Key strategies to reduce manufacturing costs – without investing capital

Many UK manufacturers finished 2016 with a surge in demand from overseas customers, largely because of the favourable exchange rates for exporters. The effect was to take manufacturing growth to a 30-month high, according to the Purchasing Managers’ Index (PMI).

However, while buoyant exports signal good news for many, manufacturers who import raw materials from abroad have seen a dramatic rise in input costs. In fact, according to the CBI’s latest industrial trends survey, 47% of manufacturers stated that the weaker pound was harming their business compared with 32% who see it as a positive factor. The same survey found that average unit costs have increased to their highest level in three and a half years.

MESTEC’s own research suggests that reducing cost is the second most pressing challenge facing manufacturers today – marginally behind the need to improve labour productivity.

Faced with higher materials costs, manufacturers must seek new ways to reduce their costs, or else face up to reduced profits. The third option, increasing prices, risks losing market share to cheaper competition.

In any manufacturing plant there are a myriad of ways to cut costs. Here we look at some key strategies that are fast and low cost to implement.

Reduce labour costs

For many manufacturers, the wage bill is the biggest contributor to cost in the goods they make; it’s also one of the most difficult to control and optimise. In the UK, our manufacturing productivity is below that of many other countries. It’s a sobering thought that it takes the average factory worker in Germany just four days to produce what a UK worker makes in five.

If low productivity is such an endemic issue in the UK, how can there be a fast, low-cost fix?

It all starts with increasing the focus on performance management and continuous improvement initiatives. But to do this successfully you need access to accurate and timely information. For many companies the answer lies in simply moving away from using outdated paper- and spreadsheet-based data collection to deploying software on the shop floor that accurately measures what people do and how long it takes them, providing insightful information in real time. Typically, this step alone will yield a 20% boost in operator utilisation overnight – taking us on par with German workers. Simply being made aware of their performance and efficiency encourages operators to change and improve, thereby building a performance culture

Deploying dedicated manufacturing software on the shop floor is a foundation for continuous process improvement. It may also enable you to reduce labour costs by employing people with a lower level of skills, as you can configure the software to provide detailed guidance to operators.

Reduce quality losses

Do you know how much time your factory loses reworking faulty products or how much money you waste manufacturing products that are scrapped? As well as these direct costs, you may incur other costs as a result of poor quality, such as sales returns, complaint handling, field service labour and loss of reputation and the inevitable consequences for future sales.

Deploying a dedicated factory software solution gives manufacturers better control over quality. You can perform accurate rework analysis; identify root causes of quality issues and prioritise improvements based on cost savings; give suppliers feedback when their material has caused problems; use real-time data to identify new quality issues before they waste more labour time, and provide embedded ‘quality alerts’ in work instructions to ensure operators avoid repeating past quality issues.

Reduce material cost

To counter increasing material costs, manufacturers should be looking for opportunities to better manage their inventory levels and stock.  Most ERP systems “backflush” material consumption when jobs are completed. This means that you don’t know accurately and dynamically what your inventory levels are, and material usage is based on planned consumption rather than actual consumption.

Any uncertainty in inventory levels requires you to hold a significantly higher level of raw material stock to prevent running out. Recording inventory usage in real time allows you to improve accuracy and confidence in inventory levels; hence you can reduce safety stocks and run your factory at a lower level of WIP.

Reduce batch sizes

Manufacturers typically choose large batch sizes to benefit from economies of scale. Long assembly runs enable them to buy raw materials in bulk and reduce variable costs. However, this approach increases inventory costs for input materials and having to store quantities of finished products – overhead costs that manufacturers avoid with small batch runs. To enable efficient manufacturing in small batches, accurate measurement becomes more important than ever. Small batch manufacturing also allows businesses to identify and fix quality problems much sooner – and more cost-effectively – than manufacturers who run long assembly lines.

The fastest way to reduce manufacturing costs

If labour content is the main expense in your factory, reducing labour costs by improving productivity is the fastest way to offset any rise in material costs and protect your profits. Improving the productivity of your workforce will directly reduce labour costs.

Mestec’s automated factory floor solution is available as a monthly subscription, enabling factories to get up and running in as little as a week, with no capital required.

Ready to find out more

To learn more about how MESTEC could help with your manufacturing challenges and reduce costs or to request a demonstration, please contact us or call +44 (0)1344 535 120.