Formulation manufacturers · Pharmaceutical and life sciences
SKU-level margin for formulation manufacturers, by dosage form, pack and customer
A formulation plant can run hundreds of SKUs across tablets, capsules, liquids and injectables, each with a different conversion cost. We cost each SKU on the line and pack it actually uses. You can then see which products and which customers carry the plant.
In one paragraph
Finished-dosage manufacturers, usually at ₹20–400 crore turnover, make their own brands, manufacture for marketing companies on a third-party or loan-licence basis, or both. Their difficulty is range. Many SKUs share lines, packing material and quality-control capacity. A single conversion rate makes the small, complex products look far cheaper than they are. Owners and finance heads usually lead the work, often with the plant head.
Managing director or owner, often with the plant head
The economics
How the money moves in this trade
Material cost in a formulation is often a modest share of the price. The rest is conversion: granulation, compression, coating, filling, packing and the quality-control testing each batch must pass before release. Those costs differ widely between a high-volume tablet and a small-batch injectable or an unusual blister format. Yet they are usually spread across all products on a single rate per unit or per batch.
Revenue comes through several routes at once. There are own brands sold to distributors, third-party manufacturing for marketing companies, loan-licence work where the customer supplies some materials, and sometimes government tenders. Scheduled formulations carry ceiling prices fixed under the Drugs (Prices Control) Order, so on those products cost is the only lever left. A cost increase that cannot be passed on lands entirely in the margin.
The problem
Where the numbers usually break down
One conversion rate for every line
A high-speed compression line and a small liquid-filling line are charged at the same rate per batch, so low-volume dosage forms are under-costed and high-volume tablets over-costed.
Packing material is costed at the last purchase price
Printed packing material is SKU-specific, often bought in minimum quantities, and becomes obsolete when artwork changes. None of that reaches the product cost until it is written off.
Loan-licence material is not reconciled
Materials supplied by loan-licence customers are tracked in the stores register but not agreed with the customer or the books, so shortages and excess consumption surface only at the year-end confirmation.
Quality-control cost sits in overhead
Testing, stability studies and batch release are a material cost for some products and almost nothing for others, yet they are spread evenly across output.
Price-controlled products are not tracked separately
Margins on products with a ceiling price are reported together with free-priced ones, so erosion on the controlled portfolio is hidden by the rest.
What we do
The work, and the result each part produces
Conversion cost by line and dosage form
Separate rates for each production and packing line, built from labour, utilities, depreciation, maintenance and actual line utilisation.
Each SKU carries the conversion cost of the line it runs on.
SKU costing with packing material and quality control
Bill of materials, packing material at actual cost including minimum-order waste, and testing cost charged to the product that needs it.
Small and complex SKUs show their real cost.
Third-party and loan-licence accounts
Customer-supplied material reconciled batch by batch, conversion charges tested against cost, and balances agreed with each customer monthly.
Contract manufacturing customers are profitable by evidence, not by assumption.
Price-controlled portfolio margin
Products with a ceiling price reported separately, with cost movements tracked against the price they cannot exceed.
Loss-making controlled SKUs are identified before they are re-run.
Packing material and artwork obsolescence
Printed material stock aged by SKU, with exposure flagged when artwork or pack changes are approved.
Obsolescence is provided for when the decision is made, not when the stock is destroyed.
Customer and channel contribution
Contribution by own-brand channel, contract customer and tender, after freight, returns and payment terms.
Capacity goes to the work that earns the most from it.
Where we start
The first steps of an engagement
Line, BOM and stores records
We ask for the bill of materials by SKU, line-wise production and downtime logs, packing material stock, quality-control testing records and the loan-licence material registers. We also take the price list marking which SKUs carry a ceiling price.
Conversion rate rebuilt by line
We rebuild conversion cost for each production and packing line from labour, utilities, depreciation and actual utilisation. The highest-volume SKUs are then re-costed on it and compared with the blended rate in use.
Loan-licence material agreed monthly
Customer-supplied material is reconciled batch by batch and the balance agreed with each loan-licence customer every month. Shortages are raised while the batch is still traceable.
SKU contribution report
The first report shows contribution by SKU and dosage form after packing material and testing cost. Price-controlled products are shown separately, with any SKU now below cost flagged before its next run.
How it is measured
The reports the work is judged on
Each is recorded as a baseline before the work starts, so later reports have an honest comparison.
- Conversion cost per unit, by line and dosage form
- SKU contribution, including packing and testing cost
- Loan-licence material reconciled by customer
- Margin on price-controlled products, tracked separately
- Packing material stock aged by SKU
- Line utilisation against available capacity
Who it suits
Written for, and not the right fit for
- You need guidance on manufacturing practice, licensing or plant upgrades for compliance; that sits with your quality team and regulatory advisers.
- You need the company's statutory audit or tax-audit report signed — that is the work of an independently engaged CA.
- Formulation plants making own brands and contract products on shared lines.
- Manufacturers serving several marketing companies on third-party or loan-licence terms.
- Plants facing a capacity or upgrade decision and needing product-level cost to make it.
Services
Services this work draws on
Costing and profitability
What each product, line and customer really contributes.
Explore service ↗Outsourced accounting
Your books kept current and reconciled, closed to a published calendar.
Explore service ↗Internal controls and risk
Controls sized to your business, documented and actually tested.
Explore service ↗MIS and financial planning
Reporting built around the questions you actually need answered.
Explore service ↗Every other service, also available in this trade
Common questions
Questions owners in this trade ask
Why does it matter which line a product runs on?
Because lines differ in speed, crew and utilisation. A product that runs on a slow, under-used line can cost several times more to convert than a similar product on a busy one, and a single rate hides that completely.
What should we charge a third-party manufacturing customer?
We can tell you what the product costs you to make, including the line, packing and testing it uses, and what margin a given price leaves. The commercial decision stays with you.
Do you advise on ceiling prices or price-control filings?
No. We report margin on price-controlled products so you can see where cost is outrunning the permitted price. Price notifications and filings are matters for your regulatory team.
5th Quadrant performs costing, inventory accounting, reconciliation and reporting work. Drug licensing, manufacturing-practice compliance and price-control filings are the responsibility of the manufacturer and the relevant authorities. Statutory audit, cost audit and prescribed certification are performed by independently engaged licensed professionals. Full detail is on our Professional Scope page.
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