Intelligent Manufacturing € July € 1995 € Vol. 1 € No. 7
Intelligent Manufacturing € July € 1995 € Vol. 1
€ No. 7
Those who learn to control costs will dominate both politics and
business by the year 2000.
Every dollar of reduced costs adds a dollar to the bottom line. Every
dollar of increased sales revenue adds about 10 cents to the bottom
line.
If you compare the benefits of cost control to the benefits of
revenue increases, you will find that cost control contributes 10
times as much to profits. The reason that American manufacturing
has historically chosen to prioritize increases in revenue - instead
of cost controls - is that it has been easier to increase revenues
than it has been to control costs. "Has been easier..."
The "has been" times were the decades of the 1950s, '60s and '70s.
World markets were exploding with pent-up demand. The U.S. was the
uncontested leader of the world in producing consumer goods. Sales
increases were easy. Covering cost increases by increasing prices
became the order of two generations of managers.
Today, in 1995, thousands of competent, cost-effective manufacturers
have sprung up all over the world. They are competing with American
manufacturers for every sale. Sales increases are increasingly more
difficult to attain. Many companies are discovering that sales are
flat - even decreasing.
When sales revenues are flat, the only option for increasing
profits is to control costs. (Even if sales are increasing, cost
control delivers spectacular results.) Now is the time to master the
concept of Total Cost Control. The full span of total cost
control would require a book. For this article, let's take an
overview look at the basics.
What Is Total Cost Control?
Total cost control is a philosophy, a structure and a set of systems
that set as a common priority the control of the causes of
business costs. A philosophy that prioritizes cost control above
other business issues. A structure that encourages cost
accountability and control. Systems that facilitate accurate and
prompt cost reporting.
Why Implement Total Cost Control?
What Are the Indicators of Inadequate Cost Control?
You should be able to answer "yes" to the following questions. Every
"no" answer indicates inadequate control over costs:
One common indicator of inadequate cost control is the occasional
surprise on the financial statement: The month when profits are down
unexpectedly. Managers should know in advance if a month is destined
to be a loser.
Another red flag is the decision to subcontract a component because a
supplier can make the item at a lower cost than your in-house cost.
If it is really true that a supplier can custom make a component of
your product, mark it up 40%, ship it to you and still sell it to you
at a lower cost than your own... then your costs are out of
control.
What Are the Benefits?
Use a small manufacturer as an example: Sales are $10 million.
Profits are $1 million - a 10% margin. Costs are $9 million. A
reasonable total cost control effort will easily reduce costs by 10%
- that's $900,000 that goes directly to the bottom line. Profits go
from $1 million to $1.9 million - a percentage increase of
90%.
You might wonder if a 10% reduction in costs is genuinely easy. It
is. The only exception would be a company that already has excellent
cost control. However, you do have to know how to get cost control
under way.
How Do I Start?
The first cost driver to address is product design. When a design is
released to manufacturing, 80% of the life cycle costs of the product
are locked in forever. Post-introduction engineering changes are
costly: Inventory is obsoleted, tooling is modified or replaced,
workers are retrained. The list of costs goes on. Products that are
on the design table today should be designed to keep costs under
control. You want a low parts count. Ease of assembly. Processes that
are easy to control. New products should be designed to "fit" the
capabilities of your equipment, your tooling and the expertise of
your people. Excellent designs will provide superb cost reductions
that contribute to the bottom line for the full life of the
product.
More immediate results can be enjoyed by developing
product-by-product costing. Allocate costs work center-by-work
center. Some work centers cost more to operate than others. A CNC
laser requires heavy doses of supplies and technical support. The
costs of CNC laser operations should be attributed only to the
products or parts that require laser operations. Most manufacturers
have one or more products that cost far more than standard costing
techniques reveal. Product-by-product, work center-by-work center
costing will almost always result in some product being dropped from
the lineup or dramatically repriced. You will be surprised by some of
the costs of fabricated components. Expect to reverse some of your
make/buy decisions.
Remember that your benefits will not come quickly. Nor will you be
rewarded with grand-scale results from one or two decisions. Total
cost control requires a continual effort over the thousands of little
costs that add up to big costs.
Total cost control is the wave of the future. Those who begin today
will be the dominant players five years from now.
Paul Peyton is president of DynaTech Industries (Colville, Wash.),
a manufacturer of pellet stoves. He can be reached at (509)
732-4066.