How Transaction Cost Can Hurt Your Manufacturing Business…and What to Do About it

John Hauer
Digifabster
Published in
4 min readJul 18, 2019

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Transaction cost can be defined simply as “the amount of money it takes to complete an order.”

Like any other business, 3D printing service bureaus and machine shops must account for soft costs that impact their businesses. Commonly called “overhead” these are costs that aren’t directly related to the production of a job.

Take quoting for example. If done manually, there is labor every time a quote is generated. If a shop won 100% of the quotes it generated, it would be easy to incorporate those costs into each job. But that’s not how it really works’ right? More likely a shop wins 30% of its quotes. Therefore it makes sense to spread the costs of all quotes across the jobs that actually matriculate.

An automated quoting system, like the one offered by DigiFabster can help greatly reduce estimating costs. Shops can leverage these savings in at least several ways. First, they can reallocate the labor to something more productive. They can also reduce their headcount or leverage their increased capacity to scale their business.

But quoting isn’t the only place where soft costs creep in. They start the minute a shop opens its doors. Human resources, accounting, and senior management aren’t direct revenue generators, they’re fixed cost centers. Their time must be accounted and billed for.

Then, when a job actually arrives, more soft costs pile on. An order must be written up and the project must be managed from receipt to delivery. In some ways project management costs are variable, as they are easily billable directly to an order, but they’re also fixed because the labor that manages projects gets paid whether or not a shop runs at its capacity.

The elements that make up transaction cost happen whether you’re printing one part or a million. Often, it costs the same amount of money to move a $50 order through your facility as it does a $5,000 order.

eCommerce can help manufacturing companies reduce transaction cost. From quoting to file prep and order entry, labor costs add up. In a manual environment, expenses continue, throughout production. Without automation, the cost to move an order through a facility can often reach $75 or more. With a highly automated workflow, those costs can be reduced to $15 or less.

Let’s look at two scenarios. Company A has a transaction cost of $75 and they’re selling a part for $10 each. In the second scenario, Company B has a transaction cost of $10.

Company A needs a minimum of 25 units to outrun their transaction cost. Company B outruns it with orders of 3 units or more. In other words, they can be profitable on much smaller jobs.

Maybe at this point you’re asking, “who would want to run a lot of small jobs?”

Well, you may not have much of a choice. As the digital manufacturing industry moves from prototyping to production, the size and value of work changes. Prototypes are typically high value, high margin orders. Shops could survive by taking on relatively few orders each month.

But the value propositions behind digital manufacturing are different. End-customers realize that they can disrupt their own supply chains by manufacturing just-in-time, or more ideally, “on demand.” They’re also leveraging 3D printing and other technologies to produce customized and personalized products. At scale, any of those use cases leads to a fire hose of small orders.

To support these kinds of opportunities, digital manufacturing companies must work aggressively to drive transaction cost out of their businesses. The first step is to understand and account for all the fixed and variable costs in your shop, whether they are directly related to a job or not. The second is to automate everything that can possibly be automated. Not only will this allow you operate more efficiently and better compete as the industry moves from prototyping to production, it will also enable you to scale with less effort.

After all, that’s what it’s really all about right?

To learn more about how software can help digital manufacturing businesses reduce their transaction cost, check out this new case study from DigiFabster.

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3D Printing Visionary and Entrepreneur. CEO of Get3DSmart, a consulting practice which helps clients identify and capitalize on opportunities in 3D printing.