Why You Need a Production Cost Management Plan
by: Jamie Bzdok
A modern discrete manufacturing facility utilizes a highly-complex, integrated infrastructure of processes and equipment often developed using one of the several proven efficient-manufacturing strategies such as Just-in-Time (JIT), Six Sigma, Lean and Total Quality management (TQM).
All of these processes require efficient managing of the wide variety of material and human resources needed to manufacture a certain amount of finished products in a given period of time. To do this successfully requires a proper production cost management plan designed to minimize expense and maximize profitability through the careful managing of all manufacturing process costs.
Effective production cost management involves managing several key elements:
Resources: This includes all material and human resources necessary for production – manufacturing operations personnel, equipment, as well as the raw materials and other components that go into the finished product.
For production and scheduling purposes, these costs really equate to time – the amount of time required for workers and the equipment they need to produce the specific quantities of finished goods in the time period agreed to with the customer.
A good ERP platform is an ideal tool for helping effectively manage resources as they relate to production planning and scheduling. It can alert managers that production is over capacity and additional resources, such as more equipment, workers, or time (e.g., overtime) need to be scheduled. In fact, if capacity is not properly defined and established at the outset, accurate planning, scheduling, and resource management are virtually impossible. Nothing drives up production costs faster than to constantly schedule overtime to meet production schedules because capacity requirements were not properly accounted for.
Material Planning: Also known as material requirements planning, this process is so closely linked to capacity requirement planning that the two processes have been gradually integrated into a closed loop system commonly called manufacturing resource planning (MRP). MRP is an integral component of best-practices ERP.
Once capacity has been determined, it’s important to plan to have the right raw materials in the right amounts available at the right times for production. Accurate material planning enables material deliveries to be precisely timed to meet production needs as they occur. Inaccurate material planning can quickly drive up production costs if too much or too little has been purchased or is not available at the right time, delaying production and further driving up cost. To streamline manufacturing and control costs, material planning and production scheduling must go hand-in-hand.
Finance: To manufacture products profitably, it’s crucial for an organization to understand all of the costs associated with production. Only with a complete understanding of production costs can effective financial decision-making take place to determine if a product should continue to be manufactured and if new product lines, equipment, and capabilities are required. Without this kind of knowledge, decisions are made based on assumptions and guesswork, not facts. Once again, an ERP software can help companies track actual production costs and analyze them. However, to do that accurately, it’s vital to ensure that all costs are kept up to date in the database. Analysis and decision-making are only as good as the data going into them.
Clearly manufacturing has come a long way since the introduction of mechanized, and more recently automated, production. With so many processes, elements, and cost centers involved in modern manufacturing, it’s absolutely essential that careful production cost management is used to maximize profitability. Without it, business growth and success will be limited.