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Factory - Cost Reduction Strategies

SAVINGS FOR PROFITS

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From www.shumaonline.com

In today’s world when Corporate are struggling for profits

and with fierce competition in the market, cost reductions,
productivity enhancement and lean organizations have
become today’s mantra s for survival.Folllowing are the key
area where you can implement cost reduction methods
with significant results.

1. Raw material procurement:

2. Logistics-Inbound and Outbound:
3. Warehouse and Stores:
4. Manufacturing Process (Production) :
5.Energy, fuel & Water

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6.Information Management
7. Finance
8. Human Resources
8. Sales & marketing

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FEW BASIC IDEAS

PROCUREMENT
IT CAN BE DIVIDED INTO TWO MAJOR GROUP

A. PRODUCT
B. SERVICES
Raw material purchases constitute around 60-65% of the
cost of product; hence any savings on this front would be
significant for profit of the organization.

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1. BULK BUYING:
A. The company which has units spread across the
geography can negotiate better price when the
volumes are high, instead of buying for individual
units its recommended to have central buying policy.
B. You can negotiate better price if you can put your
entire annual consumptions to a vendor and ask him
for annual rate contracts.
Bulk buying should be supported by bulk handling
and storage system.

2. OPPORTUNITY BUYING: Most of

commodities and raw material has seasonal Cycle
of prices they peak and fall in intervals hence you
have to look for the lowest price to buy in bulk and
get the price advantage.

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LOCAL VENDORS: Vendors should be located in

close vicinity of the manufacturing area that helps lower
freight charges and keeping low inventory. Only when it
becomes economical to source from international market
.eg crude oil from Middle east, Palm oil from south east
Asia .

4. PARTNERSHIP WITH VENDORS: It is highly

recommended to have partenership with vendors in
either having equity or technical collaboration so as any
savings on their part would be passed on to customer.
4. E-PROCUREMENT: Putting up Tenders on Internet
and setting up auction for the quantity to wider vendor
base. Cutting cost on conventional way of asking tenders etc

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for the material. In Reverse auction where you ask the

higher bidder to supply items. Many companies have
fulltime dep’t for e-sourcing.

5. BUYING FROM TAX EXEMPTED AREA: In

Several countries the federal Government have certain tax-
exempted area where they allow manufacturers to set up
their plants. In common parlance its called Tax holidays.
Look out for regions and source material from such places.

6. REMOVING INTERMEDIARIES: Wherever possible

buy from the OEM, directly from manufacturer not for any
agent, distributors or commission agents.

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7. NON – BRANDED ITEMS: Look out for non – branded

items for non-critical areas as branded items charge
premiums for their product.
8 RECYLING AND REUSE OF PACKING ITEM: All
items comes into some form of secondary packaging out of
which some of the items can be reused or recycled .Ask
vendor tot reuse/recycle packing item to recycle or re use
them for next items eg pallets, sacks & bottles, trays etc

9 CONVERSIONS: Buying primary material then giving

it to processor instead of buying directly from the
manufacturer. E.g. CBB conversion in FMCG industry.

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10. ECONOMICAL ORDER QUANTITY (EOQ): The

most basic principle of placing an order is to place an
EOQ for material, which would reduce inventory. This
figure can be arrived with your ERP software.
11. MAKE AND BUY DECISION: Certain items can be
made in house rather than buying from out side .
12. NEGOTIATIONS: The price should always be
negotiated with all information with you. Prices are
reduced when you are informed and are aware of prices in
the market. Always have an alternate quote for items
negotiated.
13. INSPECTION: By eliminating inspection at factory and
asking vendors to provide materials as per standards and
completing inspections at their end we can eliminate delays
and manpower used in these kind of activities.

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14. SCRAP MANAGEMENT : Segregation of scrap

generated in a manufacturing unit is important . It has been
observed that all scrap are sold as lot to scrap merchant
who in turn segregate in different items and sells it at
higher rates . You can increase the sale price by asking
several vendors to bid for the same lot .

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13. SERVICES: All organization has certain services to be

performed for smooth functioning of unit. E.g. hygiene,
security, maintenance, safety & pest control, plumbing and
building repair, which can’t by wished away and add cost
to operations.
In earlier days of factory operations company employees
did these but now savings can be generated if these
activities are out sourced.

Critical areas can be negotiated into some form of annual

contracts and rest should be kept for call basis services.

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LOGISTICS

Raw material and finished goods are to be transported

either into the factory or from the factory to other
destination. Transportation charges contribute significantly
to cost of product.

MAP ROUTES: By mapping all routes and then decide on

the shortest route for both inbound material and out bound
material.

IN TRANSIT DAMAGES : Check for In – transit damages

report Improve upon the secondary packing and the way
boxes are filled into he container

LOADABILITY: Check the load ability of products into

containers. i.e. utilizing most of space into container. Load
ability is term used for calculation of no of boxes per unit is
of container.

ANNUAL RATE CONTRACTS FOR

TRANSPORTATION : Always go for annual rate contract
with transporter .

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STORE AND WARE HOUSE :

SPACE: Racks and shelf or pallets should be arranged in

such manner that material could identified and can be
loaded or unloaded easily manually or with forklifts . If
space is constrain then you can have mezzanine floor or
folding racks where the pallets can be kept. Always stack
material on pallets; this helps in easy movement of material
systematic. Always standardize your stack height so as to
avoid any falling of material.

FIFO: Generally the items has to be placed in such a

manner that the first in material should be first to move
out.

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LOW INVENTORY: Check all slow moving items or

obselete items segregate them and scrap them .Use EOQ for
ordering. Having vendor in near factory vicinity helps in
maintaining low inventory . As they can be negotiated for
volumes. Materials with low lead times can have minimum
inventory .

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PRODUCTION

MAJOR AREA OF IMPROVEMENT HAS TO BE IN

FOLLOWING AREA

1.LABOUR PRODUCTIVITY.

HANDLING: The handling of product and raw material

should be reduced either putting of conveyors or automatic
transfer to the machine.

MOVEMENT: To have minimum movement of manpower

for getting materials, tools, shifting etc.

REWORK : To have zero defectives and rework as it is

nothing but pure waste . The first step towards elimination
is to adopt standards like ISO –9000 & GMP or in-house
benchmark.

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PHYSICAL STRESS : Study the positions of worker while

working eleminate stress generating position , environment
which would help in better productivity .

2. MACHINE PRODUCTIVITY.
CHANGEOVERS: When you have batch process and have
large product mix then you would have change over .To
avoid change over time have automated change over or
should have ready made spare to be fitted into machine in
place.

OEE ( OVERALL MACHINE EFFICIENCY): Overall

machine efficiency should be calculated recorded and
machine with least efficiency should investigated for
improvement. It is highly recommended to go for TPM.

A manufacturing plant should always have a schedule

maintenance program.
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PRODUCT :Savings can be generated if the product

design / shapes or INGREDIENTS are slightly modified
and presented in the same packaging .

PACKAGING : Savings can be generated in primary and

secondary packaging

Check the cut of length of Wrapper/laminates/sheets and

check the product dimension you would see that there are
large tolerances provided by manufacturer you can reduce
the cut off length hence can have substantially savings .

Avoid excessive packaging.

Secondary packaging like CBB can be checked for their

bursting strength and lower ply CBBS can be used for
Packing.

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WASTE REDUCTION :

All leakages , spillages should be plugged .

Under/overweight of product to be monitored so as to

reduce the material variance .check weigher ‘s can be
installed for this purpose .

USAGE OF BYPRODUCTS : Certain items which are by

product of process can by recycled , reused and sold for
some good value .

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ENERGY

Energy plays an critical role in cost of production in some

places the cost of electrical and fuel cost are very high for
such unit it becomes crucial to adopt energy saving
techniques and save energy .

AWARENESS DRIVE : Launch awareness program in the

establishment, promoting ideas in house and awarding
people / dept for implementing energy saving ideas.
Switching of equipment not in use is the best method to
reduce electricity consumption.

LIGHTING: Low wattage lighting are now available in

ratings of 18/20 watts with good lux ratings and can be
retrofitted with minimum cost . You can replace the
conventional tubelight with them.

Buildings or workplace should be designed in such a way

that it have maximum period of sunlight exposure during
day time .

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MOTORS: All manufacturing units have various types of

motors. Conduct a study for ratings, current during load
and compare with the ratings, you would surprised to find
that for most of the places the motors installed have current
load below the ratings, these motors can be replaced by
energy efficient lower hp motor.

BELT DRIVE: Where ever possible replacing belt drive or

chain drive with geared motor would result in savings.

VARIABLE FREQUENCY DRIVE: Add variable

frequency drives to variable load application like blowers,

Motors, Air compressors.

PUMPS: Check the load/quantity of discharge of pump

and compare it with motor rating just by reducing the
impeller dia you can save electricity.

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AIR COMPRESSORS: We can save energy by having

VFD installed for motor; reducing intake air temp also
reduces the electricity. Detecting leakages in compressed air
pipeline also saves energy. Also removing excess bends and
dropping s in pipeline layout reduces load on compressor.
You can ask comp manufacturer to install motor stop
arrangement on no load requirement.

DISCONNECT: Disconnect power to all idle machinery in

plant.

AIR CONDITIONING: Proper setting of temperature can

results in savings of power. Putting up films on windows
can reduce heat load.

You can put vapor absorption unit instead of motor driven

compressor for Central air conditioning.

Spot cooling instead central air conditioning also results in

saving

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COOLING TOWERS: FRP blades could be used instead

of aluminum cast blades to reduce load on motor for
cooling tower fan s. Thermostat can be installed in cooling
towers for unnecessary running of cooling tower when the
desired temp has been achieved.

OVENS & FURNANCES: Heat loss from the oven results

in increase of fuel consumption hence proper insulation is
required for prevention of heat loss.

Waste heat can be utilized for preheating air, feed water or

general purpose heating. This results in significant saving of
power.

FUEL EFFICIENT BURNERS: Conventional burners can

be replaced by high-pressure monoblock burners, which
are fuel-efficient.

ALTERNATE SOURCE: Alternate source of energy can be

used to reduce cost of Energy.

Solar energy can be utilized for lighting, heating water etc.

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Wind energy can be used for ventilators

Alternate fuel like bio fuel/bio mass gas can be used in some
applications.
LDO /HSD can be easily replaced by LNG / CNG.

WATER: Water used from municipality sources are

charged for some industry they are major component of
production like beverages, power plants etc.

Replace water-cooled systems to air-cool type eg Air

conditioning system.

Replace natural draught type cooling tower to forced close

type cooling towers.

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Re cycle wastewater after ETP OR STP to be utilized for

gardening or flush system of urinals.

Washings to be replaced by mopping to clean the floors.

Put sensors in place at bathrooms, urinals etc for

conservation of water.

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INFORMATION TECHNOLOGY: On advent of newer

technology and software storage of data, sharing,
transferring data have become much easier. Now decisions
are made more fast and accurate by installation of ERP
software. These software are boon for banking institution
etc.

By in stalling ERP software like SAP R/3,R/5, BAAN, and

ORACLES etc we can save much of our time from locating
and analyzing data’s. Package covers modules for

Materials management.

Production planning.

Production records.

Finance Module

Sales Module. Etc

Similarly by installing Internet and intranet facility inter

office communications can be improved drastically which
have in turn resulted in higher productivity and saved on
stationeries eg letter pads, memo etc.

HUMAN RESOURCES

While doing important jobs like hiring, training, Appraisal

etc HR plays important in decisions of outsourcing certain

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activities which can be done by third party thus reducing

manpower and generating savings

Activities, which can be outsourced, are

1. Security
2. Catering or canteen services
3. Hygiene
4. Loading and unloading of materials
5. Maintenance (fire fighting, Utilities, Admin, Air
conditioning units, Telephones, Computers etc)
6. Building Repairs.

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ACCOUNTS AND FINANCE

Basic contribution of accounts to cost reductions are

basically linked to following major activity.

BUDGETING: Budgeting is prime function of accounts and

finance where things are budgeted for a financial year and
activities are then monitored through out the years any
negative variance are highlighted in monthly reviews.

COSTING: Prepare or calculate price of product taking

into all cost involved in production as well as other
overheads. Decides when to increase the price or lower the
price of the product.

HANDLING PAYMENTS/SALARIES AND

RECEIVABLES FROM SALE: Enter into an arrangement
with any reputable bank for disbursement of payments
through their channel instead through company

Personnel. This results in savings in terms of manpower

and delays in manual disbursement.

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SALES AND MARKETING :

ADVERTISEMENT : Instead of huge billboards and tele

advertising you should try internet , targeted customer
,inviting customer to the shop floor like school children ,
setting up effective customer care office .Hirirng outsourced
people for marketing after giving them short

PRODUCT MIX : Larger product mix eats up own market

share hence reducing and focusing few mega brands would
generates more profits.

DISTRIBUTION CHANNELS: Distribution channels like

AWS and Retailers should be selected in such a way that
the products reaches the shelves on shortest Period .

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Hope you would have got some idea to control or reduce

cost & Increase productivity .

If you have some doubts I m just email away for your

queries .

Write to me subodh@shumaonline.com

Regards
Subodh

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