Factory cost reduction strategies

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Factory - Cost Reduction Strategies

SAVINGS FOR PROFITS

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From www.shumaonline.com

In today’s world when Corporate are struggling for profits

and with fierce competition in the market, cost reductions,

productivity enhancement and lean organizations have

become today’s mantra s for survival.Folllowing are the key

area where you can implement cost reduction methods

with significant results.

1. Raw material procurement:

2. Logistics-Inbound and Outbound:

3. Warehouse and Stores:

4. Manufacturing Process (Production) :

5.Energy, fuel & Water

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6.Information Management

7. Finance

8. Human Resources

8. Sales & marketing


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FEW BASIC IDEAS

PROCUREMENT

IT CAN BE DIVIDED INTO TWO MAJOR GROUP

A. PRODUCT

B. SERVICES

Raw material purchases constitute around 60-65% of the

cost of product; hence any savings on this front would be

significant for profit of the organization.


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1. BULK BUYING:

A. The company which has units spread across the

geography can negotiate better price when the

volumes are high, instead of buying for individual

units its recommended to have central buying policy.

B. You can negotiate better price if you can put your

entire annual consumptions to a vendor and ask him

for annual rate contracts.

Bulk buying should be supported by bulk handling

and storage system.

2. OPPORTUNITY BUYING: Most of

commodities and raw material has seasonal Cycle

of prices they peak and fall in intervals hence you

have to look for the lowest price to buy in bulk and

get the price advantage.


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LOCAL VENDORS: Vendors should be located in

close vicinity of the manufacturing area that helps lower

freight charges and keeping low inventory. Only when it

becomes economical to source from international market

.eg crude oil from Middle east, Palm oil from south east

Asia .

4. PARTNERSHIP WITH VENDORS: It is highly

recommended to have partenership with vendors in

either having equity or technical collaboration so as any

savings on their part would be passed on to customer.

4. E-PROCUREMENT: Putting up Tenders on Internet

and setting up auction for the quantity to wider vendor

base. Cutting cost on conventional way of asking tenders etc


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for the material. In Reverse auction where you ask the

higher bidder to supply items. Many companies have

fulltime dep’t for e-sourcing.

5. BUYING FROM TAX EXEMPTED AREA: In

Several countries the federal Government have certain tax-

exempted area where they allow manufacturers to set up

their plants. In common parlance its called Tax holidays.

Look out for regions and source material from such places.

6. REMOVING INTERMEDIARIES: Wherever possible

buy from the OEM, directly from manufacturer not for any

agent, distributors or commission agents.


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7. NON – BRANDED ITEMS: Look out for non – branded

items for non-critical areas as branded items charge

premiums for their product.

8 RECYLING AND REUSE OF PACKING ITEM: All

items comes into some form of secondary packaging out of

which some of the items can be reused or recycled .Ask

vendor tot reuse/recycle packing item to recycle or re use

them for next items eg pallets, sacks & bottles, trays etc

9 CONVERSIONS: Buying primary material then giving

it to processor instead of buying directly from the

manufacturer. E.g. CBB conversion in FMCG industry.


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10. ECONOMICAL ORDER QUANTITY (EOQ): The

most basic principle of placing an order is to place an

EOQ for material, which would reduce inventory. This

figure can be arrived with your ERP software.

11. MAKE AND BUY DECISION: Certain items can be

made in house rather than buying from out side .

12. NEGOTIATIONS: The price should always be

negotiated with all information with you. Prices are

reduced when you are informed and are aware of prices in

the market. Always have an alternate quote for items

negotiated.

13. INSPECTION: By eliminating inspection at factory and

asking vendors to provide materials as per standards and

completing inspections at their end we can eliminate delays

and manpower used in these kind of activities.


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14. SCRAP MANAGEMENT : Segregation of scrap

generated in a manufacturing unit is important . It has been

observed that all scrap are sold as lot to scrap merchant

who in turn segregate in different items and sells it at

higher rates . You can increase the sale price by asking

several vendors to bid for the same lot .


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13. SERVICES: All organization has certain services to be

performed for smooth functioning of unit. E.g. hygiene,

security, maintenance, safety & pest control, plumbing and

building repair, which can’t by wished away and add cost

to operations.

In earlier days of factory operations company employees

did these but now savings can be generated if these

activities are out sourced.

Critical areas can be negotiated into some form of annual

contracts and rest should be kept for call basis services.


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LOGISTICS

Raw material and finished goods are to be transported

either into the factory or from the factory to other

destination. Transportation charges contribute significantly

to cost of product.

MAP ROUTES: By mapping all routes and then decide on

the shortest route for both inbound material and out bound

material.

IN TRANSIT DAMAGES : Check for In – transit damages

report Improve upon the secondary packing and the way

boxes are filled into he container

LOADABILITY: Check the load ability of products into

containers. i.e. utilizing most of space into container. Load

ability is term used for calculation of no of boxes per unit is

of container.

ANNUAL RATE CONTRACTS FOR

TRANSPORTATION : Always go for annual rate contract

with transporter .


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STORE AND WARE HOUSE :

SPACE: Racks and shelf or pallets should be arranged in

such manner that material could identified and can be

loaded or unloaded easily manually or with forklifts . If

space is constrain then you can have mezzanine floor or

folding racks where the pallets can be kept. Always stack

material on pallets; this helps in easy movement of material

systematic. Always standardize your stack height so as to

avoid any falling of material.

FIFO: Generally the items has to be placed in such a

manner that the first in material should be first to move

out.


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LOW INVENTORY: Check all slow moving items or

obselete items segregate them and scrap them .Use EOQ for

ordering. Having vendor in near factory vicinity helps in

maintaining low inventory . As they can be negotiated for

volumes. Materials with low lead times can have minimum

inventory .


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PRODUCTION

MAJOR AREA OF IMPROVEMENT HAS TO BE IN

FOLLOWING AREA

1.LABOUR PRODUCTIVITY.

HANDLING: The handling of product and raw material

should be reduced either putting of conveyors or automatic

transfer to the machine.

MOVEMENT: To have minimum movement of manpower

for getting materials, tools, shifting etc.

REWORK : To have zero defectives and rework as it is

nothing but pure waste . The first step towards elimination

is to adopt standards like ISO –9000 & GMP or in-house

benchmark.


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PHYSICAL STRESS : Study the positions of worker while

working eleminate stress generating position , environment

which would help in better productivity .

2. MACHINE PRODUCTIVITY.

CHANGEOVERS: When you have batch process and have

large product mix then you would have change over .To

avoid change over time have automated change over or

should have ready made spare to be fitted into machine in

place.

OEE ( OVERALL MACHINE EFFICIENCY): Overall

machine efficiency should be calculated recorded and

machine with least efficiency should investigated for

improvement. It is highly recommended to go for TPM.

A manufacturing plant should always have a schedule

maintenance program.


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PRODUCT :Savings can be generated if the product

design / shapes or INGREDIENTS are slightly modified

and presented in the same packaging .

PACKAGING : Savings can be generated in primary and

secondary packaging

Check the cut of length of Wrapper/laminates/sheets and

check the product dimension you would see that there are

large tolerances provided by manufacturer you can reduce

the cut off length hence can have substantially savings .

Avoid excessive packaging.

Secondary packaging like CBB can be checked for their

bursting strength and lower ply CBBS can be used for

Packing.


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WASTE REDUCTION :

All leakages , spillages should be plugged .

Under/overweight of product to be monitored so as to

reduce the material variance .check weigher ‘s can be

installed for this purpose .

USAGE OF BYPRODUCTS : Certain items which are by

product of process can by recycled , reused and sold for

some good value .


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ENERGY

Energy plays an critical role in cost of production in some

places the cost of electrical and fuel cost are very high for

such unit it becomes crucial to adopt energy saving

techniques and save energy .

AWARENESS DRIVE : Launch awareness program in the

establishment, promoting ideas in house and awarding

people / dept for implementing energy saving ideas.

Switching of equipment not in use is the best method to

reduce electricity consumption.

LIGHTING: Low wattage lighting are now available in

ratings of 18/20 watts with good lux ratings and can be

retrofitted with minimum cost . You can replace the

conventional tubelight with them.

Buildings or workplace should be designed in such a way

that it have maximum period of sunlight exposure during

day time .


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MOTORS: All manufacturing units have various types of

motors. Conduct a study for ratings, current during load

and compare with the ratings, you would surprised to find

that for most of the places the motors installed have current

load below the ratings, these motors can be replaced by

energy efficient lower hp motor.

BELT DRIVE: Where ever possible replacing belt drive or

chain drive with geared motor would result in savings.

VARIABLE FREQUENCY DRIVE: Add variable

frequency drives to variable load application like blowers,

Motors, Air compressors.

PUMPS: Check the load/quantity of discharge of pump

and compare it with motor rating just by reducing the

impeller dia you can save electricity.


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AIR COMPRESSORS: We can save energy by having

VFD installed for motor; reducing intake air temp also

reduces the electricity. Detecting leakages in compressed air

pipeline also saves energy. Also removing excess bends and

dropping s in pipeline layout reduces load on compressor.

You can ask comp manufacturer to install motor stop

arrangement on no load requirement.

DISCONNECT: Disconnect power to all idle machinery in

plant.

AIR CONDITIONING: Proper setting of temperature can

results in savings of power. Putting up films on windows

can reduce heat load.

You can put vapor absorption unit instead of motor driven

compressor for Central air conditioning.

Spot cooling instead central air conditioning also results in

saving


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COOLING TOWERS: FRP blades could be used instead

of aluminum cast blades to reduce load on motor for

cooling tower fan s. Thermostat can be installed in cooling

towers for unnecessary running of cooling tower when the

desired temp has been achieved.

OVENS & FURNANCES: Heat loss from the oven results

in increase of fuel consumption hence proper insulation is

required for prevention of heat loss.

Waste heat can be utilized for preheating air, feed water or

general purpose heating. This results in significant saving of

power.

FUEL EFFICIENT BURNERS: Conventional burners can

be replaced by high-pressure monoblock burners, which

are fuel-efficient.

ALTERNATE SOURCE: Alternate source of energy can be

used to reduce cost of Energy.

Solar energy can be utilized for lighting, heating water etc.


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Wind energy can be used for ventilators

Alternate fuel like bio fuel/bio mass gas can be used in some

applications.

LDO /HSD can be easily replaced by LNG / CNG.

WATER: Water used from municipality sources are

charged for some industry they are major component of

production like beverages, power plants etc.

Replace water-cooled systems to air-cool type eg Air

conditioning system.

Replace natural draught type cooling tower to forced close

type cooling towers.


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Re cycle wastewater after ETP OR STP to be utilized for

gardening or flush system of urinals.

Washings to be replaced by mopping to clean the floors.

Put sensors in place at bathrooms, urinals etc for

conservation of water.


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INFORMATION TECHNOLOGY: On advent of newer

technology and software storage of data, sharing,

transferring data have become much easier. Now decisions

are made more fast and accurate by installation of ERP

software. These software are boon for banking institution

etc.

By in stalling ERP software like SAP R/3,R/5, BAAN, and

ORACLES etc we can save much of our time from locating

and analyzing data’s. Package covers modules for

Materials management.

Production planning.

Production records.

Finance Module

Sales Module. Etc

Similarly by installing Internet and intranet facility inter

office communications can be improved drastically which

have in turn resulted in higher productivity and saved on

stationeries eg letter pads, memo etc.

HUMAN RESOURCES

While doing important jobs like hiring, training, Appraisal

etc HR plays important in decisions of outsourcing certain


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activities which can be done by third party thus reducing

manpower and generating savings

Activities, which can be outsourced, are

1. Security

2. Catering or canteen services

3. Hygiene

4. Loading and unloading of materials

5. Maintenance (fire fighting, Utilities, Admin, Air

conditioning units, Telephones, Computers etc)

6. Building Repairs.


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ACCOUNTS AND FINANCE

Basic contribution of accounts to cost reductions are

basically linked to following major activity.

BUDGETING: Budgeting is prime function of accounts and

finance where things are budgeted for a financial year and

activities are then monitored through out the years any

negative variance are highlighted in monthly reviews.

COSTING: Prepare or calculate price of product taking

into all cost involved in production as well as other

overheads. Decides when to increase the price or lower the

price of the product.

HANDLING PAYMENTS/SALARIES AND

RECEIVABLES FROM SALE: Enter into an arrangement

with any reputable bank for disbursement of payments

through their channel instead through company

Personnel. This results in savings in terms of manpower

and delays in manual disbursement.


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SALES AND MARKETING :

ADVERTISEMENT : Instead of huge billboards and tele

advertising you should try internet , targeted customer

,inviting customer to the shop floor like school children ,

setting up effective customer care office .Hirirng outsourced

people for marketing after giving them short

PRODUCT MIX : Larger product mix eats up own market

share hence reducing and focusing few mega brands would

generates more profits.

DISTRIBUTION CHANNELS: Distribution channels like

AWS and Retailers should be selected in such a way that

the products reaches the shelves on shortest Period .


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Hope you would have got some idea to control or reduce

cost & Increase productivity .

If you have some doubts I m just email away for your

queries .

Write to me [email protected]

Regards

Subodh


Factory cost reduction strategies

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