The production of material goods, services and rights is the central, value-adding core process in many companies. One of the core goals of the entire organisation must therefore be to make this core production process as cost-effective, trouble-free and consistent as possible. To achieve this, supporting processes must be geared towards optimising the core process.
This goal is best achieved when the utilisation of production capacities is at a uniformly high level and the required labour, operating resources and raw materials are available at the right time in sufficient quantities and in an appropriate condition. This requires a complete and clear specification of the items to be produced, careful work preparation and appropriate production planning.
Opportunities and risks of cost reduction in production
Reducing production costs is an important aspect for any manufacturing company, as it can increase profit margins and boost competitiveness. Reducing costs can be done in a number of ways, such as using more efficient technologies, planning production networks, automating work processes or purchasing raw materials at lower prices. Through these measures, companies can not only increase their margins, but also offer more competitive products to increase sales and thereby improve earnings.
However, cost reduction also carries risks. Too much focus on cost savings can lead to companies losing quality and customer satisfaction. Employees may be laid off or underpaid, lowering motivation and morale. If product quality suffers from cost-cutting, customers may drop out and spread negative reviews, which can damage the company’s reputation.
Therefore, it is important that companies adopt a balanced and sustainable strategy when cutting costs in manufacturing, focusing on meaningful cost savings as well as quality and customer needs. When cost reductions are accompanied by a focus on improving processes and employee satisfaction, companies can be more successful in the long run and increase both their profit margins and customer satisfaction.
What influences the cost of production?
Production costs include the costs of machinery and equipment and the costs of input materials, storage and packaging as well as the costs of direct and indirect personnel involved in production.
The components that make up the costs in production include the following in particular:
- Personnel: Salaries, wages, social benefits and other labour costs for employees in production.
- Materials: raw materials, semi-finished products, purchased standard items, components and auxiliary and operating materials
- Machinery, plant and equipment: production machinery, tools and auxiliary equipment as well as their operating supplies, maintenance and servicing
- Energy costs: electricity, gas and other energy sources required for the operation of machinery and equipment in production
- Packaging materials: packaging and shipping materials needed to transport the goods to customers
- Transport costs: shipping of products to customers or intermediaries
- Insurance: Insurance against damage by fire, water and theft, but also product liability insurance
In summary, the production of goods involves various resources that cause costs. However, the cost items are not independent of each other, but influence each other.
For example, cheaply purchased input material can be difficult to process in production, increase time expenditure and waste and more than cancel out the price advantage achieved in procurement. Conscious, strategic and balanced use of production resources can help optimise profits. This should be considered when reducing costs in production.
10 measures for effective cost reduction in manufacturing
01. Selecting the right manufacturing process
A changing market, new customer needs or technical innovations can mean that a new manufacturing process can bring significant advantages in production. It can therefore make sense to review past decisions in order to reduce costs in production – and possibly select a manufacturing process that works more efficiently.
However, changing the manufacturing process can be a complicated process. That is why many companies are reluctant to tackle this important factor in production. This sometimes leads to the use of traditional manufacturing processes and to routines creeping in that are not optimal.
02. Manufacturing management: Organising manufacturing cost-effectively
Is production management in your company in the hands of the sales team? Do impulses from sales flow directly and unfiltered into production planning, which then has to be implemented, usually without taking specific features into account? Then you have potential for optimisation.
The quality of production management is significantly influenced by other operational functions. Therefore, manufacturing management must be perceived as a holistic management task. Skills in external management and a holistic, networked approach are fundamental.
There are several proven methods for manufacturing management. The concept of lean management, value stream mapping and the 5S concept deserve special mention. Used correctly, these methods can lead you to effectively reduce costs through successful manufacturing management.
03. Optimizing the flow of materials
The flow of material within an organisation is like the circulation of blood in a body. Only when all vessels and organs work together does the entire system remain stable. Accordingly, it is important that you take a holistic view of the material flow in order to optimise costs in production.
There is always potential for optimisation when stocks accumulate or materials are missing. Both a full warehouse and involuntary production stoppages cost you unnecessary money.
When optimising the material flow, it is important that you always keep an eye on the impact on other parts of the company. After all, in manufacturing companies, the various departments such as production, sales and management are closely interrelated. Only a holistic approach to cost reduction can work successfully.
04. Finding a suitable location strategy for production
In terms of production costs, it is not only relevant what is produced and how, but also where these production steps are carried out. In any case, it makes sense to think about which location is best suited for manufacturing. There are advantages and disadvantages associated with each possible location in the world that should be weighed against each other. Choosing a low-wage location or one where energy costs are low may seem tempting at first glance. But also consider criteria such as material transport costs, political stability and employee commitment.
If you are not starting your new production “on a greenfield site” but are already operating production at an existing location, the relocation costs must also be taken into consideration. Think not only about the relocation of machinery and equipment and redundancy and recruitment costs, but also about the outflow of expertise and experience and the fact that you are giving up well-established and functioning business processes with a relocation. Also think about the transitional phase without production output until everything is running reasonably smoothly again at the new location, and the learning curve you have to go through at the new location to reach an acceptable level of efficiency and quality.
If you run a group of companies with several manufacturing sites, it makes sense to look at a site strategy. For example, it may be worthwhile to bundle similar manufacturing processes at one location and to specialise locations in certain manufacturing processes or the production of certain article groups. On the other hand, this would mean giving up the possibility of an alternative location in the event of a disaster (disaster recovery plan).
Relocating or merging production sites can certainly open up strategic and operational advantages in the long term, but the decision also comes at a price and may even be completely unreasonable. The decisive factor is, among other things, the entrepreneurial objective: if the focus is on implementing a clean location strategy, this can increase the value of the company to an extent that clearly exceeds the costs of implementing a relocation or merger. If the aim is to improve earnings and liquidity in the short term, a relocation or a merger of production sites is generally not recommended.
05. Optimise and automate processes
All successful manufacturing companies have one thing in common: their processes are precisely coordinated. Because production only runs efficiently if all the individual processes mesh perfectly in a large whole.
For cost reduction in production, this means: you must ensure that your processes are optimised. For example, too few orders can lead to overproduction, which means that production has to be paused. Conversely, an excessive order situation with too little production leads to internal problems and possibly difficulties with the clientele.
It can also make sense to automate processes. This is not exclusively about replacing employees in production with machines. Rather, it is also about automating enquiry management and the preparation of quotations.
06. Reduce packaging and shipping costs
Packaging and shipping play a major role in production. They are cost items that occur again and again – and therefore a good starting point for reducing costs in production. Possibilities for this are, for example:
- Negotiating prices and conditions with packaging suppliers,
- the use of material-saving packaging,
- optimising the order cycle,
- organising shipping with fewer individual consignments, and
- and changing suppliers.
In addition, there are other starting points for reducing packaging and shipping costs. So take the time to reflect on which adjusting screws you can turn here in a target-oriented way.
07. Reduce stock levels
A full warehouse costs money, but so does an empty warehouse. Many companies have the potential to optimise their inventories, which in most cases means reducing them. This is because raw materials, input materials or finished goods are often purchased or prepared in excessive quantities and then take up expensive space and liquidity. Unsold finished goods are tied-up liquidity that you can free up.
In order to lower the costs of your production, you can reduce the storage space in a targeted manner. For example, a just-in-time approach would be conceivable, in which materials are delivered appropriately and finished goods are produced promptly. However, you have to make sure that your production capacity can easily keep up even with a strong order situation.
Overall, it is a sensible measure to reduce stocks. Here the rule of thumb applies: Reduce stored goods as much as possible, and only store as much as necessary. However, finding the right measure for this is an optimisation achievement in itself.
08. Optimising personnel costs in production
Personnel costs money. The more people involved in a production step, the higher the costs of production. The obvious answer, of course, is to reduce staff. However, this can only be a limited solution.
Of course, you can reduce personnel costs and thus the costs of your production by using innovative machines, for example. However, cutting jobs can also lower the motivation of the remaining staff and thus have a negative effect.
Personnel costs can also be put into perspective by increasing employee efficiency and productivity. This can be achieved through appreciative leadership, expedient work organisation, relevant training and a more pleasant working environment. Reducing occupational accidents and absenteeism also has a positive impact on productivity and personnel costs. Appropriate contributions to occupational safety can therefore also save costs on the bottom line.
So when it comes to personnel costs, don’t just think about cutting jobs, but take a close look at the factors that will make your company successful.
09. Involve cooperations
As a company, you do not have to do everything yourself. It is quite common in production to have semi-finished goods delivered that are difficult to produce in-house and to process them further. This is where cooperation offers the opportunity to reduce costs in the production process.
It is important to distinguish between suppliers and cooperation partners. While suppliers merely deliver a product, cooperation partners are more deeply involved in the entire value chain. This is a jointly created service.
Here you have the opportunity to access the know-how of companies that are possibly more experienced and efficient in a certain production step and can specifically adapt to the requirements of your final products.
Or maybe you simply don’t have the capacity to expand your product range on your own and therefore enter into a partnership. Ultimately, it is important for a fruitful cooperation that both sides benefit from it and that a truly collaborative working relationship is created.
10. Create innovations
In a networked world where technological progress can be absorbed by several industries, there is virtually a pressure to innovate. This also affects production in companies. Innovations can open up completely new design possibilities, but can also offer growth opportunities and reduce production costs.
For example, 3D printing can be used to build geometric shapes that cannot be produced by machining processes, such as hollow bodies made up of art nouveau-like struts. In any case, 3D printing such geometric bodies does not even begin to cause the material input that machining processes would cause. Perhaps such a body could be cast, but the cost of mould making and casting would likely be many times greater than the cost of a data model on which 3D printing is based.
However, innovations do not only refer to products, but can certainly also be related to processes and systems.
One example of a process innovation is the implementation of a web-based product configurator linked to the ERP system and production planning, which can be made available to customers for specifying and ordering their products. With such a product configurator, a manufacturing company benefits not only from a wider reach and ideally a higher order intake, but also from a reduction in the workload of the sales team.
To reduce costs in production, it is important to always be on the lookout for interesting materials, to seek out new manufacturing processes and to regularly check manufacturing processes for significant potential for improvement. Innovation is not about incremental improvement approaches, but about significant new steps that open up completely different possibilities. The materials the processes and the process approaches do not have to be completely new, however; they should be new in terms of their application in the company. That is why it is always worthwhile to take a curious look at completely different industries, because this is where inspiration can be gained for your own production. Ensure a functioning innovation process in the company and encourage your employees to take up such inspirations and bring them into the innovation process of the company. Send your employees to trade fairs and let them visit factories whenever the opportunity arises. Involvement in trade and industry associations is helpful in getting such opportunities.
Innovations are an important factor for success. They strengthen the competitiveness of companies and can help to reduce costs while improving profitability.
Real-world examples: two examples of cost reduction.
Manufacturer of metal components: successful decoupling of production from distribution
A company that manufactures plain bearings had a corporate target to optimize each monthly closing. This requirement, which is not wrong in principle, led to short-term thinking and action in the company. Pre-material was ordered just-in-time. As a result, the required material was often not available on time. Accordingly, production networks often had to be interrupted. High set-up times took capacity away from production. At the end of the month, it was regularly necessary to “still make sales” at short notice. For this purpose, further series were interrupted if the products could not be sold in the same month. Instead, customers were contacted and agreed to bring orders forward. Although planned sales were usually achieved, capacity, earnings and workforce motivation suffered as a result of the rescheduling. At the beginning of the following month, production regularly fell into a hole due to a shortage of materials and overtime. Manufacturing output oscillated sharply in a monthly cycle.
In agreement with the group management, the working method was changed. It was accepted that a month would end with lower sales, but in return the coherent planning would not be interrupted. Higher inventory levels were also accepted and created, and consignment agreements were made with suppliers in order to actually implement planned production runs.
The changeover also required a great deal of discipline from the sales department. However, after just a few weeks, a calm work ethic settled into production, which benefited the entire company. Sales stabilized at a higher level than before the changeover, and profitability increased significantly. The company’s management, which had not been aware of the previous problems, was delighted with the increase, and the workforce benefited from considerably less stress from then on.
Metalworking: Wrong decisions to reduce costs
The manufacturing operations of a metal cutting company were designed to efficiently produce components in large and very large batches. The equipment was specialized for batch production. The items produced were temporarily stored and sold from stock on a call-off basis.
This method of operation required a large amount of capital to be tied up. When cash became scarce during a difficult market phase, management instructed production planning to produce only customer orders and smaller quantities according to a short-term forecast.
Substantial quantities of inventory were sold off, and liquidity actually improved, but that was only the first part of the story. In order to be able to serve customer call-offs, rebuild and setup operations at the plants now increased massively. As a direct consequence, the share of setup times in total times increased, significantly more startup scrap was incurred, and employee satisfaction on the shop floor suffered. Sick leave increased and productivity and efficiency of production equipment dropped dramatically. Attempts to improve results resulted in a massive deterioration. Soon the liquidity gained in the short term was used up again. The pressure on production increased continuously without any improvement in results. The company ran into insolvency.
Conclusion: How to properly exploit cost savings potential in production
To properly exploit cost potentials in production, it is essential to have a good understanding of the entire business process in the company. Depending on the business process, sensible production processes can be selected or production can be guided step by step to sensible production processes. Crucial to achieving effective cost savings in production is an understanding of the key factors that influence production performance and production costs. These usually lie outside production, in product management, product development, sales, production planning and control, and work preparation. All processes must be well coordinated to ensure concentricity in production. The material flow and the quality of the inventory also have a significant influence on the quality of production.
If one would like to admit more fundamental questions for the optimization of the costs in production, a founded location strategy offers itself. Alternatives such as relocation or merging existing sites, as well as the question of site alignment, should be carefully analyzed. The costs and risks associated with a transition period should not be underestimated.
Process optimization is very important. An end-to-end production process that incorporates the upstream services of purchasing, production planning and control, and work preparation is the core. A balanced approach to standardization, optimization of manufacturing steps and automation can contribute to cost savings in production.
In addition, in most companies, supposedly marginal areas, such as packaging and transportation, can be optimized in such a way that they have a noticeable positive effect on costs and on company earnings.
Similarly, in most companies, inventory can be optimized in a way that not only frees up liquidity and warehouse space, but the composition of the items being stored better supports production.
Reducing personnel costs is inevitable when production staff cannot be utilized for the foreseeable future. In this case, cuts should be made boldly, if necessary by using a reconciliation of interests and a social plan. If the situation is different, work should rather be done on increasing the productivity of the personnel. In complex business processes, the effort required for coordination and project management justifiably increases. Personnel costs for administration, on the other hand, should always be viewed critically. Instead of building up your own resources and capabilities, an alternative is to enter into cooperative ventures that open up opportunities, provide flexibility, and limit risks and costs.
Finally, innovations can be used to reduce production costs. With new materials, methods and processes, cost-saving potential can be realized in production and completely new product properties can be achieved, which can lead to new applications and submarkets.