Before you can make any changes, you need to understand your current operating costs, including staffing, rents, building maintenance, utilities, insurance costs, material and supply costs, and so forth. With this knowledge, you will be ready to address the first main area of interest – your direct labour costs.
Direct Labour Costs
Your direct labour costs are usually mainly associated with wages for staff required to complete the manufacturing process. However, they can also include overtime pay, time in lieu, health insurance costs, profit-share contributions, retirement scheme costs, holiday pay, travel expenses and redundancy pay-outs. There are a number of steps you can take to reduce these costs:
Staff wages comprise a large cost to any manufacturing organisation, so it is worth reviewing these. Do you need all of the staff you currently employ? Can staff be retrained to roles that add more value and are you paying wages commensurate with those paid elsewhere?
You could reduce costs by moving some roles from full to part-time or replacing unskilled labour with technologically advanced tools. Streamlining your production lines can also help reduce staffing needs.
However, optimal staffing is also about retention as turnover can bring unnecessary costs to your business. Advertising roles, recruiting and training new staff can incur large costs to a business, including possibly paying for the services of a recruitment agency. Working out why employees are leaving and addressing any problems such as workplace culture or pay scales can prevent a revolving door of costly staff turnover.
Use process scheduling to avoid scheduling staff for shifts unnecessarily. It is common for managers to guess at the required staff numbers needed for a shift and can mean paying for staff that aren’t required on a given shift. Use a scheduling software package to track process demand against job completion to ensure you have neither too many nor too few employees on a shift.
You want your employees working at their best, which means making sure you align the skills of your workers with the required tasks. You should also advance the skills and expertise of your workforce, which will not only improve productivity, but will also help with staff motivation levels. Motivation can also be improved through incentives and employee benefits. Keeping your staff happy and motivated will improve the overall efficiency of the operation, so it is a good idea to share goals and successes so everybody feels part of a wider team and invested in the company.
Some may question the reasoning behind upskilling employees, as higher skilled workers tend to require higher rates of pay. However, unskilled workers make expensive errors that can harm production times and damage important customer relationships. Paying more money to better-trained employees cuts down costs in the longer term.
Don’t be afraid to invest in software tools to help manage inventories, accounting, payroll, point of sale, staffing and more. This will help streamline your operation and prevent problems such as overstaffing, excessive stock ordering and storage, logistics, and materials purchasing delays. Whether you opt for analytics and e-commerce, customer relationship management, factory scheduling, or enterprise resource planning software, these solutions will often cost less than hiring industry experts while still improving productivity.
As well as the raw materials required for manufacturing, material costs include fuel and energy expenses, packaging, spare parts, and more. These costs typically make up a large proportion of the overall manufacturing business costs, so should be reduced wherever possible.
Negotiating with your suppliers to try and get a better deal on your materials requires a good working relationship with them. However, if you have a good relationship with your supplier, you may be able to negotiate a discount for bulk orders or for prompt payment. Knowing the rates at other suppliers can help with this as your supplier may be keen to keep your custom.
Having money tied up in excess stock reduces your cash flow as well as costing money for storage. Inventory software can help you manage your stock needs against previous trends. Alternatively, you can adopt a just-in-time approach, where you only buy new materials as they are required in line with sales.
If you find that your suppliers are frequently late with deliveries or are increasing their costs above the competition, it may be time to shop around for an alternative source. You may be able to find a more competitive and reliable supplier for your materials. It is also worth thinking about the time and fuel used to ship your materials to you as a local supplier may be cheaper as well as possibly being able to offer more frequent shipments.
Don’t get stuck in a rut by constantly using the same raw materials, you may be able to find cheaper alternatives that provide the same end result. This can include recycling materials as well as substituting expensive materials for less expensive ones.
It is worth reviewing your products and production processes to assess their value against cost. Maximising efficiency can mean redesigning a product so there is less waste, or recycling this waste material. The less you throw away the less money you are losing as well as helping with the environment. A lean manufacturing approach can help with this, with improved quality control meaning less time wasted in redoing poor workmanship and less spoilage. Remove or refine redundant or time-consuming processes within the production cycle to improve your productivity and make sure your equipment is monitored and maintained correctly to reduce potential downtime. Automation can also help, rooting out human error in manual tasks and speeding up processes while allowing you to use your staff more efficiently in value adding roles. Redesigning processes and products while reducing waste can save on overall material costs.
More companies are using less packaging in order to save not just costs but also the environment. Excess packaging doesn’t just cost more in raw materials but also increases weight, adding to shipping costs. As well as packaging, you might want to consider paperless documentation, saving money on paper, inks, and printers.
As well as staffing and materials costs, manufacturing businesses need to cover overheads such as electricity and gas, supplies for staff like uniforms or PPE, printing and stationary costs, vehicles, and more. Reducing these overheads can save money for any business:
All manufacturing companies should be reviewing rent costs regularly across warehouses and facilities. Not only should you assess whether the rents you are paying are fair, but also whether you could cope with a smaller and cheaper facility or even get rid of some rents altogether. As hybrid working becomes increasingly normal, office spaces are less in demand, meaning that you may be able to downsize this area of your operation completely.
You should regularly review your maintenance costs to make sure they are not excessive or unnecessary. Understanding the lifecycle of your equipment and implementing a maintenance strategy accordingly allows you to determine when replacements may be required, as well as allowing you to avoid expensive downtime periods by scheduling maintenance for quieter production periods.
Miscellaneous costs such as office supplies, cleaning services or uniforms may not seem to be much by themselves, but they can soon add up. Reviewing these smaller costs and preventing overspending can reduce your overall expenditure.
You can reduce your energy bills by going green and helping the environment at the same time. For example, could you install solar panels to power your machinery? Other energy-saving options include energy-efficient lighting, better insulation, renewable heating and cooling systems and more. You can also save on energy use by making sure your machinery is working properly as well as switching off equipment when it is not in use. An automated control system can help with this if required.
Reducing manufacturing costs is all about removing inefficiencies and unnecessary expenses from your operation. However, it is best to introduce any changes gradually so you can check the impact of each improvement.
This needs to be achieved without compromising productivity or quality and includes making sure your workforce is happy and motivated. This can create a balancing act of sorts, for example, if you cut corners on the coffee your workers drink, will it harm morale at work?
Fine-tuning your business expenditure involves assessing employees, materials and your overheads to see if there are any inefficiencies, while continuing to produce products that satisfy your customer base.
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