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Tighten the belt when times get tough.

Even in better times, it's a good idea to take stock of production costs by conducting a plant audit.

In a manufacturing crganization, money is made or lost on the factory floor. There are no rewards for losers in bankruptcy court, and to be ill-informed or make effective changes too late in the game will not save a company.

Operating a company in a seller's market is easy. Customers are not too fussy about quality, appeararce, delivery or other promises. There's another customer waiting to buy it.

Invertories are built, plants are constructed and/or expanded and new equipment purchased with a gut feeling of confidence that more business will be forthcoming. When times are good, financial institutions have money to lend, using that same gutfeeling.

But when demand flattens out, look out. Competition emerges with a more appealing, high-quality product, at a very competitive price and with on-time delivery. Suddenly, your company finds itself fighting to stay in business.

Obviously, a number of things must be done, not only to survive, but to come out of a recession with strength, not weakness. What, where, when, who and how are questions that must be coordinated into a strategy and an intelligent engineered plan of action. Insiders are good at handling business expansion but their jobs may be at stake. Sometimes it takes an outside expert, who can view a production situation with pure objectivity, to conduct a thorough plant audit. He has only one objective: the health of the company.

The rest of this article is a checklist of some of the key concerns that should be addressed.

Material purchases

A good place to start is with your company's materials purchases, which for most companies is a big-ticket item. Considerations include:

* What materials are needed to make your product?

* Are there material substitutions that can be developed or found?

* What are the lowest prices and are you gefting them?

* What are the true waste and yield factors? Look at what is going into the scrap bin during the night shift.

* What is the minimum inventory required to make your product, using the average orders presently on hand?

* Do you practice an Economic Order Quantity (EOQ) formula that considers all factors, especially, low costs of high inventory turns?

* Do you have a modern, optimized materials management system or just an old-fashioned purchasing agent, who looks for good buys?

Labor reduction

The next largest big-ticket item is labor. Every dollar paid on Friday to cover unnecessary labor is a dollar you have lost right off the bottom line. Some of the considerations for eliminating unnecessary labor costs include:

* Your company must analyze unnecessary labor functions, material handling etc.

* It must re-evaluate labor content -value-added and non-value-added labor costs. Labor may be performing jobs that could be eliminated or combined.

* Often, only 20 to 30 percent of labor is spent on value-added steps. Often, 70 percent of labor costs add no value to the product at all but is paid for by you each Friday.

* Look closely at fringe benefits. Mechanize payroll deductions, including taxes, insurance, etc.

* Develop a plan to get five to eight times more production output per factory worker - annual cost.

Audit company operations

Review all company operations from receiving through shipping. This includes manufacturing, inventory, work in process, storage, machining and assembly. This is especially important if your product line is complex.

Evaluate all details. Look for obsolescence in various departments, process layouts, operation methods, order scheduling and inventory control methods. This will be the most rewarding effort you can make.

Remember: Unless your operation is efficiently analyzed and laid out, you cannot reduce cost. No cost reductions will occur unless the problem is identified and a correct solution agreed upon, installed, and the employees trained to make the solutions work.

Plant layout and processes

Evaluate factory processes in great detail. Many manufacturers do not spend time on this effort.

The only process that will do is the one that makes the product for the lowest cost.

An organized, sequential layout is of utmost importance in manufacturing. These layouts must be reviewed and updated frequently. They lose efficiency as new models and style lines are added that require a new and more flexible manufacturing technology.

A mechanized plant and processes, properly laid out, will reduce material handling costs and eliminate confusion and lost time in value-added operations.

Buildings, show-place architecture, costly computer systems, and fancy offices are secondary to making and selling a product profitably.

Remember: By reviewing and re-evaluating the plant layout and its processes and implementing changes to become a low-cost producer of your products, can only result in putting more dollars on the bottom line.

Management control

Control what your company does in management. This includes restructuring your organization to eliminate unnecessary layers of management and allow better control of decisions that will have a major impact on cost reductions.

The control system is strengthened by tightening costs, accurate reporting of critical information from cost centers and cash flow; and effectively planning and simplifying reporting to top management daily.

Buy or make?

Examine the pros and cons of buying component part from specialists.

* Does your company's size and prouct line justify a costly mainframe computer or can low-cost micro computers provide department managers with adequate and simple tools to conduct their operations? Recently, for example, I worked with a manufacturer whose cost for the paperwork to fill an order was 12 percent of the product's value.

Production control is supposed to optimize daily labor costs. Very few companies are able to cut costs and still deliver the product on-time to the shipping dock.

* Inventory turns must be at least 12 times; ideally, 26 times a year to turn vital inventory every 10 days.

Systems that drive your factory are as important as any machine or people in the work place. But, little attention is given to well functioning systems that control your plant.

* Does your company need CNC machines with an additional investment in supporting equipment, inventory or parts? Perhaps. Purchase of dimension stock from vendors might be the answer in order to provide a higher return on investment.

Quality control audit

In past recessions, good quality products still sold.

Quality control is a management responsibility. Quality can't be inspected into a bad product. Without quality-made parts or controlled strategic operations and processing in your plant, you will not have repeat quality.

What is quality? It is at least the minimum level of acceptance by your customer but better than your competitor's. Define what the customer wants.

A lot of money can be spent in areas that do not influence the buyer's decision. So, a total review of quality and of features that will satisfy will bring surprising rewards.

Research and development

Redirect research and development to eliminate high risk projects or those that promise limited return. Shift resources away from projects that require extensive funding and ones that do not guarantee a large impact in the marketplace.

Review financing

Capital must work harder for you these days. Manage your cash flow as carefully as you manage the numbers on your balance sheet. Investments in new machinery and equipment must offer a much higher potential reward than interest on CD's in a bank and other investments. In other words, you are an expert in making your product and that, while you are in business, you should aim for 20 percent profit; otherwise, you may as well go and get bank CD's and retire in Florida!

To help achieve that profitability goal:

* Tighten cash and collection procedures.

* Freeze purchasing tor a while in order to get control over excess inventory. Often, the new plant or equipment would not have been needed. After all, if each of the alternate, effective process methods should have been evaluated in detail, before you bought the concrete.

Remember: Processes make the money; buildings only house them.

Re-evaluate existing product lines

* Take a hard look at product construction - standardization of drawings, parts, components, joints, fasteners and methods.

* Eliminate marginal product lines and low-volume items that require exceptional effort.

* Standardization of parts, sizes, and thicknesses, often yields up to 30 percent in cost savings.

Review your markets

* Redefine the markets you serve. Who are your best customers today? Has your market shifted geographically? Should you change your channels of distribution? Should you reduce your prime customer base?

* Make full effort to bring (our product to the market at the lowest possible cost to you. The competition determines the price. You are in charge of the factory process that makes your low cost product.


* Short-term actions can be taken to meet immediate circumstances. Long-term planning should begin at once. This requires more input than just from experienced inhouse personnel.

* Outside experts are not obligated as most employees are to say "yes" to their managers in order to protect their jobs.

* Management must, at all times, have a complete, overall, objective picture of all areas of this enterprise.

Remember: Money is made or lost on the factory floor in a manufacturing organization.
COPYRIGHT 1992 Vance Publishing Corp.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:controlling production cost
Author:Geiger, Gunter
Publication:Wood & Wood Products
Date:Jul 1, 1992
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