Manufacturing is a multifaceted industry that requires consistent quality outputs. However, it can become quite an expensive operation without strategies to reduce manufacturing costs.
In this article, we’ll explore how you can achieve cost efficiency in manufacturing without lowering output and quality.
What are manufacturing costs?
Manufacturing costs are the total expenses associated with product manufacturing. Everything that manufacturing businesses spend money on, from material costs to overheads and labour, is regarded as a manufacturing cost.
Like most businesses, expenses tend to pile up as the company grows – which is normal. However, there comes a time when manufacturing costs need to be re-evaluated to ensure optimal efficiency in daily, monthly, and yearly operations.
7 strategies to reduce manufacturing costs
The cost recovery method
Cost recovery is the method of calculating your income based on all the costs you’ve recovered. To put it simply, revenue is only recognised when all payments are received, and profit is determined from the remaining money after selling costs are recovered.
Pros of the recovery method:
- When repayments are delayed, it does not impact accounts administration.
- Tax is deferred until all costs are recovered from a product sold.
Cons of the recovery method:
- No matter how much sales come in within that period, none count until the costs incurred in producing the product or service is paid off.
Labour wages make up a big chunk of a manufacturing budget. Although your employees are the driving force behind your operations, overtime costs can pile up and affect your profits.
Consider outsourcing or using part-time labour for urgent production tasks, or for once-off large orders. This saves money and creates job opportunities for part-time workers.
Pros of overtime reduction:
- Saves costs
- Reduces the chances of burnt-out employees
- Less pressure on the company to meet overtime expenses
Cons of overtime reduction:
- Employees often work overtime to earn additional income
Downtime is a big no-no in the manufacturing industry. It not only causes downtime for your employees but can also lead to downtime for ensuing processes – and that means time and money wasted. In addition, your customers might take the brunt of the downtime due to increased lead times.
The reality is that equipment malfunctions and unscheduled downtime are almost unavoidable. And while downtime cannot be eliminated, there are steps to avoid it as much as possible, including ongoing safety training, preventative maintenance plans, regular inspections, and determining overall equipment effectiveness and lifespans.
Pros of downtime reduction:
- Higher productivity for equipment and employees
- Lower repair costs for under-maintained equipment breakages
- Reduced downtime of ensuing processes
- Shorter lead times caused by downtime
Cons of downtime reduction:
- Preventative maintenance might cause limited downtime, but at least this can be planned for
Moving to lower-cost countries
Moving your manufacturing business to a foreign country offers several benefits for reducing manufacturing costs. There are, however, certain risks involved, prompting careful consideration.
Pros of moving to lower-cost countries:
- Lower labour costs
- Untapped markets
- Potential benefits of up-and-coming economies overseas
Cons of moving to lower-cost countries:
- The unpredictability of foreign government and economy changes
- It might be subject to local scrutiny and public relations backlash
Making a move to automation
If you haven’t already adapted to automated processes, now is the time. Automation has already proven efficient as many industrial businesses have already gravitated to technological innovation.
Not only can automation reduce manufacturing costs, but it also significantly reduces manufacturing time. Ultimately, minimising manual processes can maximise productivity in your manufacturing business.
Pros of manufacturing automation:
- Cost efficiency in manufacturing
- Reduces manufacturing time
- Minimises manual errors
- Saves labour costs
- Opportunity to utilise workforce in other departments
- Competitive advantage
- High quality and consistent output
- Seamless tracking, communication, and workflow management
- Enhances product development
Cons of manufacturing automation:
- Finding the right source to provide automation
- Adaptation time
- Employee training is often required, which could take time
- Certain employees could potentially be without work due to manual work replacement
Reduce material costs
Businesses often concentrate on reducing staff expenditure while not giving much thought to other saving avenues. Your manufacturing materials keep your business going but also contribute to high manufacturing costs.
There are many ways to reduce your material costs, from negotiating with your suppliers to purchasing stock based on demand, opting for more affordable materials, and identifying products and processes that aren’t of much value.
Pros of reducing material costs:
- The lower your material costs, the lower your manufacturing costs, and the higher your profits
- Storage space is optimised for necessary stock
- More value, less overspending
Cons of reducing material costs:
- Lowering inventory stock can lead to backorders
- More affordable stock might offer lower quality
The best way to lower manufacturing costs is to test your strategies. With all change comes adaptation, evaluation, and adjustment according to your business needs.
For your cost reduction efforts to be successful, you need to keep a close eye on the new process you’ve implemented to ensure no other adjustments are necessary.
Pros of implementing, monitoring, and adjusting strategies:
- You’ll be able to implement processes that work for your business, profit, employees, and customers
- More transparency and control over your operations
- Room for improvement and growth
- Ability to ensure optimal cost efficiency in manufacturing
Cons of implementing, monitoring, and adjusting strategies:
- Implementing new processes takes time
- Adaptation for employees, customers, and suppliers takes time
- You might be subjected to a trial-and-error process until you’ve found the right strategy
- There’s always risk in modifying operations
Reducing manufacturing costs is no easy feat, but it can make all the difference for your profits. The result? A boost in manufacturing productivity and reasonable manufacturing costs.
How EPCM Holdings produces low-cost ventilators for Africa
When the COVID-19 outbreak started, the world reacted in panic. Individuals, families, and businesses scurried to avoid the virus, while healthcare systems hurried to find treatments, cures, and effective Personal Protective Equipment (PPE).
It wasn’t long until a significant shortage of ventilators created even more panic – especially in third-world countries where monetary access was already limited.
South African engineering, procurement, and construction company EPCM Holdings specialise in oil and gas projects in Africa. When the pandemic hit, the company searched for affordable methods to make a difference.
Although he didn’t have much knowledge of ventilators at the time, CEO and co-founder Tom Cowan did some research and designed a low-cost ventilator.
The company used basic, low-cost materials readily available in most African countries to manufacture the device. It partnered with a South African laser-cutting company to supply these materials, so EPCM would only need to assemble the parts.
The resulting design could be made from Perspex, stainless steel, or wood and only needed an electrical component to work. The system is designed so an individual could set breaths per minute, volume per breath, maximum pressure, and flow for the machine.
The outcome was a system made from inexpensive materials that could be manufactured rapidly and cost a fraction of the price of other ventilators.
Their secret sauce? Minimising material costs and outsourcing processes to make the production process faster and more affordable.
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Take control of your entire business.
From supply chain to sales with Sage Business Cloud X3. Software for established businesses looking for greater efficiency, flexibility, and insight.