Reducing costs is an ongoing challenge for companies in any economic environment. The exercise becomes even more critical during and after economic downturns as organizations seek ways to reduce the costs of doing business without having to resort to personnel layoffs, plant closures and other extreme tactics.
Matthew Littlefield, president and principal analyst at LNS Research in Boston, says his firm’s internal research shows that about 50% of manufacturers cite cost cutting as their top objective.
“It’s pretty much an ongoing goal for manufacturing all of the time,” says Littlefield, “regardless of the economic conditions or other outside factors.”
Cost and value improvements
Several solutions stand out when the words “cost cutting” are used in relation to the plant floor. For example, technology tools such as radio-frequency identification (RFID), labor management systems software (LMS), wireless, mobile and even traditional enterprise resource planning (ERP) systems are all helping companies shave manufacturing expenses. Also making an impact are lean manufacturing strategies that are designed to eliminate waste and streamline operational activities.
Procurement professionals also play a key role in ensuring that plant floors run at an optimal, affordable level. In fact, finding ways to shave manufacturing costs is a task that frequently falls squarely on the procurement department’s shoulders.
“Cost and value improvements on the plant floor are vital components of a buyer’s job,” says Bill Michels, a senior vice president for the Institute for Supply Management (ISM) and president of ADR North America, a Tempe, Ariz.-based procurement, learning and sourcing consultancy. “These improvements are also critical components of profitability.”
Addressing an ongoing need
The national economy being in recovery mode doesn’t lessen the need for continuous cost cutting on the plant floor, says Michels, who sees the strategy becoming even more important as prices of raw goods and human capital increase.
“In the past, a company could live with some waste and improper management of the supply chain,” says Michels. “Today, you can’t get away with that. Keeping a lid on costs is a vital aspect of profitability and should be a part of the overall organizational goal.”
To achieve that goal, Michels says companies must look at both price and total cost of ownership. In some cases it may make sense to pay a higher price upfront for a piece of equipment that will last five years longer than its cheaper counterpart, for example. Involve shop managers and suppliers in this selection process, Michels advises, in order to get a well-rounded view of what the company really needs versus what’s being offered on the market.
Options such as consignment inventory (inventory that is in the possession of the customer but still owned by the supplier) or just-in-time inventory (a way to improve return-on-investment by reducing in-process inventory and associated carrying costs) can also help a company better manage—and even reduce—its shop floor costs.
Littlefield sees analytics playing an increasing role on the manufacturing floor, where access to data is helping companies more quickly address maintenance issues, quality problems and other important measures. Vendor score-carding is another valuable tool for the buyer who is looking to cut costs, says Littlefield, who sees compliance, traceability and safety as three key areas that frequently lead to cost overruns on the plant floor.
“A lot of times,” he adds, “those issues start with the suppliers.”
Getting everyone involved
Often-overlooked resources in the cost-cutting game are the shop managers and team members who work daily with the equipment, process and products. They can play an important role in reducing costs, according to Michels, who suggests holding regular “value workshops” to brainstorm ways to build a better product at a lower cost.
“In many cases,” he says, “the only way to drill down on this information is by working directly with the plant personnel.”
Michels says companies that take the time to assess their plant floor operations and seek out efficiencies tend to benefit from more than just lower costs.
“Strong continuous improvement programs not only lower expenses,” he says, “but they also help create smoother operations, cultural benefits and better engagement among employees. It’s definitely a win-win proposition for the firms that are willing to put the time into it.”