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3 Methods to Reduce Manufacturing Costs

If you're in the manufacturing business, you know how important it is to keep costs to an absolute minimum. Skyrocketing manufacturing costs kill your profit margins and lead to losses and employee layoffs.

In today's competitive market, it's never been more important to keep costs as low as possible. In this article, we'll take a look at three ways you can work to reduce your manufacturing costs as soon as possible.

1. Keep Track of Your Numbers

If you aren't already tracking your key expenses, it's time to start. It's impossible to reduce costs that you're not properly recording. You'll see here how important this is, especially when it comes to new product development.

You don't necessarily need an accountant to do this. With cloud accounting software technologies such as Quickbooks, the average Joe can keep a close eye on all relevant numbers.

To start out, begin tracking all of the key numbers that relate to:
  • Used capacity
  • Production capacity
  • Labor cost
  • Material cost
  • Overhead
  • Labor efficiency
  • Cost of goods sold
  • Carrying inventory cost
  • Cash in and cash out
  • Stock in and stock out
  • Overtime costs
If you'd rather not use accounting software to do this, record all your numbers in an excel file. Even the simplest number's recording will give you a much better idea about what's going on in the factory.

2. Reduce Your Carrying Cost of Inventory

Your carrying cost of inventory is the expense you incur when you hold, maintain and store product inventory over time. Raw materials and work-in-progress materials are also considered inventory.

Most of your components in the carrying cost of inventory are included in your overhead. These include:
  • Shrinkage and pilfirage costs
  • Opportunity cost
  • Staff cost
  • Warehouse maintenance and electricity cost
  • Stock-taking cost
  • Stock insurance cost
For example, let's say you've incurred $100,000 of carrying cost of inventory for a year on 10,000 stored units. This means that your carrying cost for each unit is $10. This would be a significant loss that requires reduction.

3. Keep Overhead Under Control

Overhead is typically a non-value expense that should be avoided whenever possible. To reduce your overhead, look at doing some of the following.

1. Set an overhead budget and regularly review it. Take steps to keep it under control.

2. Depreciation costs are time-based. Decide whether you want to own assets or acquire them on lease.

3. If possible, look to reduce your headcount. If one of your supervisor's roles could easily be re-delegated, is the expense of their position worth it to the business? Of course it's difficult to let people go. But sometimes, you just have to.

4. Avoid outlandish packaging that isn't necessary.

5. Work to reduce product features that don't add value.

6. If you can, avoid using air conditioning or other electric installations that aren't necessary for your production.

7. Check and update your machines to help avoid expensive repair costs.

Although some of these may be difficult, you have to put business before emotion.

You Can Reduce Your Manufacturing Costs

It's time to get serious about reducing costs. With these three methods, you'll start putting the profit back into your business.
Posted by Emily Dawson on Jan 15, 2020 3:40 AM Europe/London

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