3 Practical Steps To Control Manufacturing Costs
By David Taylor from BusinessHub
What are the true costs of your manufacturing? If you can’t see them, you can’t improve them.
Here are three practical steps to gain the visibility you need to take control of your manufacturing costs.
It’s no secret that manufacturers are facing increased pressure to
keep up with consumer demand, meet time-to-market expectations and
create high-quality products, while achieving increased productivity
at lower costs – especially in the face of mounting competition from
overseas. Controlling manufacturing costs has never been more
important if manufacturers want to stay competitive.
But if you can’t see the costs, how can you expect to improve them?
While multi-national manufacturers are investing a lot of money and faith in Big Data, robotics and automation, mid-sized manufacturers are struggling to find a solution that fits. So, rather than getting lost in the future, mid-sized manufacturers we work with are focusing on the here and now. It’s all about solving practical problems that will deliver results they can see.
The fact is data insights are a critical input for improving efficiencies and lowering manufacturing costs. They enable manufacturers to achieve visibility of inputs and outputs, and control costs. But the data doesn’t need to be “big” to make an impact on your bottom line; it simply needs to be the right data, used in the right way.
Where do you begin? Here are three steps to get started:
Nowhere is this rule more evident than with raw materials. Many manufacturers rely on historical raw material costs for forecasting, even though these are highly variable due to fluctuating exchange rates, import costs, and so on. What you need is a manufacturing model that pulls from your current costs of raw materials and current manufacturing process.
Overestimating will cost you money in either waste or storage. Underestimating will force you to short your customers, causing them to go elsewhere, or will put you under pressure to find raw materials quickly (and therefore pay a higher price).
For example, one Australian cheese manufacturer we work with wasn’t tracking raw materials required for standing orders. They’d been doing things the same way for decades – relying on Excel spreadsheets – which was causing headaches with pricing accuracy and stock levels. They realised they needed the backwards visibility into data to ensure they are accurately pricing their products, and to make better decisions about their manufacturing processes and inventory holdings.
Another black hole for manufacturers is labour and overheads. When it comes to overheads, getting better visibility of your power costs alone can make a huge difference. The Australian Financial Review reported that average spot-power prices across the states in February 2017 were between 98% and 360% higher than a year earlier. Every price rise puts another dent into the manufacturer’s bottom line, especially if they have overseas competitors unburdened by higher Australian power prices. With better visibility into power costs, you can look at ways to adjust run times (e.g. run slower to save energy) and see the real impact on costs – without sacrificing output.
"Underestimating will force you to short your customers, causing them to go elsewhere, or will put you under pressure to find raw materials quickly (and therefore pay a higher price). "
Don’t begin and end with technologies. Not all technology is relevant to mid-sized manufacturers, especially with the recent rise in robotics and Industry 4.0. Chances are you won’t need to utilise machine-learning tech or make use of fully integrated sensor networks right now (if at all).
Ask yourself: What do I want to achieve in my business? Don’t overinvest in technology that doesn’t align to these business goals – rather, start with the absolute essentials, then scale up as needed.
So, what are the essentials? You need to put good business management software at the core i.e. Enterprise Resource Planning (ERP) and Materials Requirements Planning (MRP). ERP will immediately provide greater visibility of what’s going on. By integrating this with MRP, you can analyse sales, purchasing, manufacturing and forecasts to build an accurate picture of inventory requirements.
"The Australian Financial Review reported that average spot-power prices across the states in February 2017 were between 98% and 360% higher than a year earlier. Every price rise puts another dent into the manufacturer’s bottom line"
Something that is majorly overlooked is how these changes will impact internal resources. Do they have capacity to absorb a new system? What tasks will they need to do? Are they ready to take it on?
We’re not just talking about the operational staff, but management too. Often, you’ll be changing the way things have “always been done”, so there could be some initial resistance to the change.
As with any organisational change, the best preparation is to involve your team early in the process. Explain why the change is a good idea and how it will make their job easier in the long run. In other words, sell the change. Ask them about their concerns, so you can address them directly and quickly.
For management, the key is to make sure that they really want it. Chances are the first question they’ll ask is “How much will it cost?” But a better question would be, where’s the value coming from? Spend some time upfront ensuring management fully understands the value of the investment, and the process will be far smoother.
"As with any organisational change, the best preparation is to involve your team early in the process. Explain why the change is a good idea and how it will make their job easier in the long run. In other words, sell the change."
The way forward
The challenge ahead may seem daunting. You’re potentially overhauling generations of processes and reimagining the way things work. The only way to make this work is to keep sight of the end goal: The more insight you have into your business, the more effectively you can gain control of costs, and ultimately increase profits.
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