Written by Jeremy Praud, Head of UK & Europe
Taking cost out of your manufacturing operation so that your unit can stay competitive will help you win your contracts again when they come up for tender – but how do you know what is the right amount of cost to take out, and from where?
Here are 5 ways to identify opportunities to take cost out:
1. Make sure your plan covers all 3 areas of major spend.
Direct Labour, Raw Materials and Packaging, and Overheads are the 3 major areas of manufacturing spend. Your manufacturing ‘Overhead’ spend is probably mostly on Engineering, Salaries, and Energy. Does you plan cover all these areas, or are you missing a whole area of opportunity?
2. Measure your plans against ‘True’.
Your standards were useful for the costed submission that won your factory the work last time – but they’re no good for knowing what you can do in the future. Ensure you have an opportunity matrix that identifies opportunity against maximum run speed of the bottleneck, not the standard speed. Don’t fool yourself that you’re doing well if you have a positive material variance, when the standard allows for 8% waste.
3. Set the right technology benchmarks.
You’re never going to achieve 100% – unless you haven’t followed point 2. So what is possible? 75%-98% depending on what technologies you are using. Could you achieve 98% with a technology change?
4. Understand how much of the gap you can close.
40% in the first year is possible. Have you allocated the resource to get you there? Is your improvement team skilled and efficient and able to close the gap?
5. Align capital plans and non-capital plans.
Invest your capital allowance for improvement in equipment that is going to increase the bottleneck rates or reduce headcount. Investing in replacing performing equipment is simply trying to run away from root-cause problem solving, and increasing your depreciation to simply stay still in terms of unit cost – which could leave you in a nasty place in the future.