The manufacturing world is in the midst of its worst downturn in 75 years. Some of the uncontrollable forces confronting assembly lines today include historically low consumer demand, rising raw material costs and credit restrictions. Although most of the news media has focused on the beleaguered auto industry, manufacturers in many other sectors are struggling to survive in these wicked conditions.
They’re trying all sorts of strategies to cut costs and prop up revenues. Unfortunately, laying off workers is often the first thing that manufacturers do. The list of companies following this tactic reads like a who’s who of the production world, ranging from Boeing to Whirlpool. Other blue-chip companies, such as Caterpillar, plan to temporarily idle their assembly lines to balance production flow with demand. Some other companies, such as Pella Corp., a leading manufacturer of doors and windows that’s based in Iowa, have resorted to four-day workweeks.
However, companies can achieve major cost savings beyond the traditional budget cuts and salary freezes if they rethink and redesign their global manufacturing operations for optimal performance. According to a new study conducted by the Boston Consulting Group Inc. (BCG, Boston), this approach can unlock a huge amount of hidden value. But, it’s often overlooked as a cost-cutting measure.
“Too often, companies rely on benchmarking to drive their redesign decisions,” notes Michael Zinser, a partner in BCG’s Chicago office. “But, comparing the performance of different plants against industry- or company-wide standards and identifying best practices are useless exercises unless the reasons for cost differences are fully understood. Even subtle differences in business makeup or strategy can lead to erroneous benchmarks that result in suboptimal decisions.”
Zinser says manufacturers have numerous cost factors to consider, such as location, product mix, plant capabilities and supply chain design. As a result, many assumptions about cost savings are often wrong. He claims that a detailed analysis of hidden cost "drivers" can cut through the complexity and deliver straight answers for making redesign decisions.
According to Zinser, when the same product costs more to make at one plant than at another, the difference can be explained by the underlying cost drivers. Three things typically drive costs at assembly plants:
- Scale-the effect of volume on cost per unit made.
- Efficiency-the effect of productivity, utilization and complexity.
- Factor Costs-input costs such as labor; operating costs such as electricity; and logistics costs such as shipping.
“When costs and cost drivers are truly transparent, the insights gained can be surprising and, if acted on, can improve a company's overall competitive position,” adds Andreas Maurer, coauthor of “The Power of Cost Transparency: Finding Hidden Value in Manufacturing Networks.” “By optimizing their manufacturing networks, companies can often realize cost savings of 10 percent to 15 percent.”
By going beyond a simple cost analysis and understanding true cost drivers, manufacturers can avoid making an expensive-and potentially fatal-mistake in today’s difficult economy. According to the BCG report, an optimized production network will help companies reduce their total manufacturing costs while improving resource utilization, asset productivity and output. Manufacturers that are willing to make those changes now will emerge stronger, and will be better positioning for quick growth, once business conditions start to improve.