Many manufacturing companies have a high focus on constant growth, especially increasing their profitability. Manufacturing companies are more complex in nature than most organizations. Therefore, there is a need to carefully consider and develop costs for pricing and other decisions. Manufacturing costs include the following elements: direct materials, direct labor, and manufacturing overhead. Here are 3 concrete ways to reduce manufacturing costs while increasing profitability.
1. Cutting Material Losses
Material losses like scrap, spoilage, waste, and defects cause a difference between the input and output quantity. The output ends up reducing due to waste, scrap or spoilage hence reducing profitability. Any form of scrap viewed as a loss needs to be eliminated.
Abnormal waste should be thoroughly investigated and preventative measures should be taken to avoid re-occurrence. Standards need to be maintained by the inspection staff and responsibility for abnormal wastage needs to be understood and acted on by purchasing, storage, and the production departments.
Legitimate administrative and defective scrap should have a cost assigned to it and accountability. Defects are products, which are bad, but not totally destroyed. Therefore, they can be restored to original condition and such products are advisable to be rectified. Normal spoilage is expected by the manufacturing company, but abnormal spoilage needs to be controlled through supervision to prevent inefficiency.
2. Stringent Control Measures on Quality, Material, Inventory, Machine and Delivery
Managers need to check the quality of products through warranty claims, defects in units, and customer complaints. Insensitivity to such matters leads to losing market share and this leads to low profitability. Managers should be quick in resolving such matters when they arise.
Manufacturing companies should focus on higher quality, shorter lead times, and exerting control over scrap. Unreliable and undependable suppliers need to be identified and eliminated through the use of lead time.
Use of automation requires massive investment in equipment and floor space. There is a need to minimize the amount of machine downtime and enhance bottleneck operations. There is also a need to speed up machine setup time, which is very vital because it relates to all equipment. This leads to an increase in throughput and decreases setup time.
Customers want to get quality products on time. The delivery time should be adhered to from the receipt of an order to shipment of finished goods. Reduction of delivery cycle time, throughput time, and the velocity of production. This reduces customer waiting time and creates a competitive advantage over other similar companies. This increases customer loyalty, market share, and profitability. Manufacturing companies should pare away non-value-added activities allowing the products to reach customers more quickly.
3. Elimination of Non-value-added Activities
Activities such as reworking and inspection do not add any value to the customers. This may end up reducing profitability if it gets past the quality control department because it will reduces market share and customer loyalty if the customers don’t perceive the products to be of good quality. They may no longer take the chance and buy your products decreasing your profitability.
There is high competition among similar manufacturing companies and it is of great importance to put into practice the right control measures to manage manufacturing costs and increase profitability.
How else do you reduce your overall manufacturing costs to increase your profitability? We want to know.