Money-saving tips for the smart manager

Plant managers wear many hats and as such are assessed in many different ways. However, few accomplishments bring as much approbation as saving money. Companies work on this continually, even down to reinventing products. Fundamental strategies apply in almost any business. Other than by growing top-line sales, profits improve only by cutting costs.

Reducing expenses starts with a baseline. The basis for expectation is a budget; at the production level, it is a job order cost estimate. The very existence of a budget provides control of costs. Comparing actual results to expectations highlights problems. Ideally, spending outside of pre-established parameters should require approval ahead of time.

Optimizing resources takes effort, even involving outside experts. The accompanying sidebar (facing page) summarizes many ideas for reducing costs.

Control costs

If controls are not in place, the opportunities for savings are vast. Personnel costs may reflect excess headcount and overtime pay. Operations may be inefficient. Floor space may exceed needs. Certain equipment may be underutilized or altogether idle. It may be advantageous to implement state-of-the-art technology.

Downtime is particularly detrimental. From a savings perspective, when machines are down, the costs of capacity are still incurred, including facility, utilities, machinery costs, administration, and other indirect functions. Cost per unit of output increases. Moreover, downtime may cause loss of orders or of customer goodwill. This results from missed schedules and delivery dates. An order that is not completed timely may cause its cancellation. Beyond the loss of particular orders, the company over time may develop a reputation for being unreliable.

Materials costs may be excessive due to improper design of parts, low-volume purchases, high levels of scrap, poor negotiation with vendors, expediting, delays in receiving, and many other problems. Inventories may be bloated due to vendor quantity minimums or discounts; poor controls; unreliable inventory records; overly complex product lines; obsolescence; and unpredictable vendor lead times or quality. Excess inventory costs a company in space, financing, handling, insurance, personal property taxes, shrinkage, and pure waste.

Plans must consider market changes. The anticipated tariffs on imports of steel and aluminum into the U.S. would seem to direct companies toward local sources. However, this may not be the case. When the U.S. imposed tariffs in 2002, the higher import prices were matched by U.S. mills almost immediately. Moreover, the trade barrier applied only to the import of steel, not to products made of steel, which led to further encouragement of off-shore sourcing of fabrication and other processes.

Likewise, appropriate internal controls are needed. The objective of internal controls is to provide a company with a level of comfort that fraud cannot happen, or at least if it does happen, management will detect it. In order to accomplish that, it is necessary to provide suitable controls, including maintaining adequate records and segregating incompatible functions.

When people have access to assets and feel little chance of theft being caught, they are tempted to steal. Exposure to theft is most obvious with inventory and supplies. Items of value will grow legs and walk off. Many businesses also leave blank checks, signed checks, or even signature stamps lying out in work areas. Similarly, loss is risky when employees handle cash, as in retail stores.

Fraud diverts assets through an otherwise legitimate process. Managers having approval authority can take a more direct approach to fraud. They can authorize payments or wire funds to a vendor of their own creation. Alternatively, they can have vendors do personal work for them, such as home remodeling, and charge the invoices back to the company. Overpaying vendors and attempting to pocket the overpayments is another way of obtaining cash.

For personnel, hiring might not always arise from needs. Employees may report time that they did not work. Those with corporate credit cards may use them for personal items. Likewise, expense reimbursements provide fraud opportunities to the wrong-minded, such as obtaining money from the employer that the employee never spent.

Managers must specifically authorize hiring, pay rates, overtime hours, and paychecks. Protocols should govern personnel records, time tracking, expense reports, and protecting the company for employee liability.

Review products and processes

Beyond managing costs, success depends on providing what is of value to customers. A problem that many companies have is in attempting to do everything they can to service customers, such as deliver, customize, or expedite, without recovering the costs through higher prices. The inventory investment required to maintain a just-in-time niche may exceed the price premium obtainable. The benefits of new technology may not justify its cost. Or, customization may cost more than customers are willing to pay. When this happens, it is time to find a new strategy.

Products may call for redesign. According to conventional wisdom, product design determines 80% of cost. Lean initiatives attempt to reduce costs and inventory through redesign by building around common parts, simplifying manufacturing. and engineering formerly custom items in advance. The base product and options, reflecting the optimal mix of internal and outside involvement, can be predetermined, as part of minimizing lead-times.

Operations may need reorganization to eliminate bottlenecks. Backlogs grow from work ordered but not done, and hence unbilled. Too many companies suffer from bloated inventories and lags in delivery due to problems with ordering, scheduling, and coordination of effort.

For layout plans, implementation begins with testing the manufacturing line, using comparative statistics to seek efficiencies, and then proceeds with adjusting the process to optimize the use of labor and capital. The optimal process comes from analytical methods and approaches. This includes understanding materials usage and other requirements; determining appropriate machines; reprogramming them for this customized use; optimizing cell layout and sequence of operations; and getting them to work together properly. Much iteration is often needed. The added benefits are to improve production flow, minimize leadtime, and reduce travel distance of materials.

Today's competitive environment calls for flexible strategies. In flow processing, for example, production cells, which are often U-shaped production lines, are dedicated to the continuous piece-by-piece manufacture from start to finish. Benefits of flow production include easier scheduling, reduced set-up, lower work-inprocess, and reduced material movement and handling, while improving teamwork, communication, and productivity. Flexible layouts can be optimized further by putting machinery on wheels, to facilitate reconfiguration.

If integrated with the right design, operations can be reconfigured in such a way that customization occurs during final assembly, rather than having to be addressed throughout production. That way, a single subassembly can become the main component of 100 or more products, reducing inventory substantially.

However, managers should be forewarned that what appears to be inefficiency may actually be desirable. On a tour of a process plant, you may encounter a crew lounging around, perhaps playing cards. The owner may be happy to hear it. This crew being idle means that the company is making money. As it turns out, they are actually reserve maintenance people who go into action only when the plant's operations are down, and losing thousands of dollars per minute. EA