Cost Reduction in a Manufacturing Business

As a manufacturer, It is expected to
reduce the manufacturing costs
without having any impact on the
Quantity, Quality, Efficacy and
Safety of the products. However, the
manufacturer shall be very careful
while selecting the cost saving ideas
because they may ruin the business
instead of growing it.

The best way to increase the profit margin in manufacturing is usually to lower the
product's manufacturing costs rather than increasing the price of the product.

Manufacturing cost is the sum of costs of all resources consumed in the process of
making a product. The manufacturing cost is mainly classified into three categories
as Direct materials cost, Direct labour cost and Manufacturing overhead.

In general, the manufacturing costs can be determined as,

Total manufacturing cost = Direct costs + Manufacturing overheads

The manufacturing costs can be differentiated in two parts i.e. Direct costs and Indirect
costs.
Following are the methods of reduction of the manufacturing costs,

1. Selection of Low Cost Materials:

Material costs involves the cost spent for the raw materials and materials used in the
support for manufacturing of the product. To select the low cost material does not mean
only purchasing lower quality material to lower the material acquisition cost. Rather it
is advisable to invite quotations from accessible suppliers for the quality of material
that business requires.
In case of manufacturing of Antigen, these costs combine for raw materials used for
manufacturing processes, Consumables including Silicon tubing, Filters used in
 upstream and downstream processes, Probes used for online process monitoring,
Mechanical accessories including SS Clamps, Valves, Diaphragm valves etc.
Precautions shall be taken when reducing the costs of the raw materials, product
quality shall remain intact. Manufacturer should have option to choose the supplier
who agrees to supply the required materials at least cost or offers discounts.
Manufacturer shall also try to develop some alternate vendors which drives up the
competition driving down the prices, improve the supplier responsiveness, end of
monopoly which help in reducing the capacity risks and dependency on one supplier.

2. Reduction of Labour Cost:

One of the major costs incurred by a manufacturing company is in the salaries paid to
the factory employees. Reducing the labour costs is an essential cost cutting measure.
However, there shall be clear differentiation from a skilled employee with un skilled
employee. A well trained workforce enhances production and reduces re-work. As a
business owner, it is a must for the responsible personnel from the supervisor team to
train the employees so that they can improve their skills and production on the shop
floor. Having qualified employees can help to minimize the turn over which leads to
significant labour cost reduction.
Some companies often increase the overall efficiency by introducing incentive
programs to encourage workers to work harder and smarter. Because, the cost of
finding and training new employees is extremely high – so it makes more sense to hold
on to these trained/skilled employees and keep them happy.

3. Reduce the Rejections and Avoid excess inventory:

Every product requires similar efforts to manufacture to meet the pre-determined
acceptance criteria. Same costs is involved in manufacture the item of similar
type/size. If any of the item is rejected, the efforts put behind to manufacture the item
will be in vain. Rejection involves lot of financial burden as it involves rework, re pack
and lot of documentation work. In some of the scenarios the manufacturer has to re-
call all the items manufactured under the similar lot number to avoid regulatory issues.
There are various tools to reduce the rejections i.e. Cause and Effect, Brainstorming
to name a few.
 Similar to cost involved in the rejections, building of inventory with less demand also
costs huge to the manufacturer. When the manufacturer will have too much
inventory and it just sits in the warehouse, not only does the manufacturer loose
profits, but they are forced to find ways to get rid of it. Strong co-ordination shall
be ensured between the manufacturer, supply chain management and marking
team. If the manufacturer can have a centralized multiple warehouses if possible
can help greatly in inventory reduction.

4. Reduction of overhead costs:

Manufacturing overhead (also known as factory overhead, factory burden, production

overhead) involves a company's manufacturing operations. It includes the costs
incurred in the manufacturing facilities other than the costs of direct materials and
labour. This costs includes general administration, product selling, rent paid if any,
depreciation and taxes to few a names. The overhead costs also include the amount
spent during organizational activities as well.

As the manufacturing overhead is an indirect cost, the tasks become challenging to

assign or allocate overhead costs to each of the units.

5. Minimize Process Steps from Manufacturing:

Manufacturing is a complex operation. It involves lot of unit operations, unit processes
to convert the initial raw materials to final product. Some of the processes are
developed in house or received at site as part of technology transfer. Every step in the
manufacturing process costs some or more money as it requires separate raw
materials, consumables and additional time to execute. The manufacturer has to look
thoroughly into process to understand significance of each and every step.
Some of the process steps might not contribute much to improve the quality of the
product still manufacturer follows them AS IT IS. These steps can be removed from
the final process by ensuring the final quality of the product is maintained and the
revised process is consistent.

In short, the manufacturer can increase the profit margin by saving direct and indirect
costs as mentioned above than increase the product costs.