Controlling costs within manufacturing: Guidelines for a systematic approach
If sales are down, it becomes even more critical for manufacturers to control costs. However, thoughtful leaders want to be sure that as they control costs, they’re not cutting corners in ways that could hurt the organization long term. Towards that goal, manufacturing leaders can be most effective with a systematic approach that includes the following steps:
Identify the biggest cost drivers and opportunities. Begin by identifying the key cost drivers within your manufacturing operations. Assess each area for potential opportunities to control or reduce costs. While some cost drivers may be inflexible, other areas may present significant opportunities for cost reduction.
For each opportunity, use data to estimate impact and feasibility. Analyze factors such as the following to prioritize the most impactful and feasible cost reduction opportunities:
Size of financial impact ($/yr)
How easy would it be to reduce this cost without negative impact on the company? (easy, hard, very hard)
How reversible is the decision? (easy, hard, very hard) For example, delaying hiring for an open role or opening a new facility is easily reversible, whereas laying off an expert teammate or closing a facility is not.
Develop action plans based on cost reduction needs. Consider potential action plans and timelines starting with the big and easy opportunities, then filling in smaller or less easy opportunities if needed and keeping both the short-term and long-term in mind. As cost reduction can be a sensitive area, it’s critical to build these plans extremely thoughtfully, with input from key stakeholders.
Leverage data and set concrete goals. Use data to estimate the potential cost reductions and set concrete goals that can be measured. Data-driven decision-making enhances the likelihood of success. By setting specific targets, leaders can track progress and assess the effectiveness of their cost reduction efforts.
Make decisions, take action, and measure results. Make informed decisions about the best course of action and implement the identified cost reduction measures. Monitor progress closely and measure the results achieved. Regularly evaluate the impact of cost reduction initiatives and make necessary adjustments as needed.
Now, we will go into a bit more detail on the first step: Identifying potential cost drivers and areas of opportunity for cost control.
Identify biggest cost drivers and opportunities to better control costs
It’s important to start by understanding both your biggest cost drivers, and your biggest opportunities to control or reduce costs. Sometimes, these will be the same—but other times, your biggest cost drivers may be inflexible so the biggest opportunities to reduce will be in other areas.
Although every operation will vary, the following are typical big cost drivers within manufacturing that may contain opportunities to reduce costs:
Non-production related costs
Sales & Marketing: Where might the team be more efficient? For example, can travel or other expenses be reduced without impacting sales? Are there ways to leverage technology to improve efficiency?
Research & Development (R&D): Where might R&D be more efficient? Can cost of R&D be reduced or postponed without impacting sales? Should projects be re-prioritized in an environment in which sales are down, and do any projects make sense to put on hold for now?
Direct costs of production
Materials, both for the product and associated areas such as packaging: Where could materials spend be more efficient? For example, are there opportunities to reduce scrap? If scrap is a big cost driver, can data be collected and root cause analysis applied to reduce that area? Are there opportunities to work with suppliers to reduce cost of materials?
Electricity or utilities directly related to production: Where could spending on energy or utilities be more efficient? For example, can startups be staggered or flexible loads be turned down to reduce the peak demand charge on the utility bill? Are machines idling when they don’t need to be? Could the team be engaged to identify ways to be more energy efficient? Can maintenance dedicate time to addressing low-hanging fruit such as fixing compressed air leaks or better insulating cooling or heating systems?
Quality control and testing: Can more robust process controls in the manufacturing process reduce the need for extensive testing and rework? Can the right visibility and alerting reduce quality issues earlier in the process? Are there opportunities to work with suppliers to eliminate some causes of quality problems?
Direct labor: Are there opportunities to use data and continuous improvement to improve efficiency while also creating more empathy and other positive results for the team? To reduce overtime? Can performance management and reward structures be better aligned with cost reduction goals to improve results? If efficient use of machines or labor is a potential area to reduce costs, can alerts be set up, or data be collected and root cause analysis applied to improve efficiency—such as by optimizing setups or changeovers? Are there shifts that could be consolidated while sales are down, or teammates who could make use of technology to leverage their expertise across multiple plants rather than one? (Any measures that impact jobs are listed last to reflect that such measures should come after other options)
Indirect costs of production
Cost of equipment: Where might spending on maintenance, leases, upgrades, tools, etc be more efficient? Could maintenance processes be enhanced? Could preventive, runtime based, or predictive maintenance processes help target valuable maintenance resources where they can have the most impact?
Cost of managing inventory: Are there opportunities to implement just-in-time or lean inventory management practices to reduce the cost of carrying excessive inventory?
Indirect electricity or utilities: Where might spending on facility-wide, office, energy and utilities be more efficient? These costs tend to be small relative to electricity or utilities used in production, but may contain opportunities to reduce costs. Are HVAC or other systems running when they don’t need to be? Do employees have ideas to reduce energy cost? Could it make sense to see if a volunteer wants to be an energy champion to identify areas to improve energy efficiency in the building?
Rent: Where could spending on rent be more efficient? Are there opportunities to streamline production or other layouts to optimize space? To renegotiate leases or otherwise reduce costs?
Indirect labor: Management layers, maintenance, administration, etc. Can existing managers or experts use tools or training to be even more effective and delay hiring for open roles? Can performance management and reward structures be better aligned with cost reduction goals to improve results? Are there administrative processes or manual tasks that can be streamlined? Can employees be cross-trained or provided with tools to cover more skill sets or reduce spending on external consulting or contractors?
Within each of the cost drivers, there may be lots of other opportunities to apply continuous improvement principles and use data to better control or reduce costs—as well as ways to engage teammates throughout the company in identifying opportunities, taking action, and measuring results to make sure the business is set up to thrive regardless of the sales environment.
Ideally, cost reduction initiatives can help kickstart overall continuous improvement best practices that will make the company significantly stronger rather than weaker in the long-term.
As any leader knows, these are complex and challenging decisions to make. The modern leader has a far more complicated and dynamic business landscape to navigate than in the past—and, on the positive side, often has much more good data available to make those decisions. The key is focusing on using that data and insights to get to the right path forward. If your company could use support with data and insights to inform good decisions for the bottom line, don’t hesitate to reach out.