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Top 6 Cost Reduction Strategies for Manufacturing Industry

  • 11-12 min read
  • September 14, 2021
  • 👍 Rating — 5 (2 votes)

Every business always fights for lowering costs. Manufacturers are no exception — there are dozens of expenses that are necessary and responsible for the smooth running of the production process and optimal supply chain management. According to Fictiv’s 2021 State of Manufacturing Report, 47% of manufacturers state that supply chain overhead costs become too high and spiral out of control due to the long-term pandemic effects.

At the same time, 91% of responders ratcheted up their investment into digital transformation. Our experience shows that adopting new technology not only upgrades your capacities but optimizes processes, therefore creating opportunities for cost reduction. 

In this article, we gathered the main cost reduction ideas in manufacturing that you can implement right now.

Understanding manufacturing costs

Manufacturing has several types of costs that you need to understand. The first type — manufacturing costs — includes spending that is directly connected to the generation of production volume. If the factory produces more items than usual, then consequently the direct costs grow as well. 

Direct costs consist of:

  • direct materials (the cost of raw materials used to assemble the product; it may be the fabric in the clothing industry, aluminum and lithium in electronics, etc.);
  • direct labor (all costs related to the labor compensations of the employees who are directly working on production);
  • overhead (all other expenses required for successful production: administrative costs, the labor of supervisors and managers who are indirectly involved in the production, rent, depreciation of factory equipment, utility expense, etc.). 

The second type is non-manufacturing costs. They exist outside of production but are also vital for any manufacturing business. They are divided into two groups:

  • selling expenses (every cost that is required to sell their products: advertising, salaries, and commissions for marketing and sales staff, storage, and delivery);
  • general expenses (administrative, accounting, and legal expenses, R&D, etc.).

How to calculate cost savings in manufacturing

So, there is a long list of expenditures manufacturers should plan to cover. But how is it possible to implement cost reduction strategies for the manufacturing industry without any loss in quality or quantity of production? 

There is a traditional approach that has popularly been around for a long time. It is quite simple: strategizing about pricing policies arose after the concept of the product was created. The engineers have been taking into account numerous aspects, like design, customer experience, etc., but not the cost. In this position, it is hard to make significant cost cuts. 

However, the industry has come up with several other techniques that help make cost reduction in manufacturing realistic.  

Cost Reduction Manufacturing

We will talk in more detail about the most efficient one — design-to-cost.

In the design-to-cost approach, the cost is considered to be an important aspect of the design process, along with reliability, functionality, and appearance. Around 70% of the future cost of product manufacturing is determined at this stage before the product even gets to the assembly lines. With a thorough analysis of material options, shipping, packaging, manufacturing details, engineers can create customer-friendly, but cost-optimized products easily. 

To ensure your efforts in cost optimization aren’t in vain, we suggest implementing appropriate software that can predict how changes will reflect on total cost and profit. Our experts on business intelligence applications can run a discovery stage and tailor a software piece accurately for your business needs and requirements. 

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Contact our specialists for a consultation.

Our team will walk you through the main aspects of software development for manufacturing.

Cost-saving ideas in manufacturing

Apart from changing your approach to creating products, you can come up with dozens of ideas on how to reduce costs in your manufacturing business: audit your facilities, cut the surplus, change the suppliers… The GBKSOFT team collected the best strategies to optimize your spending through software implementation and IT-related technologies. 

cost reduction strategies for manufacturing industry

Implement Production Automation

Advanced automation is a new word in the manufacturing field. Thanks to cutting-edge technologies like IoT, artificial intelligence, and smart robotics, a lot of routine tasks can be handled without human involvement. That’s where a smart factory comes in handy, where machine-to-machine communication is a key to higher efficiency.

In addition, a high level of automation helps to cut costs significantly thanks to the next points.

  • Lower labor cost: truth be told, machines are becoming a good replacement for workers: they don’t require wages and social benefits, they can work constantly without shift schedules, time off like recesses, or vacations and usually, the likelihood of mistakes or defects are significantly lower with the machines than with humans. Though the idea of machines totally replacing humans sounds like an episode from a dystopian movie, the situation isn’t so critical as employees get to refocus their attention on more crucial, strategic tasks and improve their qualifications, or work alongside robots.
  • Increased safety: robots and machines can be assigned to work on dangerous tasks and hazardous zones, so no human would be subjected to safety threats. Smart sensors can also detect when employees enter dangerous facilities and notify them about the need for increased attention. Hence, the factory can reduce the number of accidents and work-related injuries, which in turn decreases the downtime of manufacturing and compensation for industrial injuries.
  • Decreased waste: humans are prone to errors, and every error leads to the waste of raw materials. Interconnectivity and seamless data exchange provided by the power of the Industrial Internet of Things accurately streamline machine operations. Respectively, errors become a very rare occurrence, and the company doesn’t need to cover any waste costs — all materials are efficiently used for their intended purpose.
  • Improved turnaround time: with automation, the production cycle will definitely take less time than with traditional approaches. And the benefit here is quite simple: less time to produce the product — more product can be produced in a given amount of time, e.g. a day. A higher volume of production gives an opportunity to increase sales.

Resort to Production and Resource Usage Monitoring

IIoT and its smart sensors bring additional monitoring capacities to manufacturers. You have the ability to get real-time, accurate data on your manufacturing and supply chain efficiency, resource usage, etc. And then it’s a matter of cleansing, sorting the data and processing it: with the right tools like artificial intelligence or ERP system, you can detect the “bottlenecks” that are wasting your resources and optimize them. Here are some examples you may want to pay attention to:

  • digital twins: this concept presumes the creation of a digital copy of existing equipment, machines, or trucks. These items may be difficult to disassemble regularly, especially if they are constantly in use. IoT sensors collect data on the state of the item based on different parameters, and then further transfer the information to the interfaces that create a digital twin. Later, managers and supervisors can monitor and keep tabs on the efficiency and usage of every piece of equipment remotely;
  • realistic measurement of Overall Equipment Effectiveness (OEE): OEE is a common standard for manufacturers to evaluate how much time something is really fully productively employed for their manufacturing business. Three major indicators are taken into account: availability (shows how long the real run time is and whether there are any unplanned production halts); performance (shows how much time production runs on maximum capacity); quality (shows how much time was lost on the production of defective parts). Implementing OEE can help drastically increase the productivity of the factory, but trustworthy data generation is a must, and IoT sensors can come in handy here as well;
  • utility consumption monitoring: electricity, water, gas, etc. can take up a significant part of your budget. Misuse of these utilities leads to waste, and therefore, to irrational spending of money. IoT and smart automated systems can manage your consumption relying on the state of facilities. For example, air conditioning and temperature may be adjusted automatically, as well as usage of water and electricity. Apart from reining in your costs, you will also be doing a great favor to planet Earth by preserving invaluable resources.
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Want to know more about IoT potential? Check the prediction for the top trend of IoT in manufacturing for the next year.

Use Inventory Management Software

Inventory management is an efficient practice that structures the stock storage for clients’ demand and internal use. Basically, inventory storage helps you to keep your inventory levels on the necessary level to satisfy clients’ needs and avoid it going stale, in other words, avoid the excess stock or, on the contrary, stockouts, all of which lead to significant losses.  

Using inventory management software will produce enough data for you to plan ahead on your inventory production, storage, and shipments. Most excessive costs caused by human errors, inaccurate prediction, or miscalculation will decrease if not disappear. 

Such a system digitalizes and automates this process and usually includes the following features:

  • inventory tracking;
  • inventory value assessment;
  • low stock alerts;
  • purchase management;
  • supplier management;
  • inventory reporting.

The inventory management system may be reinforced by other functionalities, for example, with advanced analytics your company will be able to predict the seasonal surges of demand and make appropriate adjustments. GBKSOFT specializes in custom software development, and our business analytics and tech lead are ready to create an application tailored to your business needs and requirements.

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Apply Predictive Maintenance

Predictive maintenance is a certain path to cutting costs and losses. Powered by IoT, predictive analytics, artificial intelligence, smart systems may monitor the state of equipment and notify the stakeholder when maintenance is required. But why is this so important?

Traditionally, the approach to maintenance has been different: usually, repairs only started when something was definitely broken. It led to machine downtime and interruptions in production streams, as well as costly and expensive repair processes.   

Predictive maintenance changes this flow: instead of waiting for machines to break down and react then, manufacturers take a proactive position, get updates on the state of equipment, and run maintenance to prevent the breakdown from taking place. 

First of all, this strategy reduces downtime, hence minimizing the losses connected to the pauses in manufacturing. Second of all, this system’s preventative measures are also more efficient from a cost standpoint than the alternative method of waiting until something fully breaks down and only then repairing it.

Optimize IT-related costs

IT plays a crucial role for modern manufacturing businesses, and maintaining an up-to-date IT environment is a paramount task for the health and well-being of your business. It is impossible to stop using digital technologies, however, you can take the maximum value from your investments and focus on the most important aspects.

Some major actions you can take to optimize IT-related cost outlays include:

  • move your IT infrastructure to the cloud services;
  • implement unified IT policies among all your companies/subsidiaries/department/teams to make it uniform;
  • implement cybersecurity measures and prevent cyberattacks;
  • consider using the practices of DevOps;
  • virtualize your databases.

Partner up with a Reliable IT Outsourcing Company

Resorting to an outsourcing partner will save you a decent amount of money. According to Deloitte’s 2020 global outsourcing survey, 70% of businesses name cost reduction as a key reason they choose to outsource.

There are several benefits of having an outsourced partner instead of keeping an in-house team:

  • optimized labor compensation: outsourcing companies offer different payment structures and plans: dedicated team, time & material, or fixed price. However, all of them cover only the development services. While gathering an in-house team requires more spending as they will be on your full-time payroll meaning: wages and social benefits, workplace arrangement cost, supply costs, etc.;
  • deeper and wider expertise for lower cost: through outsourcing, you may access highly qualified professionals that you need easily; moreover, you can involve not only developers with a higher level of skills (for example, seniors to back up your middles) but also to expand your expertise horizontally and work with experts in specific technologies like artificial intelligence and data science. Going out to hire staff in a conventional way will be far more costly for the company in such a case;
  • less time needed for hiring: outsourcing companies usually are ready to start cooperation quickly, often delving into complex projects within a few weeks after establishing initial contact and rapport with the client. As you can guess, finding the right person to fit right into your team or even assembling the aforesaid team may take months, dozens of interviews, and meetings. With outsourcing, this time may be filled with productive development which will speed up your time-to-market.

GBKSOFT can provide you with outsourcing and outstaffing services. Our team of mobile and web developers, architects, UI/UX designers, QA engineers, business analysts, and project managers approach every project with maximum attention, agile methods, and a customer-oriented attitude. 

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Let’s improve your manufacturing costs.

Our experts will help you determine the best strategy for these tasks.

In Conclusion

Reducing costs is no easy task, but it is quite possible to reach your goals and optimize spending without any dropoff in production quality, quantity, or speed.  New technological solutions and software pieces can help through automation and real-time monitoring. 

GBKSOFT is ready to contribute to your optimization plan and provide you with the necessary software development services. 

Manufacturing has two main types of costs: manufacturing (direct materials, direct labor, and overhead) and non-manufacturing (selling expenses, and general expenses).
There are a lot of means, like rethinking the process of product design. Implementing the concept of a smart factory usually also reduces costs by extension, as the technologies that power smart manufacturing improve efficiency and accuracy, hence decreasing financial losses.
Industrial Internet of Things, artificial intelligence, big data, advanced analytics is usually required to implement automation and predictive approaches to manufacturing, which, in turn, help cut spending.

Creator

I believe that the tech sphere is one of the most important markets nowadays, therefore I like to dig into new trends and explain their main point in simple words. My interests include how new technologies improve our everyday life, including education, traveling, communication, and workflow.
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