Cost Savings in Manufacturing and Tech

– by Rupert Turton

We currently have somewhat of a perfect storm with the on-going impact of COVID and Brexit disrupting production, the supply chain and the marketplace we sell into.  In turn, this means holding more stock to minimise the impact on production, which ties up more cash.  But cash costs money, either as interest on borrowings or where it cannot be invested elsewhere. To add to the problem prices are increasing as suppliers look to cover increased transportation and production costs.

If we can’t sell more in this climate the alternative is to reduce costs, which your accountant may have mentioned to you but may not have given you enough practical advice on how to achieve this!

Know where are you spending your money?

The first question is do you know where you are spending your money and why? Which of those costs are variable and which are fixed.  If you are selling less, so manufacturing less, have you been able to reduce your variable costs?  Now is also the time to look at the fixed costs that you didn’t previously care about.

Do an audit of your business. Look at stock holding and process to understand where your expenditure is.
Review your stock holding both materials and finished product. Ask if you have got more than you need for the immediate demand and how quickly can you replenish it. It is better if the stock, and hence cash, is not in your warehouse as long as you know it can be delivered before you need it.

 Many businesses don’t worry about cash flow, meaning their money is tied up when it could be invested in growing other parts of the business or worse, is costing money where the business has had to borrow. If you can get cash flow under control you can reduce the Cash Gap, which is simply the time between you paying for goods and you receiving payment for the finished goods. If the cash gap is low, or even zero it reduces your borrowings while simultaneously increasing the value of the company. There are plenty of examples of organisations that have reduced the cash gap to negative, i.e. the goods are paid for by the customer before the supplier of the raw materials is paid.

Review your suppliers to ensure you are getting the best deal and go back to existing suppliers and ask for a better price, or better terms such as free or quicker delivery or extended payment terms.

A good process can substantially increase your profit

Processes often evolve, being tweaked here and there as new technology is introduced, a new stock management system, a new lathe, or faster press. What started as the most efficient route from start to finish has now become a gentle meander, resulting in slower and expensive ways of working. It is quite likely that your team running the process knows this, but it is not how they are told to do it.

The process is not just about speed, it is also about quality. The Technicolour Widget Company makes the industry-leading Blue Widgets which sell at a 10% gross margin, they also have a 10% failure rate. Every time a Blue Widget fails in the field they have to replace it and then make and sell 10 more Blue Widgets to cover the cost. As they are only making a 10% margin what should be a profitable product is only just breaking even. Investing the time to improve the quality of production would reduce the failure rate and allow the Blue Widget to be a profitable product line.

Once you have fixed your process take a leaf out of Amazon’s book, the absolute masters of process. If they see an employee performing below the level of their colleagues, they have trained mentors who will work with the person to help improve their performance.

Staffing represents the biggest cost for most businesses

The unavoidable truth is that staffing represents the biggest cost for most businesses, so you need to ensure they are giving you the best value. Firstly, by ensuring they have the tools and skills to do their jobs as effectively and efficiently as possible. Secondly, ensure you employ the correct number of staff, which in normal times would possibly lead to job losses. However, in the current crisis, we have the government tool of furlough, where staff can be put on hold until business returns to previous levels once the COVID crisis ends.

Overall, the message to manufacturing and tech, regardless of size, has to be to know your costs and take steps to fix any problems. A good process is likely to be key to getting your costs under control.

If you would like to discuss any of the above over a virtual coffee, feel free to email me: rupertturton@actioncoach.com