Understanding and managing manufacturing costs in your operations is an important task for success. By learning basics, your manufacturing business can identify areas for improvement and add effective cost-reduction strategies.
In this blog post, we will guide you on how to improve production and profits with the help of techniques like lean manufacturing principles, supply chain optimization and other new technologies.
Let's learn about the strategies to lower manufacturing costs while maintaining product quality.
Understanding the Manufacturing Cost
Manufacturing cost is the sum of all the expenses made on resources during the production of a product. Suppose you own a car parts manufacturing company. You assemble the engine along with all the components like exhaust, cooling systems, oil pumps, air filters, and more. When you add up the cost of all the parts, workers’ salaries, and costs spent on other resources, you get the manufacturing cost of that engine.
Manufacturing costs are divided into three different categories. They are:
1. Direct Material Costs
The direct material cost is the expense of getting the raw materials or parts that go directly under production. There can be many other expenses included in it, such as packaging, freight, taxes, storage costs, and much more. To calculate any product’s direct material cost, this formula can help you:
Formula:
Costs of material purchased + Beginning materials - Ending materials = Direct materials used.
2. Direct Labor Costs
When you own an SME manufacturing business, you need workers for production. You pay their salaries, their insurance bills, medical bills, and provide other benefits. All those expenses come under direct labour costs. It is the total expenses of workers who are directly related to your business's production process. Here is how you can calculate the direct labour cost:
Formula:
Direct Labor Cost = Pay Rate * Project Time
3. Manufacturing Overhead
During the manufacturing process of a product, you face many indirect expenses. All those indirect expenses come under manufacturing overhead costs. These are added to your product’s final cost, along with direct material and direct labour costs. Generally, all the expenses under manufacturing overhead costs include depreciation of your equipment and machinery and electricity bills.
What Is The Importance of Reducing Manufacturing Costs?
Suppose you own an electrical switch manufacturing company, and you are spending Rs. 35 on sourcing components and Rs. 25 on manufacturing, assembly, and testing of each switch. Reducing those costs can help you invest that amount in processes like better packaging and shipping or even lowering product prices. However, maintaining product quality while reducing costs is important for manufacturers.
There are many factors affecting your manufacturing cost, but you must regularly examine all the processes related to expenses and manufacturing. Reducing manufacturing costs is very important for your business to keep making profits. When you reduce expenses in your manufacturing processes, you can reinvest those profited funds in other operations.
How Can You Reduce Manufacturing Costs?
Manufacturing is a highly competitive industry, and reducing costs is necessary to survive in the market. However, reducing manufacturing costs can be difficult for business owners, as many factors can affect it. From lean manufacturing techniques to negotiations with suppliers, here are the best practices for manufacturing cost reduction and boosting your business operations.
Best Practices For Reducing The Cost Of Production
1. Lean Manufacturing: Lean manufacturing can help you manage and lower your production wastes. It can reduce manufacturing costs and increase efficiency in your manufacturing processes. You can achieve this by applying lean principles like flow creation, value stream mapping techniques, and pull systems to reduce waste from the manufacturing cycle.
2. Supply Chain Management: It is an important part of cost reduction in manufacturing. Administrative processes like payrolls, invoicing, and placing orders can be time-wasting if performed by staff whose time is more valuable elsewhere. You can automate those tasks and improve your cost-reduction strategy.
3. Utility Costs: Energy bills can be a huge expense for a manufacturing business, as you need to continuously keep running heavy machinery. You can apply more energy-efficient practices, such as using renewable energy sources and upgrading equipment. With these changes, you can lower your operating costs as well as environmental impact.
4. Technology And Automation: The usage of modern technology, like installing sensors and manufacturing automation systems, can help you reduce resources and manufacturing costs over time. Using modern technology and automation, you can lower labour costs, errors and waste by improving scalability and flexibility in your operations.
5. Just-Time Production: The Just-In-Time approach is an effective manufacturing method that helps you receive materials and parts when needed for production. With this approach, you don’t have to pay for storage costs, and it also leads to lower inventory costs and manufacturing cycle time.
6. Alternative Materials: Traditional materials are usually expensive to get and work with. You can replace them with alternative materials, which can improve your product quality and lower costs related to replacements and repairs. For example, if you are in the automobile parts manufacturing industry, you can use aluminium instead of steel in your parts manufacturing processes.
7. Maintenance Procedures: Proper maintenance of your equipment and machinery helps you operate at optimal levels. You can choose better maintenance procedures to reduce the chances of machinery breakdowns and costly repairs. This approach will result in lowered production costs and higher efficiency.
Control Your Costs And Profits With Manufacturing ERP
Controlling costs and maximizing profits is the goal of all SMEs. Using manufacturing ERP software customized specially for Indian small and medium enterprises can help you achieve those goals. An advanced ERP system provides better cost-reducing opportunities by improving your financial management, improving procurement processes, and much more. These advantages of ERP can help you make more profits, reduce your product’s retail prices, and stay competitive.
Here are some key elements of an ERP system in manufacturing processes that can help you reduce manufacturing costs and make more profits:
- Optimizing inventory management
- Production planning and scheduling
- Real-time analysis and reporting
- Supply chain visibility
- Labour management
Improve Your Cost-Reduction Strategies With TranZact
Improving cost-reduction strategies is important to stay competitive in the market. From lean manufacturing techniques to using modern technology and automation, you can maximize your profitability. TranZact helps you automate your manufacturing processes and reduces costs on a higher level. It helps track your inventory and improves productivity.
TranZact offers an easy and simple dashboard with only the important modules for Indian SMEs. The tool has been made particularly for Indian manufacturing SMEs. It helps you track inventory, create BOM, and manage a lot of important tasks with easy navigation. Invest in TranZact now to achieve your business goals with improved operations and resource utilization.
FAQs
1. What is process manufacturing cost?
Process manufacturing cost is the expenses spent on producing goods through continuous or batch manufacturing processes. These costs usually involve the assembly of parts in a manufacturing company.
2. How can manufacturing costs be reduced?
Manufacturing costs can be reduced with many strategies like lean manufacturing techniques, applying technology and automation tools, and using alternative materials. These strategies can also minimize waste, improve your processes, and reduce your manufacturing lead time.
3. What are the three 3 components of manufacturing costs?
The three main components of manufacturing costs are direct labour, direct materials, and manufacturing overhead.
4. What is manufacturing cost with example?
Manufacturing costs are the addition of all the expenses on production, including raw materials, direct labour salaries, energy bills, and other expenses.
For example, if you are running a car parts assembly business. While assembling an engine, you’d need to acquire parts like exhausts, cooling systems, and much more. You’d also need to pay your worker's salaries for the task. All the expenses, including used oil, glue, or even screwdrivers, would be called the manufacturing cost of that engine.
5. How is the manufacturing cost calculated?
Manufacturing cost is calculated using a formula:
Manufacturing cost = the cost of direct materials + direct labour + other direct expenses + factory overhead (manufacturing overheads)
6. What is a Kaizen cost reduction?
The Kaizen cost reduction is a practice where you slowly reduce the manufacturing cost of a product while maintaining the quality, safety, and price of the product. This method is usually applied when your product is finalized and production has started.
