Effective Ways to Reduce Manufacturing Costs article series

By Ron Ketterling – President

As we have discussed throughout this series, reducing manufacturing costs relies on multiple activities and methods. The last method in our series, total cost measurement, focuses on calculating the total cost savings to encourage and support continual savings.

Implementing total cost measurement begins with the cost driver approach. Cost drivers are the root causes of a cost, or the things that drive the cost. Recognizing the factors behind the costs will provide you with more accurate and relevant information, as well as encourage further efforts to lower or eliminate manufacturing costs.

Identifying the major cost drivers and measuring the costs to those drivers is the key to total cost measurement. A company’s overhead expenses can give significant insight into cost drivers. Even though the drivers may not be directly linked to the overhead costs, the overhead contains costs related to the most important cost drivers.  For costs that are defined as neither direct material nor direct labor, you can start looking at the drivers behind those costs and how they impact the total expenses.

Until the total cost can be quantified, everyone must make decisions with total cost in mind. Linking cost with the behavior and characteristics of products or customers will reveal areas that need cost and investment reduction. Senior management must understand the importance of quantifying total cost, implementing total cost measurements and encouraging every cost decision to be made on the basis of total cost. This will not only reduce manufacturing costs; it will transform your company. Calculate total cost with ease. Download Business Automation Specialists of Minnesota’s guide on “How to Choose a Manufacturing System” to see if your current system will be a help or a hindrance to reducing your manufacturing costs.