Are you looking for ways to reduce manufacturing costs? If yes, you are at the right place!
The best way to do this is to aim for three areas:
- direct labour
- materials
- manufacturing overheads
In this blog, you will get a detailed look at each of these areas and understand the ways in which business owners and managers can go for BOM cost reduction. The suggestions mentioned below do not leave an impact on the output or overall quality; hence, on the whole manufacturing productivity is amplified.
What are Manufacturing Costs?
Manufacturing costs are the addition of expenses of all materials and resources utilised in the process of developing a product. They consist of manufacturing overheads, material costs, and direct labour costs.
Now that you know what manufacturing cost is, let’s dive straight into the topic!
How to Reduce Manufacturing Costs?
Direct labour costs are mainly cover wage spend that is delegated to the manufacturing process consistently. Apart from regular pay, it also takes account of:
- Health insurance
- After-hours pay
- Matching payments to retirement schemes
- Time in lieu
- Travel expenses
- Leave entitlements
- Redundancy payouts
- Profit share contributions
How to Reduce Material Cost?
Planning BOM cost reduction does not just mean cutting down staff expenditure. Businesses should not restrict to this approach alone. Take a look at the four strategies that will help you to trim down materials costs.
• Discuss and Bargain with suppliers
Negotiating costs may not come naturally; it takes time and patience. It is recommended to business owners to think carefully before they approach suppliers. They need to be ensured that they are planning strategically when it comes to discussing and bargaining on costs.
The foremost step in this method is to construct authentic relationships with suppliers. Once you have built a bond, negotiating funds is less bumpy.
• Stock Resources and Supplies When You Need Them
Many small entrepreneurs make the blunder of ordering unnecessary inventory. Surplus hoard reduces the flow of money and your competence to depend on backup resources. Therefore, business managers need to be methodical when it comes to purchasing bulk stock.
The finest way is to use inventory software. It can precisely forecast future demand on the basis of earlier sales, rather than merely making a guess. On the other hand, consider whether a Just-In-Time option is suitable for your business or not. Here, you get stock responsively as you make sales.
• Replace High-priced Materials with Affordable Ones
Do not make the blunder of depending on the same supplies for your goods during the business’ life cycle. As your trade grows, managers need to think about alternative resources that will generate the same or similar end product. However, the resources need to be economically sustainable.
For instance, consider ways in which you can recycle materials into new goods. Or, use alternative materials which are not costly. These small adjustments can radically help you to decrease manufacturing costs.
• Review and Redesign Products or Processes
Sometimes, merchandise and production processes can become incompetent. It is worth frequently reviewing the products and methods to weigh up their value, and how much everything is costing you. Later, you can remodel the produce or tweak changes in the process to make the most of efficiency.
For example, you discover that your expenditure is more on resources than the industry benchmark. Among all your products, you find out that you use pricey packaging materials than the other competitors in the markets. You calculate the packaging material and conclude that the purpose is the same and it does not hold any additional value.
Yet, it is accumulating more to the total material costs. This is where you can exchange the costly packaging substance with a standardised one that is almost used by everyone. You save more than before and invest the money is buying other raw materials for your business.
How to Reduce Overheads?
Reducing manufacturing overhead can be key to BOM cost reduction overall. This is how you are going to do it:
• Review Rent
Rent is something that many business heads tend to overlook. It is a compulsory expenditure, so there is no means to shrink costs in this area. All businesses should be repeatedly reassessing their rent, whether they have numerous warehouses and sites, or only one or two.
Consider whether the rent you are paying for these sites is worth it. Ask yourself if you making enough revenue from your goods in contrast to your letting expenses. If not, you may need to think about renting a smaller site or reducing the number of sites.
• Consider Your Budget for Maintenance
Maintenance costs are very often ignored by business owners. Managers should regularly review maintenance costs to ensure they are not excessive or unnecessary. Consider cutting down the cost if they are not serving any purpose.
• Review Miscellaneous Costs
The final costs to consider in manufacturing businesses are things like, supplies, office supplies, fuel, vehicles, security keys, uniforms, cleaning services other miscellaneous expenses. As with all the costs mentioned above, things like this add up too. And, there may be room for improvement.
Frequently check these minor costs and ensure that you are not spending recklessly, or paying on pointless things. For example, you could make a switch to a different brand of office stationery or coffee. It will not be too much of a change but can considerably impact your overall expenditure.
Conclusion
A BOM serves as the base of a production planning system. The information in it provides the basic numbers and figures for different business methods, including product costing, material provision for construction, manufacturing resource planning, and plant maintenance.
Since this system combines all potential information that goes into building a final product, BOM cost reduction can help you manage the entire unit. It finds extensive use in departments beyond manufacturing, such as design, engineering, sales, plant management and material management.