Reduce Manufacturing Overhead Cost

Material and labor costs may not be where all your money is going.

Here's a simple visual: If you've got an empty bushel, a tree full of fruit, an order to fill the bushel, and a limited amount of time, where are you going to start? Before grabbing your ladder and climbing to the top, most pickers are going to reach for the bottom branches first. For the least amount of effort they'll get the most significant gains the fastest and easiest way possible.

What's important to take away from the example is that any change process has its own" low hanging fruit". In an effort to cut the high expenses that come with inventory storage, oceanic shipping, and manufacturing overhead cost, many companies are looking for ways to change to lean production. It can seem like a daunting task. A little confidence building is often found by filling the bucket with some high-leverage morale boosters, i.e. finding the "low hanging fruit".  This is done with activity-based costing, or the ABC approach.

How to use the ABC approach to find your "low hanging fruit":

Cost drivers are the elements that "cause" cost to occur: material, labor, and overhead. By breaking these down, a company can identify the areas that can be lowered or even eliminated. Anyone who has followed the wildly fluctuating cost of steel these days well understands that material costs may not always be something easily controlled. Labor costs are somewhat fixed. That leaves the unwieldy category of "overhead" that offers the most leeway.
Overhead can include a wide range of activities that contribute to cost:
  • Engineering Change Orders
  • Purchasing, receiving, testing, and storing raw materials and purchased components/materials
  • Quality, scrap, rework, and other non-value-adding activities
  • Moving and storing in-process inventory
  • Setting up or changing over equipment
  • Handling and storage of finished goods, sometimes for very long periods
  • Packing, shipping, and relabeling
Do you know which of these most significantly influences the cost of your activity? Identifying the largest element is the first step in finding your "low hanging fruit". Keep in mind that all product-costing is approximate; there are too many estimates and fluctuations to be precise. You want to accurately identify the relevance of a cost driver, rather than pursue precision. Many times the actual culprit comes as a revelation as the numbers are often different than believed or perceived. For example, it may not be the rising cost of steel at all that's causing your profit margin to drop but rather, the ongoing expense of inventory storage, separate assembly, and offshore shipping. Knowledge offers the power to reduce manufacturing storage cost or any other area that harms your profit.

A turn-key resource for build-to-order assembly with relabeling reduces overhead manufacturing cost.

Build-to-Order is a strategy to build products on demand without forecasts or inventory. This avoids potentially inaccurate forecasts, expensive inventory storage, and purchasing delays. A domestic source that can offer you build-to-order customization as well as assembly with relabeling and drop shipping availability can significantly reduce manufacturing storage cost as well as several other areas of overhead expense. Domestic sourcing keeps everything on the same continent relieves the uncertainty and uncontrollable expense that comes with offshore shipping, which is for many companies, much of their low-hanging fruit. With a few simple source changes, significant advances in lean production strategy and cost cutting can be achieved. This provides ample motivation to continue into the more difficult, less obvious areas of product line rationalization.

Unique Tool and Manufacturing in the USA is based in Temperance, Michigan and is a domestic source for build-to-order custom part manufacturing and assembly. They are known for innovative development, responsive communication, and quick delivery. If you'd like more information on how to use the ABC approach to reduce manufacturing overhead cost call 1-734-850-1050 or send us a message using the contact form below.
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