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Cut Losses, Cut Costs: The Ultimate Cost Reduction Strategies for Manufacturers

As manufacturers satisfy demanding customers with high-quality products, perfect deliveries, and value-added service, they face a constant tension: How to do so without increasing costs. Yet in industry after industry, executives are watching margins shrink as expenses rise in a variety of ways. Many in the industry advise increasing employee working hours, freezing wages and nickel-and-diming procurements on materials. These steps, in our experience, are rarely based in data, rarely work in the long-term, and almost always creates unanticipated costs down the line. Sustainable cost reductions in manufacturing come from optimizing the way people and materials move through your manufacturing process. In doing so, you fix several critical issues:

• Quality: Product must be reworked, scrapped, or sold at a discount.
• Safety: Workplace injuries demoralize workers, negatively impacting productivity and increasing workers compensation and insurance premiums.
• Reliability: Unscheduled machine downtime freezes production, leaving employees and equipment idle.
• Excess: Surplus inventory accumulates beyond market demand, tying up working capital.
• Poor design: Product and process designs require unnecessary actions to produce a product, or the product is overdesigned (features beyond what customers will pay).
• Redundant oversight: Functions or activities are established to “control” outcomes (quality, continuous-improvement, in-line testing), which add unnecessary layers of employee and process costs.
• Supply chain: Suppliers deliver low-quality components and materials that don’t meet specifications, or incoming and outgoing goods are damaged or delayed in transport.

Many of these losses are related to core Toyota/lean wastes — i.e., anything that does not add value for the customer. But how can manufacturers most efficiently lower operating costs? Where should they start? What’s the right way to reduce the costs in front of them?

Our Process for Reducing Production Costs

1. Tally: Total cost losses day-to-day and then aggregate them to an annual loss figure. This number is often surprisingly large — as much as 65 percent of cost of goods sold — and can be the impetus an organization needs to pursue change.
2. Prioritize: Record how and where losses occur (as well as frequency and duration) to assess a plant’s or firm’s loss landscape, which allows employees to prioritize improvements that can generate the highest returns or solve the most urgent problems (e.g., safety and environmental issues).
3. Eliminate losses, reduce costs: Develop a plan to address losses throughout operations, starting with a model area where solutions, customized to specific problems, can be trialed (i.e., don’t use an “off-the-shelf” set of tools, techniques) and then replicate these throughout your facility or organization.

Completing a holistic loss analysis and assessing where your organization is at today not only tallies losses, but also identifies a model area within plant where improvement work can begin before replicating elsewhere in your manufacturing facility. The model area is typically a line or area with high losses, but other factors also are considered: urgency for improvement; capacity to replicate solutions, standards, and best practices to other areas; and the ability to improve the model to as close to perfection (zero losses) as possible. The model also gives managers and workers proof of the savings possible via loss-prevention efforts, which motivates the rest of the plant to become involved.

The Impact of Our Cost Saving Strategy

Performance Solution by Milliken conducts an in-depth review of losses as part of every plant assessment. This work guides Performance Solutions practitioners to local problems that require creative, local solutions, and it has driven major cost savings for Performance Solutions clients:

• A food and beverage manufacturer reduced waste by 31 percent and improved productivity by 28 percent.
• A packaged-goods plant recorded $1 million of annualized savings in a model area and $2 million in savings across the facility
• A packaging-products company achieved performance improvements of 60 to 70 percent and waste reductions of 80 percent.
• A chemical plant achieved $2 million in variable cost savings in two years.

Performance Solutions knows how to find losses and eliminate them, lowering costs and increasing profits for its clients. If your company is having trouble cutting costs, sign up here to receive more news and analysis, and to learn more about how Performance Solutions can help.