Saving on operational costs is one of the biggest goals for manufacturing companies. Most manufacturers look to streamline systems, reduce production costs, and increase profitability without sacrificing product quality. Often, the quickest and easiest way to cut costs is by accepting minimum quality levels or reducing employees. This can lead to increased product returns, warranty claims, and loss of a loyal client base that will probably increase costs in the future.
Most manufacturers focus on reducing costs but overlook the benefits of identifying the causes of the quality costs. While it is challenging to maintain quality and reduce manufacturing costs simultaneously, this article focuses on the most effective ways to trim your production costs while improving product quality, business efficiency, and profits.
Understanding the Manufacturing Cost
The manufacturing cost is the sum cost of all resources used in procuring raw materials and converting those raw materials into finished products. The different components of the manufacturing cost include:
- Direct material costs – purchase cost and expense to bring the raw material from the supplier to the manufacturing plant
- Direct labor cost – front-line worker wages
- Production overheads – rent, insurance, electricity, small tools, packing materials, machine maintenance, and other costs incurred in the factory excluding direct labor and material costs
How Can You Reduce Manufacturing Costs?
Step 1 – Factory Audit and Calculation of Operating Costs
The first step is to identify all operating costs and understand which costs have increased. Some specific areas of operating costs include raw materials, administrative expenses, rent, insurance, inventory maintenance, direct and indirect labor, maintenance, utilities, and other facility expenses.
Step 2 – Track Production Costs Carefully
Once the costs have been identified, it is important to track them carefully. Decide the intervals for tracking key information to help you make informed decisions about manufacturing cost reduction. Track your costs for a specific accounting period to help you identify expense amounts.
Step 3 – Cost Analysis
Consider each category of costs and individual expenses. It is important to collaborate with other team members to get different perspectives on costs and ways to reduce them.
Step 4 – Reduce or Eliminate Spending
After analyzing which costs can be reduced, take action to minimize spending on some items. Some actions, like finding new suppliers and renegotiation of contracts can be done fairly quickly. For cost reduction strategies that take longer to implement, develop a plan to carry out the required changes. Decide on deadlines for implementing the cost reduction strategies and assess your progress towards making the changes.
The 7 Most Effective Ways to Reduce Manufacturing Costs
1. Reduce product design and architecture costs
Since the design and development of the product determine 80% of the production cost, you must start here to reduce overall manufacturing costs. The architecture of the product includes the definition of the product, the composition of the team, technology, and a combination of parts including off-the-shelf parts. This phase also determines the strategies for the manufacturing supply chain, quality, service, vendors, configurations, reliability, variety, and derivative products. All these decisions have a very high impact on cost reduction strategies. Some of the top ways to reduce manufacturing costs include:
- Provide sufficient time and resources in the planning stage to eliminate change orders
- Focus on vendor partnerships to build better relationships.
- Design the products to minimize parts costs and material overhead, without affecting the quality
2. Adopt lean manufacturing principles
The adoption of lean manufacturing principles can significantly reduce the cost of manufacturing by cutting the production through-put times, increasing labor productivity, reducing inventories, and eliminating errors and scrap. The core principle of lean production is to achieve more output with fewer inputs by focusing on the elimination of waste. Waste is any activity that does not add value from the perspective of customers.
According to research conducted by the Lean Enterprise Research Center (LERC), over 60% of the production activities in a manufacturing operation are waste, as they do not add any value to the customer. The good news is that every manufacturer can leverage lean manufacturing principles to reduce manufacturing costs. It is great to identify types of waste and ways to eliminate them. Some forms of waste are inventory, over-production, transportation, waiting time, defects, over-processing, and wasted talent.
3. Build-to-order and mass-customized products
A great way to reduce manufacturing overhead is through build-to-order and customized inventory approaches. The inventory doesn’t need to be on hand or forecasts completed for products to be ordered, and on-demand mass customization can be used to manufacture custom products. In both approaches, the products are built only after the order is confirmed. This strategy can lead to staggering results, as it significantly reduces inventory carrying and procurement costs. It does not directly cut manufacturing costs, but can increase sales by better accommodating customers’ needs.
4. Standardize parts to reduce manufacturing costs
Parts standardization supports the fundamental concept of mass customization and build-to-order with all of the parts needed for manufacturing on hand at all points of use. It eliminates setup that involves finding, loading, and kitting parts. Standardization reduces the number of part types and makes it easier for parts to be included in the production assembly. Fewer types of bulk ordered parts reduce the overall parts and material overhead costs. Additional benefits include reduction of floor space, time saved in setup, better logistics and supply chain management, and reduced overhead costs.
5. Rationalization of the product line
Simplifying operations and freeing up critical resources are often overlooked but it is a great opportunity to improve productivity, cash flow, and profit. The product line and all of its components can be rationalized to focus on the most profitable products and eliminate or outsource low-profit products that demand high overhead and are not compatible with the cost reduction strategies. Successful product rationalization has the potential to cut the overall supply chain management cost by up to 50 percent and improve inventory performance by up to 100 percent.
6. Simplification of supply chain management
If various types of products or materials are used, it’s impossible to achieve a steady production flow. For the same reason, products should be designed with standard parts. The rationalization strategy can help in simplifying supply chain management and establishing vendor partner relationships. The simplification of all process parts includes planning, sourcing, production, and delivery to improve production efficiency and reduce manufacturing costs. Rationalization also involves vendors within the product designing process, enabling them to recommend low-cost production items that are readily available for use.
7. Optimize workforce productivity
Investigate manufacturing workflow to identify time-consuming and redundant processes. It is important to break down the individual steps of the production cycle, track the time taken by each activity, and use specific equipment to perform tasks. It helps to eliminate unnecessary processes and enhances workforce productivity. Predictive or preemptive machinery maintenance programs should also be used to reduce downtime and maximize efficiency.
Make a move to automation
If you haven’t already automated processes, now is the time. Automated technologies can help in every facet of the manufacturing plant by eliminating waste, meeting manufacturing control and regulatory compliance requirements, reducing labor costs, keeping production on schedule, reducing delivery times, and cutting manufacturing costs. It also reduces many hidden manufacturing costs including idle machine time, product recalls, time wasted in product transfers, and high labor costs.
Control your costs and profits with manufacturing ERP
Reducing manufacturing costs is important regardless of the company size or the type of products manufactured. When reducing manufacturing costs, you also increase the return on investment (ROI) and promote innovative thinking by teams within the organization.
Another manufacturing cost reduction strategy is to leverage integrated manufacturing ERP software. The right ERP software helps to identify, measure, and analyze costs associated with your manufacturing processes. If you are interested in finding the right manufacturing ERP software, download our white paper titled “A Roadmap for ERP Selection in Today’s Digital World” to learn how to choose the best ERP system for your business.