produce but how much you plan to produce, what your growth projections are and what systems you want to put in place.

What You Need to Know Before Starting

First, start with what you are going to produce and how much. Let’s take a simple product: plastic injection mold toys. The process to make them is relatively simple and straightforward. The machinery is not complicated, and it would not take long to train staff. We will assume only one type is produced with a simple changeover for molds between different types of pieces. One is a plastic soldier, and the other is a dinosaur.

Now that we have the product, it’s time to determine how much you plan to produce. How to determine that is beyond the scope of this blog. That is decided by sales. Understanding not only how much you need to produce, but what the expected sales will be, is critical to pricing out the manufacturing.

Equipment Costs

The manufacturing aspect needs to start with the most critical piece of equipment. The rest of the manufacturing process will be designed around that. For plastic injected pieces, it is an injection mold machine. The tempo that this machine sets creates the tempo for manufacturing. If you need a million pieces a year and one machine produces 2,000 per shift, and you run one shift for 250 days per year, you will need two machines.

That figure assumes 100% efficiency which is unlikely and does not account for growth. It is better to buy 3 machines to account for estimated growth. Additionally, this gives the flexibility to perform routine maintenance. Next, find the capacity of the other direct equipment. Direct equipment is the equipment used specifically to work on the product, not to transport or package it.

Now that you have the most critical piece of equipment, you design the manufacturing flow around it. Do you need a conveyor belt? Dust collector? Cooling stations? Based on your production and capacity you can plan around each of those.

Some equipment has much greater capacity so only one might be necessary. For example, in many factories, the paint department has to be a certain size and capacity regardless of how much capacity is exactly needed. We had a client that was building a factory with low production of less than 50,000 and then expanding it to 500,000. The paint department did not change size. The tempo was increased but the equipment did not change.

Process Flow and Decorations

The process flow will drive the needs of the rest of the factory. These are used for “decoration”. Rather than Christmas lights or bunding, decoration in this context is what needs to be changed in a factory to ready it for production. It is good to assume at least 5% of the cost of equipment however the needs can vary greatly.

Taking a modular approach can be very helpful here. Even if there is enough space, only use the space required for the current production. Structuring utilities so they can be moved to accommodate different configurations can also save a lot of time and expense. We had a client that built all their utilities into the concrete floor and had to tear up the floor when it turned out that the hookups were not in the right place. It was expensive and unnecessary.

Next, price transportation equipment needed such as a forklift, office and employee areas (canteen) as well as supplies for the workers on the line and in the office. While you want to keep indirect labor to a minimum, it is important to have the necessary supplies ready.

Personnel is the last part of the consideration. Most equipment manufacturers give a recommended number of operators. That should form the basis of your direct labor calculations. The first position to hire is a general manager and next an HR person. These two should form the core of your administrative team and will work together to select, hire and train new employees.

The Bottom Line: Always Assume It Is More Expensive Than Estimated

Finally, once you have added all these costs together, add 20% to the costs. That 20% is to cover any unforeseen issues that may come up. These can range from problems with the contractors installing the equipment, price increases on essentials, delays, etc.

This guide can assist you with understanding the price of your factory. Click on the link below to receive a spreadsheet to calculate the basic costs of operations for your factory and possible operations over the course of 1 year.

 

CMC is committed to providing you with the latest quality content and insights, download our FREE cost calculator spreadsheet below.

factory cost calculator spreadhseet

Topics: New Factory Setup, Manufacturing In China

David Collins III

David Collins III

David was a Senior Strategy Consultant for Deloitte, served in Iraq as a Special Operations Civil Affairs soldier, and as a Governance Advisor to the Afghan Government with the Department of State. At CMC, David advises clients on strategy and investments.

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