If you want to do more than just survive within your manufacturing business, you need to be profitable. If you are profitable, you are taking in more money than you spend. It’s very simple in manufacturing—you must sell your goods at a higher cost than it costs you to manufacture them.
Looking at a manufacturing operation from a 10,000-foot view, there are a few key items that drive cost:
Taxes and loan payments
To increase profits, there are two basic options: raise selling prices or lower expenditures. Raising prices without offering more than the competition can alienate customers and negatively affect profitability. The better way to increase profits is to manage your costs and continuously work on reducing them.
So, how can you cut your expenditures? Here are a few ways to cut costs without losing the quality your customers have come to expect from you.
Work on your operation costs:
Conduct an energy assessment. Contact local or state utilities for assistance.
Implement a facility energy management team.
Educate your employees on energy-saving practices.
Ensure all unused equipment is powered down and shut off, including copiers, printers, and PC monitors.
Make sure air lines are not leaking, which can cause air compressors to operate unnecessarily.
Verify boilers and hot water heaters are set to the correct temperatures.
Replace energy-inefficient equipment.
Implement a quality plan to:
Keep processes in control:
Use Lean manufacturing practices like value-stream mapping and pull-not-push manufacturing.
Use statistical process control (SPC). Target a minimum of 1.33 CpK.
Don’t batch orders. Instead, use single piece flow.
Review your front office:
Verify travelers and shop work orders for accuracy.
Use a print revision verification process.
Make sure your bill of materials (BOM) is correct.
Use check sheets.
Use a layer audit process.
Make quality everyone’s job.
Focus on doing things right the first time.
Provide adequate training.
Address quality issues immediately.
Improve shop floor efficiency:
Use Lean manufacturing principles such as 5S, cell manufacturing, waste reduction, Kaizen, Kanban, setup reduction/single-minute exchange of dies (SMED), and takt time.
Develop a culture of continuous improvement.
Verify cycle times meet quoted times and address differences immediately.
Have the right tools for the right job.
Provide good training.
Standardize your processes and operation.
Implement beneficial technologies.
Improve front-office efficiency:
Review your fixtures and tooling.
Use technology when it is beneficial.
Ensure scheduling, sales, and engineering are on the same page.
Eliminate conflicting department goals.
See if office supplies can be bought less expensively at a local store, online, or through a dedicated vendor.
Review your purchasing processes.
Cross-train job functions.
Standardize processes and operations.
Check out your material costs and whether they can be lowered:
Renegotiate material and component prices with your suppliers.
Manage your inventory:
Stock only what you need.
Use a Kanban system.
See if vendor-managed inventory (VMI) can save you money.
Ensure accurate inventory counts.
Simplify your bill of materials (BOM):
Remove duplicate part numbers.
Simplify your component requests. For example, you may be able to use a single component (such as a longer bolt) in place of multiple components.
Make sure your warehouse space is utilized effectively. Instead of stacking boxes, use bottom-to-top shelving and label everything (barcode).
Ensure work orders and shop floor travelers are accurate.
Pull all materials at once.
Review the cost of your labor:
Utilize skills and talent for the right jobs.
Identify why you need OT.
Add equipment or staff if needed.
Reduce equipment downtime:
Implement preventative (PM) and predictive maintenance (PdM) programs (see video).
Schedule to capacity.
Have adequate maintenance staff.
Don’t just focus on direct labor costs when indirect labor costs could be skyrocketing.
Ensure costs are expensed correctly.
Provide effective job training.
Provide safety training.
Perform a simple finance check:
Don’t spend money on things you don’t need.
Make sure capital expenditures really give you an ROI:
Automation isn’t always cheaper in the long run.
Shop multiple suppliers.
Shop for used equipment.
Check if equipment leasing is better than a loan or buying it outright.
Verify your insurance coverage:
Do you have the right coverage?
Do you have too much coverage?
Shop annually for insurance.
Make sure you are not paying fees.
If you need to borrow money, shop around for best interest rates.
Invest excess capital.
You can see there are many potential areas where you can review your expenditures and costs. Make sure you really look at all aspects of your operation and focus on the biggest cost savings first. Cost reviews should be done on an ongoing basis, not just once in a blue moon.
At some companies, staffing is the only cost that is addressed. Don’t fall into that trap. Reducing your employee count below what is needed can be detrimental to your company. In my experience, I have found that Lean manufacturing is one of the best ways to manage costs. Embrace it and apply it every day to every operation in the plant. You will remove waste, which translates to lower costs and higher profitability within your operation.