Do the Impossible: Minimize Manufacturing Cost and Improve Quality
By: Scott Jessup
The Holy Grail of any manufacturing operation is to minimize manufacturing cost and improve product quality. While to some that might sound impossible, it can be done with proper planning and forecasting, effective negotiating, and working closely with vendors to control costs. Let’s first take a look at the role that planning and forecasting play in controlling the three basic manufacturing costs: materials labor, and overhead.
Materials are the parts, components, and systems that go into making a finished product. For manufacturers operating with Lean or Just-in-Time (JIT) strategies, it is vital to accurately forecast needs and plan purchases and deliveries so that the right materials and quantities can be available at the right time to meet various process requirements. If materials aren’t in inventory when they’re needed, last-minute purchases and delayed production schedules can quickly drive up costs. Accurate forecasting and having flexible, responsive supply chain agreements in place can go a long way toward mitigating materials problems and controlling costs.
Labor costs play a significant role in any manufacturing operation, especially those that utilize a highly-skilled workforce. By employing realistic and efficient scheduling techniques, unnecessary overtime can be avoided and labor costs kept to a minimum.
Overhead includes all indirect costs associated with manufacturing, including building costs, equipment depreciation and maintenance, utilities, and quality control, among others. Once again, proper forecasting and disciplined budget control can substantially impact general cost containment.
One major area where quality and cost collide is scrap-and-rework. Poor manufacturing processes and quality control results in higher scrap rates, which require more labor to produce additional finished products to fulfill the order. Having a solid quality assurance program that includes an effective quality management system and documentation procedures will significantly help reduce scrap-and-rework.
Key to controlling all of these costs is analytics. Utilizing a best-practices ERP system with efficient data management and sophisticated analytics will enable you to conduct root cause investigations that can help identify and fix weak spots and bottlenecks in the system. By creating greater efficiencies and optimizing overall performance, unnecessary costs can be driven out and quality improved.
The role of contract negotiations in minimizing manufacturing cost and improving quality
The devil is in the details, as the saying goes, so it’s vital to look at every element of a contract and negotiate the best possible terms to minimize costs. For example, transportation can be a significant cost factor, so look closely at freight terms. In a global supply chain arrangement, freight, along with insurance, duties, and other costs can greatly impact overall material costs.
Contract negotiations can also affect quality. The level of expectations spelled out in contracts can have a direct effect on quality and costs. For example, product characteristics can be a double-edged sword. Poorly-defined product characteristics can lead to more time (and money) spent on design, prototyping, and approval. At the same time, highly-defined product characteristics increase the risk of rejections, scrap and rework.
In addition, customers may require specific certifications, testing, analysis reports, and/or production part approval processes (PPAPs), to name a few. All of these take additional time and money, so if they weren’t clearly defined in the contract and you’re then put in a position where you have to do these, you’ve just lost some or all of your profit.
Whether the contracts are with customers or vendors, the key to minimize manufacturing cost and improve quality is positive relationships. The best customers and suppliers are more like partners – everyone benefits from working closely together, openly communicating, sharing data, and holding each other accountable for the good and the bad. Understanding and working well with your supply chain and customer base is crucial for controlling costs and improving product quality.
Minimize manufacturing cost and improve quality through business/operational process improvement
Optimizing the processes that affect manufacturing has a direct impact on minimizing manufacturing cost and improving quality. This involves creating a corporate culture built around a desire to pursue and eliminate waste in all its forms.
Most often overlooked are front office activities – after all, how can they possibly impact manufacturing on the plant floor? The truth is, they do. How products are designed and produced affects material and labor costs. Order entry and contract review are other key activities that, may not directly affecting quality, can affect cost. Inefficient purchase order processing and entry can eat into production time availability and cause an unnecessary and expensive rush to fulfill orders.
Optimizing processes through continuous improvement through strategies and methodologies such as Total Quality Management (TQM), Lean, JIT, and Six Sigma plays a significant role in minimizing costs and improving quality. But it’s important to understand the difference between improving a production model and a process model. It’s often easier to tweak what’s needed to produce a finished good (production model) by adding more equipment or labor. While that will certainly help with costs and quality, a far greater impact can be achieved by improving the process – how something is made. That takes a little more analysis and hard work, but the pay off in the end can be substantial.