When not writing on Bizain or running his businesses, Vishal likes to travel & explore places. Costs such as depreciation are mostly time-based. Exhibit I and show total annual operating costs ranging from a high of $18.7 million in Long Island, NY, to a low of $14.4 million in the Scranton/Wilkes Barre, PA, area. And, business means profit. But logistics costs, tax, personnel displacement and even absenteeism can be reduced by moving address. That’s the reason they’re also known as Manufacturing indirect expenses. JIT means ordering inventories only when it’s actually needed for production. It can also reduce the compressor operating pressure band (remember, 2 psi increases the energy consumption by 1%). Inventory also includes raw material & work-in-progress material. Dropping non-value adding activities in the manufacturing cycle can assist in cutting unnecessary costs and keeping the manufacturing cost to minimum. For example, you can take the help of an outside company for either marketing or advertising your product or manufacturing … John produces 100 units (per month) of a certain product with a total production cost of $ 300. The question of how to reduce operating costs is a common issue for many companies, especially in times of market contraction and a down-turned economy. Let’s find out. Labor costs are a significant portion of the budget for any new launch. Strategic purchasing “procurement” techniques can greatly help in your quest for reduced operating costs. Basically all maintenance strategies, besides breakdown maintenance (run-to-failure maintenance), are designed to improve the efficiency and effectiveness of your maintenance activities which, in turn, leads to reduced operational expenses. Manufacturers in search of cost-saving measures would be wise to seek to reduce manufacturing … Both are important. The next step is to "go and see" and try to find ways at the Gemba to trigger alerts when one of these exceptional costs happens, so that you can understand the facts of the costs … Spend Less (manufacture the same number of parts using fewer resources) 2. Example: A furniture manufacturer can consider replacing cost raw wood with a cheaper alternatives like plywoods. The 10 Most Effective Methods to Reduce Manufacturing Costs. His selling price is $ 10 per unit. How can we minimize the purchase of office supplies? No, you don’t need an accountant to do that. Let me share a few: The direct material is the most significant part of production cost. Required fields are marked *. Of course, we need to account for and study the best alternative depending on the interest rate and cash availability, but a good discount can be interesting for both parties: you spend less and your supplier is paid faster. Not only some methods may reduce your expenses, but also drive up productivity of your employees. (Pro tip: Local un-branded transport companies offer cheap rates for transport. see how to ensure quality when outsourcing processes, here. Reducing manufacturing costs can be achieved directly (by spending less) or indirectly (by making more): 1. The following are some of the ways to reduce the manufacturing cost. Prepare a database of suppliers with details like name, phone number, email, address. Thereby the customers will be satisfied and the reputation of the business will improve due to the low error rate. It includes material purchase cost & expenses incurred to bring the material from supplier location to your factory location. Then the carrying cost per unit comes to $ 10 per unit. Whether the gate-keeper’s job is essential?. Selling & administrative expenses (falling outside the purview of the factory) aren’t included in the production cost. The formula to calculate EOQ is square root of 2DS/C. Take your factory workers’ feedback. Now, to increase production beyond 100 units, he installed a new machinery. Anything more or less will result in additional cost. Since the demand didn’t increase, his selling price falls to $ 9.75. Transitioning to green manufacturing … If you can reduce the same effectively, half of your job is done. Since all costs are not directly proportional to production level, we have to determine a level at which the per unit cost of production reaches the minimum. For some companies, especially in the manufacturing sector, maintenance management costs … Assume you’ve hired 10 labor staff with a combined cost of $ 10,000 per month. Human beings are more prone to mistakes than machines. 11. The formula used for it uses variables like demand, lot size, the cost of the order, inventory and average unit cost. Energy efficient lighting is another way to reduce spending, and these lights last longer and require less electricity to operate. There are mainly two ways to increase profit, viz. Setting up a reasonable testing plan rather than testing every SKU. Find out how to reduce costs in a company with BPM. When reducing operating expenses via smart manufacturing, the TOC inherently prioritizes and focuses improvement efforts on the area with the greatest cost impact: the bottleneck. Corporate Travel: fewer costs and more efficiency with BPM. Machines have a useful life after which their operation becomes very costly and unproductive. Reduce business costs by operating in a virtual manner whenever possible. In order to reduce such wastes, your business needs to have a strong internal control system. Even a verbal engagement may work. Makes sense? Whereas, the Marginal revenue(MR) is the additional revenue you earn by by selling one extra unit. One of the simplest ways to reduce manufacturing overhead costs in by cutting down the material costs. Thus, most businesses opt for the second one. Yes, it’s a significant cost. And, make sure you communicate with them regarding the proposed process changes. A good idea is to use an IT tool and set up rewards and incentives. John started a new business of manufacturing LED Lights. Reducing employees’ remuneration is not a great option because it results in employee dissatisfaction and ultimately in hiring and retaining unskilled employees. Maintenance strategies designed to reduce operating costs. In this case, what will be the production cost for each LED?. These exceptional costs are probably the first costs you can reduce if you understand them better. Providing labor force with adequate training and cost reducing techniques. Manufacturing overheads are mostly non-value adding expenses & thus can be avoided. While the ABC method advocates costing approach, this method recommends a qualitative way to manage inventory. Thus, most businesses opt for the second one. These are activities such as security, hygiene, and cleanliness, meals, etc. (Example: A worker specializing in packing should only pack & not get involved in other tasks), Share a clear production goals with the team. In long run, the benefits will pay off the cost easily. 1. by increasing selling price per unit and 2. by reducing costs. Reduce Operating Costs. That avoids unnecessary stocking & thereby reduces carrying cost. Travel Cost Reduction Strategies In A Business, How To Reduce Expenses In A Restaurant Business, Electricity & other expenses required to run the factory, Lubricants & consumable stores like packing materials, Invite quotations from as many suppliers as possible. To reduce the carrying cost of inventory, follow these time-tested techniques: The idea is to reduce the inventory to such an optimum level that minimizes the carrying cost & at the same time doesn’t affect the production schedule or sale. Request the transport company to take care of unloading raw material into your factory. The MR comes to = $ 4 (Approx) [(103*9.75) – (100*10)] which is equal to the MC. Motivate the labor force as & when required. Take into account the workers’ fatigue & unproductive time while charting a new improved process. Outsourcing. Have you considered negotiating discounts by paying cash? Consider re-structuring your product. So, the total production cost comes to $ 96 per chair. One of the primary components of operating costs is the cost … Necessary steps are to be taken to control them. Virtual meetings help minimize travel expenses and virtual offices can eliminate the need for physical space. He incurred the following expenses in his first month while manufacturing 100 LED Lights: Purchase of raw materials = $ 500Shipping cost incurred to import raw material from China = $ 150Import duty paid for custom clearance = $ 50Transport cost incurred to bring raw material from port to his factory = $ 20Labor salary engaged in production = $ 100Salary of factory quality control executive = $ 1000Salary paid to office accountant & marketing executive = $ 1500. Giving some of the inspection work to production operators; 3. #2. If you understand the process and are working every day with it, you can get to know that process very well. Now, let’s say that John produced 103 units instead of 101 units in the second month. The moderate ones should fall under Essential category & the least critical ones should fall under Desirable category. Invite quotations & enter into a long-term contract with the shortlisted transport company. Doing so is the most efficient and effective way to save money without necessarily having a negative impact on services being rendered to customers or on salaries being paid to staff. Offering incentives to the workers who produce an average unit at less than the standard time. With the advent of technologies like cloud accounting softwares (Example: Quickbooks), even a non-accountant can track & keep a tab on numbers. Do it now. Often operating expenses receive the most scrutiny from a company, as these types of costs may be less fixed than their non-operating expenses, manufacturing costs and capital expenditures.
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