Companies of all sizes have an incentive for cost reduction to remain competitive and to increase profits. For companies that offer goods for sale, production costs are a major factor in pricing and overall performance. Approaching the initial reduction of production costs in a structured way and putting in place a system that continuously watches for additional savings are effective ways of achieving reductions and keeping costs down. Such a system identifies the drivers of high production costs and develops strategies to deal with them.
One of the main costs of production is the cost of the components that make up the finished product. Reducing these costs even slightly on a percentage basis can have a substantial impact on the cost of production. Sometimes companies can reduce component costs by buying in bulk or substituting less expensive components that satisfy the requirements. Sometimes a design will allow for fewer fasteners or less material without affecting quality. A review of such possibilities often results in a decrease in production costs.
If the supplier of components is not willing to consider price reductions and can't offer less expensive alternatives, a company can explore sourcing from different suppliers. It can send the component requirements to various possible suppliers and select those that offer the best value in terms of meeting the specifications and low pricing. Sourcing from two or three suppliers keeps prices low due to competition.
An effective strategy for reducing production costs is to redesign the product. Companies have to identify the key characteristics of the product that are responsible for its success in the marketplace. Other features may be costly but add little value for customers. Companies can change the design of the product to reduce costs by eliminating unimportant features while retaining the characteristics that customers value.
A company evaluating its production costs may find that employees are not working efficiently or lack the awareness of costs that would allow them to help with reductions. Training employees to understand how the production cycle works and their role in cost reduction makes them part of the solution. When a company trains its employees to be aware of how to reduce costs and informs them of progress, production workers become partners in cost reduction.
Optimize With Technology
Technology allows cost reduction in two ways. It allows automation of certain production processes, resulting in greater consistency and reduced costs, and companies can use it to analyze their production work flow. Many companies already use a high degree of automation but have considerable scope for work flow optimization. Software analyzes the production processes and identifies waiting times and their causes. It shows where material and components are not available when needed and allows companies to streamline production, increasing efficiency and reducing costs.
- Kim Steele/Photodisc/Getty Images