In most cases, production costs are the largest expense that manufacturing businesses face. Where these costs are high, profit margins may not amount to much. Therefore, if you have been looking for ways to optimize your profit margin and increase your bottom line, it may be worth your while to find how to cut back on your costs of production.
However, cutting costs during production is often easier said than done. You want to ensure you’re not compromising the quality of your products on your cost-cutting mission, while finding ways to sustainably reduce your production costs. How do you navigate the complexities of this situation?
In this article, we explain the top tips for a cost-reduction strategy in the manufacturing industry that you can implement to elevate your profit margin.
#1: Apply lean manufacturing principles
Lean manufacturing is all about doing more with less. In every business, ‘waste’ is one of the factors that limit production. This may include waste of resources, waste of time, or a waste of workspace. It may also mean that you’re not taking full advantage of your manufacturing tools or the skills of your employees. In whatever form it occurs, there is always a financial cost that comes with waste.
Lean manufacturing covers all the means of eliminating this waste and improving production. As the owner of a manufacturing business, you must always seek ways to give customers what they want, and you must try to do this with:
- Less human effort
- Less resource
- Less equipment
- Less time
- Less space
Doing more with less represents one of the most sustainable ways you can reduce production costs. Reviewing how you source your raw materials and other production input can be a great place to start. When you source your raw materials from Alibaba.com, you may be able to save more on costs and boost profits in the process.
#2: Review your costs of labor
While the costs of your production input are always a great place to start, the cost of labor is a potentially bigger target. Trimming the workforce may be regarded as a quick way to lower the costs of labor. However, this is often a wrong move. The cost of finding and training new workers often holds hidden costs that can be prohibitive over time. Instead, hiring a core nucleus of employees you need to operate and keeping them happy is a better business tactic.
Since a successful labor reduction strategy must also balance resourcing and production overhead. This leads to one of the biggest dilemmas that manufacturers are faced with: how do you reduce labor costs in manufacturing without laying off part of the workforce?
Always put your labor costs under the microscope. This will help you determine whether you’re overpaying or simply paying for a job not done. A good way to go about this is to maximize the potential of your workforce by balancing man-machine activities.
It will also help to have versatile employees that can multitask and fill up other less-tasking roles. But don’t ignore the value of employees that are well-experienced and can specialize in one niche – especially in roles that are central to the business you do.
Overtime and overscheduling are two of the largest contributors to exorbitant labor costs. Many manufacturing businesses struggling for survival usually have staff working at non-peak times or times when production is low. Overtime or overscheduling costs are incurred with little productivity to show for it.
To solve this problem, it is advisable to first ascertain your peak and non-peak times. You then have to make sure that your business is appropriately staffed and shifts are organized around your production flow.
- Provide excellent training to your staff
Well-trained workers not only help businesses run efficiently, but they save you money in the long-run. If you want to get the best out of your employees, you have to make sure they are skilled in the tasks required of them. The training has to focus on the specific roles or tasks necessary for your manufacturing business. Importantly, this will lead to improved productivity in your business. Even more, it will help reduce work errors and workplace accidents – and the resulting liability this may cause.
Your employees are your biggest assets. Periodical training programs will help make them better at their jobs. This will also keep them motivated and loyal to your company.
- Consider outsourcing or using part-time workers
Outsourcing enables businesses to approach their staffing needs with greater flexibility. During peak times, you can bring in temporary or part-time workers to solve your immediate labor needs. With part-time labor, you’re exempted from paying certain benefits, 401(k) contributions, and bonuses that you would ordinarily pay to your full-time workers. You may also be able to obtain relief from paying payroll taxes when you hire workers through a staffing agency.
There are some other things that influence labor costs that you may have to consider in your manufacturing business. Keeping your work premises safe is one of them. Providing a safe work environment and ensuring the safety of your employees will save you a lot of headache – and money.
Implementing safety and health standards on your premises will help you avoid work hazards and accidents. This will keep your employees in good shape and help avoid sick leaves or absence from work as a result of injuries. In addition, prioritizing safety results in less exposure to workers’ compensation claims and paid time off work for recovery.
#3: Save on energy costs
Every manufacturing business requires energy to function. While these energy needs definitely vary depending on the size of the operation, there’s no doubt that you will be spending a lot on energy. Heating, cooling, lighting, and the operation of special equipment that powers your manufacturing business are all energy costs you must absorb. But these costs can run really high if you’re not careful.
Cutting your energy costs can be a great way to reduce the costs of production. If you do not have a working plan in place to conserve energy or you feel the plan is not quite effective, this is the right time for you to review your plan. Here are some of the ways you can cut down on your energy consumption:
- Use LED lights that require little energy to run
- Install smart thermostats and sensors to manage your heating and cooling functions
- Find leaks in your air-conditioning lines and fix them
- Invest in manufacturing equipment that is energy-efficient
- Strategically schedule machinery use. Turn off and run equipment only when required
- Schedule Shut-Downs and Start-Ups. Use smart technology to power down equipment when not in use. During off-peak season or hours, you can schedule a shutdown of the production area. Powering off machines or equipment during off-production hours or weekends will help reduce energy consumption by a large percentage
Even the slightest change to your energy consumption routine will impact your energy costs. The various options recommended above will bite a chunk out of your energy expenses and may also help lessen your carbon footprint.
#4: Explore quality control, standardization, and good manufacturing practices
Successful manufacturers will tell you that you must continue to give the consumer what they want – at unwavering high levels of quality.
To maintain a certain level of quality or standard for your products, you have to implement a respectable level of good manufacturing practices (GMP) in your business. Apart from being a critical aspect of providing goods that are made with the best possible (and sustainable) production practices, GMP also presents a great branding opportunity to establish your business as a producer of safe, quality products.
Whether you’re operating at a local or global level, you will continually be faced with challenges when it comes to managing and standardizing manufacturing business processes. These challenges will lead to a hike in the cost of production if you don’t quickly fight them off.
There are organizations (government-owned or otherwise) that conduct or issue standards expected of businesses. The most notable of these organizations is the International Standards Organization (ISO), a non-governmental agency of 165 national bodies that develops and publishes International Standards.
With various standards that cover management systems, manufacturing processes, services, and documentation procedures, an ISO seal may be all you need to cut some of your production costs. In an earlier post, we have discussed what the ISO is and how it may help you as a manufacturer.
Becoming ISO certified means that your company can provide high-quality products. The ISO seal will no doubt help to build trust between a customer and an international manufacturer. Here are some of the advantages the ISO seal can get for you:
- Improved environmental performance of your supply chain
- Becoming compliant with international regulations and legislation
- Position yourself as an eco-friendly, health and safety conscious and reputable manufacturer
- Reduce workplace accidents, incidents, and errors
- Provide excellent customer service and generate repeat customers
- Improve financial performance and risk management
- Meet or exceed international standards of excellence and increase sales
#5: Implement automation, inventory management, and other technology
You cannot completely replace the use of direct human labor in your business. However, what you can do is find the perfect blend of human resources and technology.
Automation and technology have transformed the look of manufacturing businesses. With impressive growth in robotics and artificial intelligence, the use of technology to perform some human roles has expanded over the years.
One of the ways you can rapidly reap the gains of technology is by adapting automation for repetitive manual tasks in your production process. Some of the processes commonly automated in companies include e-mail and push notifications, helpdesk support, data aggregation and migration, backup and restoration, employee leave requests, procurements, sales orders, time and attendance tracking, payroll, invoicing, and so on.
With the use of tech, you can get work done faster, more efficiently, and with higher quality output. In the long run, this will cut down on your manufacturing costs. Also, a business that makes use of collaborative robots (commonly called ‘cobots’) will in turn yield great profit. Not only will you be able to reduce lost-time costs, but the safety of your workers will also further be guaranteed.
#6: Conduct routine equipment maintenance
If it isn’t broken, don’t fix it, right? No, you shouldn’t apply this philosophy when it comes to the equipment or machinery you use for manufacturing. You have to see your machinery as an investment – not an expense – for your company. Keeping them in good shape is not only sound manufacturing practice, it’s the absolute minimum required.
Waiting till equipment breaks down before repairing it is counter to your efforts to reduce waste. The use of outdated or poorly conditioned equipment will only add more expenses to your production process. The wise choice to cut costs is to adapt periodical preventive and predictive maintenance for your tools. You can keep your equipment and machinery in perfect condition by:
- Routinely lubricating machinery to avoid rust
- Replacing filters
- Technical cleaning
- Paying attention to equipment to detect vibration anomalies
- Developing a maintenance plan to maintain all your equipment during plant stops
- Replacing obsolete equipment and revamping machinery that produces unexpected downtime
#7: Identify where product-line rationalization can help
In most cases, 80% of sales come from the top 20% of a company’s products. This is regarded as the ‘80/20 rule’, and is a cornerstone business principle. The problem with many underperforming industries is that they keep adding products without removing low-grossing products from their catalog. Unfortunately, the result of this is high overhead costs, under-utilized plant capacity, shortage of manufacturing resources, and supply chain management complications.
This is where product-line specialization comes in. Product-line rationalization is essentially a method of identifying and focusing on your most profitable products. This rationalization will help you eliminate low-profit products that are eating up your production costs. The business logic of product-line rationalization can be submerged under these four actions:
- The least-profitable products are dropped from production
- Less profitable products that need to remain in production are outsourced
- High-profit products are identified and remain in production
- Products that gross more profits become more specialized in. means of production, manufacturing processes, and marketing strategies are channeled towards these products.
Improved production of the top products and elimination of production costs towards low-grossing products will lead to more profit for your manufacturing business. If you’re wondering what your top-grossing products may be, you can check the Alibaba.com industry report and dashboard for best-selling profitable products.
#8: Improve logistics and save shipping costs
One of the many things that may be inflating your production costs is logistics and shipping. This is an area you have to pay special attention to. The logistics involved in packing or shipping your products may have been costing more than necessary. In many instances, you may be losing money because you’re moving your product around too many times. Waste of time, resources, and high risk of damage to your products are some of the dangers in this. Minimizing the distance and the time spent transporting your products will save you production costs.
One way to improve your logistics processes and save cost is by finding packaging and shipping solutions that are more efficient, environmentally friendly, and cost-friendly. Rather than outsourcing, it is advisable to make use of in-house services to make your deliveries.
#9: Engage your staff and make them happy
A happy and enthusiastic workforce is efficient, effective, and ready to work. If you’re thinking of making a change, getting the input of your staff will point you in the right direction.
Your employees are the people directly involved with the day-to-day operations of your manufacturing company. If there’s any waste that needs to be plugged or any improvement to be made, your employees are the people with firsthand knowledge about it.
Getting your staff involved in company policies will not only boost their morale, but it’ll also lead to an increase in their productivity.
#10: Focus on return on investment
The primary reason you’re cutting production costs is to ramp up revenue and profits. What better way to do this than to boost ROI and market your products where you’re sure they’ll get sales? Return on investment (ROI) is used to measure the financial gains of specific strategies you have adopted in your business. It is basically a ratio between net income and investment. In the case of cost-saving ideas manufacturing companies implement, it means keeping a close eye on the impact of cost-cutting strategies you have applied to see how well they have worked.
You can derive your ROI by dividing the gains from the strategies you implemented by your costs of production. A positive number means you gained a return on your investment. A negative number means you have either picked the wrong strategy or incorrectly implemented it.
By inference, your business strategy should involve one that boosts your ROI. Building an online presence and employing the use of digital marketing is a sure way to do this. Here are a handful of tips on how to increase sales for your manufacturing company.
B2B e-Commerce platforms like Alibaba.com now make it easier than ever for manufacturers to connect with more customers, generate more leads, boost sales, and grow your business. Get your business on Alibaba.com to find more international buyers and generate more sales today.