COST REDUCTION AS AN ENGINE FOR GROWTH IN MANUFACTURING

When business growth is spoken about, the first thing that generally comes to mind is the top line i.e. "what can be done to increase sales?" Cost saving is seen as sacrifice, something painful and described using terms like “belt tightening”. 

In the case of fixed costs such as salaries and wages, this can be true to an extent, though it could be argued that a given budget can be used in a variety of ways, and that many organisations just have not deployed available resources optimally. In the case of manufacturing businesses however, cost reduction has a very different flavour due to the fact that variable costs tend to dominate.  

Variable costs are costs such as raw materials, energy, water, waste management and other costs that depend on the level of production. In simple terms, the way to reduce variable costs is to minimise the price paid for every resource (while maintaining quality levels) and to minimise the quantity of resource consumed per unit of production. There are a range of ways that these costs can be reduced:

1. More favourable tariffs or pricing can be accessed by engaging with utilities and suppliers of materials.
2. Operating procedures can be changed such that waste is reduced e.g. measurement frequencies can be increased to ensure that plant operators have more control over a process. An example would be to measure the thickness of a coating mixture to ensure that it never exceeds specifications, thereby saving valuable paint.
3. A plant setup can be changed to make a process work more efficiently e.g. an air damper valve on a burner can be manually adjusted to reduce excess air levels and boost efficiency, thereby reducing fuel consumption.
4. Process setpoints can be changed to minimise resource consumption e.g. the operating pressure of a compressed air system can be reduced to reduce compressor energy consumption and artificial air use.
5. Minor plant modifications can be undertaken to increase productivity e.g. vessel cleaning can be carried out using sprayballs and a circulation pump instead of manually, reducing water use, energy use (in the case of hot water) and turnaround time.
6. Technology changes can be instituted to unlock efficiency e.g. an unevenly loaded fixed-speed screw compressor with a low overall load can be replaced with a VSD compressor, thereby saving electrical energy.

In some cases investment is needed, and of course we need to consider the returns delivered on those investments before making them. In my experience, solutions with very good paybacks, often < 1 year, are generally possible for resource efficiency projects. I often see even large investment projects with paybacks of < 3 years. In many cases however significant savings are possible at no cost or at very low cost relative to the savings realised. In many cases there are benefits over and above the primary resource savings – for example a fuel pump that has to deliver less fuel under pressure tends to last longer, and consumes less electrical energy itself. The point I want to make is that variable cost reduction is often painless.

Then there is what I consider to be the real magic of variable cost reduction. Unlike fixed cost savings, which require time to accumulate, are constant (except for inflation) and as mentioned, can come with associated sacrifices, variable cost savings multiply with production. As your business grows, so do the savings. And the real beauty here is that there is no additional effort needed to realise the increased savings. When you reduce staffing levels to save costs, those left behind face increased strain. If production volumes grow, that strain increases even further. This is not the case with variable costs. If I change a process setpoint to increase the raw material yield of a manufacturing process, this change delivers benefits regardless of the level of production, with no further effort required on my part. Those savings continue to accumulate with each unit of production, and all I need to do is to monitor process performance to confirm that the benefit is being delivered. What should you do with the savings? My advice would be to reinvest them in further resource efficiency projects, multiplying the benefits and improving your asset base. You could also use the savings to reduce prices and gain market share. The increased volumes resulting from this approach would in turn lead to yet more variable cost savings. The cumulative impacts of such a strategy can be enormous.  

Let’s get back to the role of cost reduction in growth for manufacturing businesses. Let’s be clear, we cannot “save” ourselves into a state of abundance, most businesses fail due to a lack of sales. A business that operates with low variable costs is however more resilient in hard times and also more profitable in good times due to the multiplier effect of low unit costs and high sales.

Copyright © VWG Consulting, 2017, all rights reserved