3 MIN. READ
To reduce manufacturing costs, businesses must understand and control both direct and indirect cash outflows. Direct costs connect to a specific product. Indirect costs apply to running and maintaining an entire operation. Manufacturers can find savings in both categories.
Direct Costs
Materials comprise a considerable portion of direct costs. This includes raw materials, tooling, chips and other parts. Labor working on a particular product can also be a direct cost. These expenses can vary in response to kinks in the supply chain and unemployment rates.
Indirect Costs
Indirect costs cover everything from cleaning the shop to keeping the computers online and the lights on. They may include:
● Utilities.
● Office equipment.
● Office supplies.
● Phones.
● Insurance.
The video explains how indirect costs make up 20-45% of operating budgets. This wide range of opportunities allows companies to cut budgets by 6-22%. However, direct costs are still a major portion of required outlays.
Cutting Direct Costs
A business must track expenses to decrease them. By understanding the exact costs of raw materials and how they fluctuate, buyers can compare suppliers to find the best deal. Since the pandemic, labor costs have experienced many ups and downs. Managers can try to hire when the market loosens. Utilizing automation may also lower labor costs.
Cutting Indirect Costs
Companies can’t avoid ordering supplies they actually need. However, many facilities are either overprovisioned or underprovisioned. Keeping careful records of actual requirements will prevent buying more than necessary or paying rush upcharges.
Market rates for many services change over time, causing many companies to pay more than necessary. Attention to new deals available, such as unlimited data plans, can lower expenses.
Pinched for time and personnel, accounting departments can be slow in detecting billing errors or miss them entirely. This is especially true with a high volume of suppliers. Paying extra attention to billing can yield a substantive return.
Excessive software licenses can also be a drain on company resources. Licenses can also linger after the employees who use them depart. Instead of paying for a raft of individual licenses, many of them can be shared.
Telecom technology changes constantly. Finding the most efficient systems and eliminating payments for unused equipment and connections helps trim costs.
As companies expand or pull in their belts, waste disposal needs can change. Facilities can often cut back on unneeded pickups and services.
Businesses should review their insurance. Insurance rates change from year to year. Rather than allowing policies to auto-renew, companies can survey the market for the best deal.
Energy can represent a large portion of business overhead, particularly in manufacturing facilities. Finding the lowest rates and using alternative energy sources can result in appreciable savings. Staying abreast of government programs to support cleaner energy usage can also pay off.
As fuel costs rise, shipping and logistics fees rise as well. Small to medium-sized businesses pay approximately 13% more than necessary. A business can fight back by negotiating for volume discounts when possible. Minimizing packaging materials and the size of packages can also lower shipping charges. In some cases, shipping charges can be both direct and indirect costs. Other expenses may also apply in both categories.
Saving Across the Board
Businesses are cutting both direct and indirect expenses by reshoring and nearshoring. Reshoring began to attract interest in 2009, but as IndustryNet noted, it experienced considerable growth because of restrictions on imports from China due to tariffs and Covid-19. However, as recently as 2020, offshoring also grew. Due to artificial intelligence (AI) and the Internet of Things (IoT), reshoring is gaining momentum.
Reshoring and nearshoring not only cut shipping charges but also facilitate better quality control through better access to manufacturing sites. Reshoring also enables manufacturers to attract trained American workers, centralize operations and exploit smart technology.
Finding U.S. Suppliers
IndustryNet maintains an up-to-date database of over 400,000 industrial companies. Manufacturers can find the American suppliers they need by capabilities, location and certifications. Search here to quickly and reliably find the products and services to keep bottom lines in the black.
Explore This Topic Further
Want to delve deeper into the topic of saving your company's . See expert Adam Baker's free course on MNI University on Reducing Indirect Costs in Your Manufacturing Facility below. In this session, Adam will give an overview of areas he often finds overlooked in manufacturing that can lead to large cost savings for the organization.
