Whether your business is publicly held or privately, in the red or in the black, cost control methods in manufacturing are critical to maintaining a profitable company. In times when your competitors are outsourcing to Southeast Asia, or automating their manufacturing floor, trimming the fat is a painful but necessary step. Here’s how to do it with a little less pain.
Take Inventory of Your Cost of Manufacturing
Before you take any steps in implementing cost control methods in manufacturing, take a good hard look at where your money is going. We are going to break down your costs into three areas, labor, materials, and overhead.
You might, for example, see a large portion of your budget going toward sales or marketing, which falls under overhead. If you cut there, you might lose sales because of it. You could compromise on material quality, but you’d risk losing loyal customers. Wherever you cut, make sure you make the right cuts, or they could be detrimental to your company’s future.
How to Control Direct Labor Costs
If your company is like many, direct labor is your largest expense. So, paying attention to it is one of the most important cost control methods in manufacturing. It’s also the first many companies cut. While shareholders and investors love lean labor costs, there are ways to accomplish your goals without destroying people’s lives.
Keep in mind that on average, companies spend between $1,200 and almost $2,000 training each new employee, and that doesn’t include the 30+ hours of taking someone from their real job to train each new hire. If you are in a temporary downturn, do everything in your power to avoid layoffs, if for no other reason than to avoid the costs of hiring new people in the future. That doesn’t mean you’re stuck with too high labor costs, though.
How to avoid layoffs
If you want to avoid layoffs, it helps to have a long-term strategy. Hire the right people, to begin with. Two superstars can do more than three mediocre employees. Train people to have multiple roles, so if one job becomes obsolete, they can slide right into another.
Talk to your employees
Let your employees know that the company is feeling a pinch. You’d be amazed at how reasonable people can be, especially when the alternative is unemployment. Explain that you will have to cut perks like free meals. Negotiate a slight pay cut or a cut in benefits. Offer some of your senior employees early retirement. Perhaps some employees might be interested in part-time work. If you have openings in other departments, it may be cheaper to train someone who already knows the ins and outs of your company than hire from outside.
When layoffs are unavoidable
Unfortunately, one of the saddest cost control methods in manufacturing is layoffs. No matter how hard you might try to avoid them, at times layoffs are unavoidable. No matter how well you handle layoffs, you will upset people, but there are ways to mitigate the pain.
Use the band-aid approach. Stretching it out doesn’t help anyone. Explain that the company is not doing well and that their job will have to be eliminated. You will hear sob stories, and most of them will be genuine. Listen and be sympathetic, but don’t get too bogged down.
Enlist an outplacement firm to help people find other jobs or receive training. An outplacement firm (or at least your HR team) can also help you avoid wrongful termination suits. Offer as much severance pay as you can, especially for your seasoned employees. Don’t offer false hope. You may want to hire everyone back, but unless your sales projections support it, don’t bother mentioning it. Looking for jobs is hard work and employees might latch on to any glimmer of hope rather than actively seek another job.
Is automation worth it?
You’ll probably never be able to automate sales or many other positions, but like it or not, automation is the wave of the future in manufacturing. Long-term, the ROI will certainly be worth it. During a downturn, though, automation is simply too expensive for most.
What about outsourcing for cost control methods in manufacturing?
Many companies are turning to outsourcing for their manufacturing and other functions, such as customer service. While no one can dispute the upfront cost benefits, don’t discount the hidden costs, including loss of sales. Quality control and even data security can slip through the cracks when management is thousands of miles away. There is compelling anecdotal evidence that customer satisfaction goes down when customer service is outsourced to another country.
For a less ambitious and less risky solution, you might be better off outsourcing functions like bookkeeping, payroll, HR, and marketing. You can keep those jobs in the U.S. and still save money on payroll taxes and employee benefits.
How to Rein in Raw Material Supplier Costs
Raw materials are perhaps the least predictable costs in any business budget. They are subject to material shortages, the whims of politicians, and even the weather. It’s sort of misleading to imply that you can control raw material supplier costs, but you can take measures to rein them in.
When to negotiate
When it comes to cutting supplier costs, negotiation is the greatest tool in your arsenal. Never let your company get too comfortable with a supplier. Comparison shop at least once a year. If you find a company that’s comparable in quality to your current supplier, but cheaper, don’t automatically jump. Contact your current supplier and ask them to match the costs. Ask for discounts or freebies every time you place an order. If you are a reliable customer, companies will bend over backward to keep your business. Keep in mind, though, that if you are slow to pay, you will have less negotiating power.
When to go cheaper
The last thing you want to do as a business when looking for cost control methods in manufacturing is to compromise your company’s reputation by offering an inferior product. As technology advances, though, so does the quality of manufacturing materials. For example, some metals, such as titanium, were once cost prohibitive for most consumers. Today, new technologies have driven down the costs. You might want to keep in mind, though, that working with new materials may require retooling your manufacturing floor.
Inventory Management of Raw Materials
There is a fine line between controlling inventory and controlling your overhead costs. Ideally, you should maintain enough inventory to get you through a few months, but too much inventory costs you money in warehouse space. When negotiating with your suppliers, try to shave delivery times. If a supplier can guarantee delivery in a short enough period of time, perhaps you can do without excess inventory altogether. If you have empty space in your warehouse, look into renting it out or downsizing.
Cost control methods in manufacturing: trimming overhead
Nothing is too petty when it comes to trimming your overhead. Look at all costs, including shipping, company cars, cell phones, office supplies, and even cleaning supplies. Can your cleaning crew, for example, just do a cursory cleanup most days and a more thorough cleaning just once a week? Competition among carriers should allow you to negotiate shipping costs. Can you save money by reimbursing your sales team for using their own cars instead of driving company cars?
Best Practices Programs
Best practices programs like Kaizen and 5S can streamline many of your business practices, but they come at a cost. Sit down and weigh the cost/benefit before making the investment.
Cost Control Methods in Manufacturing Work
No matter how amazing your product, or how well-run your company, remember that your greatest asset is your employees. Exhaust every cost-cutting measure that doesn’t interfere with quality before layoffs.