Increasing Gold Production Costs, and How They Affect You

Gold production costs have increased gain. In fact, they are at an all time high. This means that for some mining companies, the cost to mine and produce gold is too high to make a profit based on the current price of gold. So, what should you do?

Gold production costs are arguably the most important number for gold investors. After all, to truly understand the value of a commodity, you need to how much it costs to produce. For wise commodity investors, it’s like a dream come true when the cost to produce a commodity becomes higher than the public price, because for a limited time, investors can buy the commodity at a low cost, before dwindling supply and growing demand eventually drive price growth. It’s essentially a rare case of retail prices falling below cost.

In other words, given the high cost to produce gold, we are in the midst of an excellent opportunity to buy the metal at a low price. If production costs continue to rise, less gold will be mined, simply because the companies cannot make a profit. If less gold is produced, demand will increase, and eventually, so will the price (and value) of gold.

Another factor is the concept of newly mined gold. Most available gold is newly mined gold, because the rest has already been purchased. Therefore, if production stops, then the only available gold on the market is gold already held by others, which will in turn lead to higher mark ups and price. It will be a seller’s market.

So, what are the costs to mine gold currently? Depending on the company, mining costs range from about $1000 to $1400 per ounce. Given that gold closed at about $1284 on November 13, 2013, you can see that many companies are struggling to maintain the cost of production as compared to the price of gold.

With that in mind, and to use this development to your own personal advantage. The window of opportunity to invest in a commodity when its price is less than the cost to produce it is small. Many mining companies have already stopped production. If more continue to follow in that direction, we will likely begin to see increasing demand and prices in the near future.

After four consecutive down days, short covering in gold ensued in the afternoon yesterday on the heels of commentary from Federal Reserve Board Vice-Chair Janet Yellen. Her key lines of note were the following:

– The US economy and jobs are “performing far short” of potential

– Unemployment is too high with inflation short of 2% goal

– Economy must improve before Fed lessens stimulus

The USD tanked against a basket of currencies while the euro and gold ripped higher. The overnight session was largely tame but was reignited in NY with Yellen’s testimony this morning. Gold jumped up $20 before finding resistance ahead of $1,300. Without achieving a close above $1,300, it’s difficult to get too bullish on gold in the short term though. Working against the yellow metal on the fundamental side is some news out of India. The World Gold Council stated that gold imports into India fell in the 3rd quarter to the lowest level in more than four years. This is largely attributed to the government’s escalation of tariffs in an attempt to quell Indian demand for gold. Silver has caught some bids today after five consecutive down days but will likely follow gold lower should it turn south. Of interest, the US Mint sales of American Silver Eagles have already hit a new record in 2013 of nearly 40.2 million ounces.

D.I.Y. Production II – Production Costs

In the previous article I gave you some pointers on selecting a vendor for production. Another very close tie-in to vendor selection is price. As the client you need to watch your budget and as your design firm we design with those costs in mind. However, even when both client and firm have the best intentions on staying within a budget we must weigh project features against costs and make some tough choices.

1. Let your design firm handle it. Seriously, when conceptualizing we design for the sky and scale back at a latter stage unless we are already bound by a low number at the start of a project. We know as we get closer to production we may need to cut out some finishing details in order to come through under the budget wire. We may take a special spot varnish away or determine a special metallic ink that costs extra can be done in the normal process colors instead or perhaps we decide not to round the corners. Whatever the sacrifice, your firm will work with you to make those decisions and perhaps you can find a little extra wiggle room in your budget.

2. Quantity is key! In the print world, the more you buy the lower the unit cost. We cannot stress this enough. In fact, we see the best price breaks at 5000 units or more. Here’s an example. We recently purchased one-color stickers with our logo on it and wanted a price on one roll of a thousand. The printer quoted three levels (as they often do); one roll, three rolls and six rolls. To order just one roll of 1000 the cost was $137, three rolls was $48 per roll ($144) and six rolls cost $26 per roll ($156). It would have been insane for us to purchase only one roll as any responsible business person would have chosen the six. It’s not always this easy. When you are dealing with items that are costing you around $50 to $100 per unit, coming up with that extra budget can be difficult. Weigh it against your potential ROI and go from there.

3. Per unit cost versus production budget. It may be easier to figure what you would like to spend per piece on a project, however, you should always speak of an overall print budget. A per unit cost can always be met. It all goes back to number two – how many are you producing?

4. The possibilities are endless. Printing is a very in-depth process with many variables that affect cost from paper and color to varnishes, cuts, foils, dies, folding, binding (and on it goes). Each feature will have an impact on cost. As a result you, you will not be able to get a quote prior to having the project designed first. This is another reason why number one is important. If you hire a firm to design a piece and simply hand the files over for production, how are you going to be able to subtract features in order to meet your budget? At this point, you have your files and the job is done according to the design firm as time had not been budgeted towards production management.

There’s a saying in the business world, time, cost and quality; pick two. The same can be said for printing. Features, cost and quantity; we won’t make you pick two but your recipe has to be just right to achieve all three harmoniously. In the next article in this series we will talk about your files.

What is the Optimal Lot Size to Conserve Cash, Minimize Production Cost & Maximize Customer Service?

Lot size means the number of units in each production run. Minimizing production costs generally requires higher lot sizes. This is because the cost of machine changeover and machine set-up declines steeply with larger production runs. Meanwhile maximizing customer service whilst conserving cash requires smaller lot sizes. Lot size optimization is a collaborative business process comprising numerous “what if” simulations across Production, Finance and Sales. Lot size optimization is greatly assisted by the availability of usable factory productivity data and capacity utilization data. Production, Finance and Sales may then collaborate to determine optimal lot sizes to conserve cash, minimize production cost and maximize customer service.

Every unit of output in a production run that is not immediately on-sold to the customer must be funded. Even if output is on-sold to the customer immediately, there may – depending on purchasing arrangements – still be surplus materials and intermediate inputs or leftover work-in-process that needs to be funded. The cost of inventory funding is either the interest paid to the bank or the return foregone from investing cash into something other than inventory.

So does that mean it is best to keep production runs small? Maybe. Factory machines, like vacuum cleaners, come with various nozzles and attachments or ‘tooling’. Changing-over a product/process/job (I.E. a new production run) usually involves adjusting tooling to suit each production run, fitting tooling to machines or otherwise working with tooling to vary inputs and outputs. This is called machine set-up. Also changing-over a product/process/job may require the machines to be cleaned and/or sanitized.

Every production run incurs the cost of changeover (of product/process/job) and cost of machine set-up time. The cost of job changeover and machine set-up time can include part (or, for 24*7 machines, all) of the cost of finance and depreciation cost incurred while the machines are not producing output. The aim is to capture the total cost for those machines while they are not producing output.

The cost of this job changeover and machine set-up is apportioned over the number of units in each production run. If the production run is one unit then the cost of changeover and machine set-up must be added to the cost of that unit. If the production run is one thousand units then one thousandth of the cost of changeover and machine set-up must be added to the cost of each unit. If the production run is one million units then its one millionth of the cost of changeover and machine set-up for each unit. So the unit cost of changeover and machine set-up declines rather dramatically with higher lot sizes.

On the surface the solution seems to be consolidating production runs across manufacturing plants so each plant produces higher lot sizes less frequently. Then there will be increased specialization and greater productivity (I.E. lower unit costs) due to larger production runs: “many hands make light work.” However you will be constrained by the availability of labor in each manufacturing location. And the risk of concentrating each product across fewer production runs may outweigh the potential cost benefits. And larger production runs – aggregating many customer orders – are more complex to schedule than smaller batches, each corresponding to one customer order: “too many cooks spoil the broth.” Also the decreased cost of changeover and machine set-up per unit of output may be more than offset by the increased cost of transportation.

And with larger production runs and factories further away customers may have to wait longer to have their orders filled. This is unacceptable – sales revenue is closely tied to customer service.

But wait there’s more. Namely the additional resources and additional warehouse space to store unsold output and surplus inputs. Then there’s spoilage and obsolescence. If you sew garments and by the time you finish the production run the fashions have changed…

So what exactly is ‘customer service’? For the purpose of this article its three things: lead time, Delivery On Time and job tracking. Lead time is the promises you make to your customers about how long it will take to fill their orders. Delivery On Time is the extent to which you keep your promises. And job tracking is the extent to which customers are informed about changes to the production schedule and actual versus promised deliveries. Did I mention customer service is the critical determinant of sales revenue?

So if the objective is to increase sales revenue the question then becomes how to decrease lead times, increase Delivery On Time and keep customers informed in real-time. Which sounds like the topic for another article for another day. (Also maybe something on in sourcing, transaction cost and economies of scope.)

To conclude, smaller production runs are associated with lower cash spend and improved customer service whereas larger production runs are associated with lower production costs due to the declining cost of machine set-up. Lot size optimization necessitates simulation of numerous production run scenarios drawing on capacity utilization data and factory productivity data. MS SQL Server based Production Scheduling and Production Planning Software, integrated with SAP and MS Office, enables data sharing and collaborative decision-making across the enterprise.

Methodology:

Make To Order (NOT Make To Stock)

1. Orders from external customers
2. Internal orders for production eg.:
* from SKU re-order triggers
* based on sales forecast
* supply driven
* materials variances
* 3PL generated
-Production schedules based on priority assigned to each order
-Rescheduling to reflect contingencies in supply and demand
1. Variable process routings and order priorities
2. Inputs either variable or fixed:
* Very long run: plant variable, labor variable, materials variable
* Long run: plant fixed, labor variable, materials variable
* Short run: plant fixed, labor fixed, materials variable
* Very short run: plant fixed, labor fixed, materials fixed
Capacity utilization and factory productivity data summarized for lot size optimization