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Cost Reduction Strategies for Manufacturing Unit

In: Business and Management

Submitted By dobus
Words 2408
Pages 10


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


6.Information Management

7. Finance

8. Human Resources

8. Sales & marketing






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.




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.


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.



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.


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


for the material. In Reverse auction where you ask the higher bidder to supply items. Many companies have fulltime dep’t for e- sourcing.



Several countries the federal Government have certain taxexempted 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.


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.


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.


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 .


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.


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 .


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.


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 .




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.


PHYSICAL STRESS : Study the positions of worker while working eleminate stress generating position , environment which would help in better 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.


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.


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 .


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 .


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.


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


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.


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.


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.


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


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.


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.


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 .


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

Regards Subodh

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