Manufacturing operations leaders should follow three guidelines to reduce costs, boost performance and maximize value.
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Manufacturing costs are part of a bigger picture
Manufacturing leaders who focus too much on cost reduction at the operational level can lose sight of broader strategic objectives. Many costs stem from prior investment decisions, while discretionary costs in manufacturing must be balanced with other supply chain expenses to optimize total network and business performance.
Gartner research consistently finds that pressure to cut costs fosters skepticism and resistance, rather than having the desired outcomes — alignment, collaboration and innovation toward supporting the business strategy. Instead, manufacturing operations leaders should respond to directives in a manner that demonstrates reframed thinking and constructive action.
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Reduce manufacturing costs while supporting business performance
When faced with cost pressures, take three principle-based actions.
Identify better asset cost structures to improve ROI
Manufacturing leaders who understand that internal manufacturing costs are the result of strategic investment decisions are better positioned to explore options for cost restructuring.
Motivations for cost restructuring include:
Lowering fixed costs to reduce the break-even point, such as by consolidating staff and management overhead.
Converting variable costs to fixed capital costs to improve returns on capital investment.
Modifying costs through outsourcing or other strategies to provide greater value and performance across operating conditions.
Clarify the relevant operating assumptions and conduct multiple scenario analysis to show how costs may vary under different conditions — for example, whether lower energy pricing will result in higher investment returns.
Ensure capacity availability for maximized value creation potential
After optimizing cost structures, focus on ensuring capacity availability by:
Balancing manufacturing capital assets against inventory working capital.
Using the concept of a manufacturing perfect order (MPO), which captures whether all quality, compliance and timing requirements for product availability have been met.
Continually measuring and improving performance by focusing on big-picture objectives such as safety, supply chain sustainability and quality control.
Optimize for complex portfolios
Beyond labor and energy, the cost of owning and operating manufacturing assets is generally stable. However, business and financial leaders often blame “manufacturing cost problems” for lagging profitability. A better approach is to analyze how manufacturing capacity interacts with product portfolio demand. Gartner recommends:
Improving agility to reduce capacity downtime during changeovers, which will increase total capacity cost and profitability in turn.
Using value-based metrics, such as “cash margin generated per capacity-hour,” that quantify the differences in value creation across a product portfolio.
Demonstrate how SKU demand impacts capacity productivity.
Manufacturing costs FAQs
What is the impact of emergency repairs on manufacturing costs?
Unexpected breakdowns in the manufacturing pipeline can have a serious impact on manufacturing costs. Performing emergency repairs is three to five times more expensive than performing these repairs as part of routine maintenance. In total, the cost of an unplanned manufacturing shutdown is estimated to be between four to 15 times the cost of repair.
How can a strong operating culture reduce manufacturing costs?
Businesses that emphasize behavioral norms and practices such as safety, environmental responsibility and quality control reap many benefits, including lower manufacturing costs. Prioritizing safety lowers the risk of incidents and accidents that can shut down the manufacturing pipeline, while quality control improves internal productivity and the customer experience.
Drive stronger performance on your mission-critical priorities.