Reducing Factory Overhead And Plump Up the Bottom Line

In essence, factory overhead is all those costs necessary to keep the doors open whether you are producing anything or not that day. They include things like taxes, electricity, and front office staff. In other words, it is everything else, not including actual production.

Production costs are much more of a given and have something of a tendency to be inflexible. Factory overhead is an area with more elasticity. When calculated as a percentage of the cost of production of each item, overhead has more capacity to vary than the direct manufacturing costs do.Thus, finding ways to cut these costs is an excellent means to plump up your bottom line and make your company more profitable. Here are some things to look at to try to cut your factory overhead cost in a smart way and not one you will live to regret:

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It may turn up frivolous expenses, bad practices that can be eliminated or other places where you can quickly improve comfort while cutting costs. It may find areas where you can do things like improve building insulation cheaply and promptly or install better light bulbs that put out more light for less money. Both of these moves may be able to rapidly pay for themselves and quickly lead to additional and ongoing savings for years to come.

Or maybe you are holding on to old machinery because you don’t think you can afford to upgrade. An energy audit may reveal that your old machinery is so energy inefficient that replacing it with new equipment would quickly pay for itself and can be a hidden opportunity to modernize your facilities while cutting factory overhead.

In some industries, the cost of energy can be the difference between profitable and running the company at a loss. New energy saving technology is coming out all the time. Cutting energy costs can be one of the smartest ways to improve your bottom line almost painlessly.

Reduce Inventory Costs

When you have products sitting idle on a shelf somewhere, they cost you money while potentially ending up damaged to boot. If you can find ways to reduce time spent in inventory, you reduce factory overhead in a way that is typically all upside, no downside.

One way to do this is to pursue a build to order business model. You do not build anything until someone orders it. This means you do not have a warehouse full of goods waiting for someone to buy them — possibly waiting forever if no one decides to buy.

Another aspect of inventory costs that can be reduced is from the supply side. Instead of having large quantities of parts and materials sitting around waiting to be used, you can implement a just-in-time ordering system.

Getting parts and materials delivered as you need them or only very shortly before you need them can also reduce inventory costs. It can also help to reduce losses by limiting opportunities for spoilage. Having stuff sitting around can leave it vulnerable to pest infestations, rust, and general deterioration. So not having a backlog of inventory can help eliminate those expenses.

Additionally, having parts and materials sitting around can inhibit the desire to modernize the facility or other updating of processes. It can make you reluctant to change how things are done because you don’t want to only throw out those parts and materials and eat the cost. Just-in-time ordering can help your factory become a leaner, more agile operation.

Reduce Waste To Cut Your Factory Overhead

Case studies have found that businesses that spend a lot of money on hauling out the trash are throwing away money in the process. The motto “Reduce, reuse and recycle” is not just good for the environment. It is also good for the bottom line, meaning it is a good business practice.

It may require a comprehensive review of manufacturing processes to pinpoint places where waste is occurring. It sometimes makes sense to hire a consultant who does this kind of work. Reducing these costs involves a change in practices that tends to pay dividends for many years to come.

Sit down and look at your monthly trash bill. Multiply that by twelve to get your annual cost. If you can cut that in half, that will give you some idea of how much you can afford to spend on a consultant and have it soon be paying for itself.

For example, if you are paying the trash company to haul away wood products, such as damaged two by fours, and then paying a landscaping company to put down certain kinds of ground cover, you can potentially reduce both expenses. It may be possible to have the wood chipped and then used as ground cover in place of things like leaf litter.

Increase Production Output

Increasing production is a tricky one because sometimes it involves hidden expenses that make it ultimately not make sense. But if you can increase production in the same factory space without undermining quality or excessively increasing maintenance costs, then your cost per item manufactured can go down.

One way to do this is to add a second shift so the line spends less time idle. The manufacturing equipment tends to have mostly the same overhead costs, whether it gets used 8 hours a day or 16 hours a day. So consider the possibility that this may make sense, financially, but be mindful of potential hidden costs. Doing this well can be trickier than it may seem.

For example, it may increase the need for maintenance downtime on some critical pieces of machinery and may mean the production line will be down more often because maintenance can no longer be done during regular “off duty” hours. Or it may de facto say that you need to buy a second piece of machinery. Depending upon how expensive it is, this just may not make sense — at least not yet. Such decisions also depend on how much you can sell and some other factors.

Consider Buying Local

Reducing your factory overhead costs can happen through locally sourced materials. Locally sourced materials may take a little effort to locate, but they have lower transportation costs. A hidden cost of buying cheap goods from far away are forgotten by most people. They may also be of more reliable quality.

A hidden benefit is that you are less likely to have your supply chain disrupted by non-local events. Go over your company history. Have you ever had production disrupted because of political events or other events elsewhere in the world interfering with the delivery of critical parts or materials? If you have, how much did it cost you that you can readily quantify? How much may it have cost you regarding customer loyalty or other hidden costs that you can’t easily quantify?

But Do Not Be Penny Wise, Pound Foolish

Yes, you are trying to improve your bottom line, but keep in mind that you want to work smarter and improve the cost-benefit ratio, not just randomly cut costs thoughtlessly. Being too much of a cheapskate or cutting costs in the wrong way can really come back to bite you.

You don’t want to cut corners on materials or processes in a way that will increase defects. This can cost you money in the long run from returned products, lost customer loyalty and even from being sued. So while you are looking for ways to cut expenses, keep in mind that you don’t want to do in a way that undermines your value position or otherwise causes potential harm to the company.

Another good example of this principle is that businesses that pay a little better tend to have lower employee turnover. This can save money on hiring costs, but it also can have additional hidden benefits. Employees who have been there a long time will develop in-depth knowledge of the business and can save your bacon when something goes seriously wrong or when such wisdom is needed for a critical decision.

Keeping an eye on the bottom line does not mean that any savings are good savings. You need to cut costs judiciously and wisely to reduce your factory overhead. Approaching it the right way will improve your cost-benefit ratio instead of cutting your own throat.

Author: Eric Raio

Eric Raio is one of the founders of Factory Solutions. When he isn't plotting new ways to create awesome software. He likes to geek out about flying drones and technology.

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