How to Reduce Production Costs?

How to Reduce Production Costs?

Production means cost. Regardless of product/service, each production activity cannot start/continue without raw materials, semi-finished products and/or labor. Just like a mathematical equation, the production activity should have an input so that a product can emerge. Each input revealed and each vehicle used for production is a source of cost.

Another fact is that a production business always goals to earn more income. Cost reduction of production processes is one of the most reasonable steps to reach this goal. When it comes to strategies of reducing the manufacturing cost, you can see and experience that there are many different perspectives. In this article, we will mention about the methods of reducing cost, but we need to remind you that these methods should be used to optimize the cost. Because, in some cases, it may be necessary to increase certain costs, or you may need to regulate costs in less profitable but the most efficient way in order to meet the general user expectation about production.

Related article: How to Calculate the Manufacturing Cost?

Improving Every Stage of the Production

The production process consists of many sub-stages. Procurement of raw materials required for production, proper processing of the supplied product into stocks, making the production with the product in stock, conducting the marketing activity of the manufactured product and the final stage of the selling product, all of these processes should be considered as a production stage. Because, when you try to make a calculation of the manufacturing cost, you can observe that you refer to these processes in all expenditures you listed as cost item. To summarize, production is not just about manufacturing. Before asking the question “How to reduce the manufacturing cost?”, you should analyze all sub-processes of your production accurately and control your expenditures.

One of the most important mistakes made by business managers is to focus only on the manufacturing stage and to ignore the other stages in the production activity. A manufacturer who failed to notice a major error in one or more stages of marketing, sales, quality management, human resources, stock tracking and procurement, may soon see that efforts to reduce the manufacturing costs are wasted. For instance, a manufacturing business working on a new product that will make a difference in the sector may not have analyzed the expectations of the customers correctly, may have acted solely with the insights of the employees and developed a new product which is very advantageous in terms of costs compared to its competitors. And it may try to take the leadership in the sector by reflecting this cost advantage to the sales price. However, if this product does not have specifications that meet the desires of customers, it is quite possible that you will not be able to reach the sales figures you expect from that product and you will suffer a total loss as a result. In order to avoid such situations, you should consider all your production processes integrally and actualize some improvements that will eliminate the disruptions in all processes without slowing down.

Adopting the Perception of Optimizing Costs Instead of Perception of Reducing Cost

As we mentioned at the beginning of this article, the main goal of this article is to inform you about optimizing costs rather than reducing costs. The world of production is a world that changes day by day and is constantly renewed in line with the technological developments. When considered from this point of view, it is very important for the future of your business to build your cost reduction strategy in terms of close, medium and long. A cost reduction strategy that will give you a price advantage for a recent date and thus give you the chance to outperform your competitors, may cause you an unforeseen loss in the long term. For instance, it is possible to increase your profit in a short time by replacing a raw material that you use in manufacturing process with another raw material that is relatively equivalent and cheaper. However, in the upcoming period, in case that your new raw material cannot meet your needs due to its capacity, the problems you will encounter on that day may immediately melt the difference in profits you earned in the short term. As a forward-thinking manufacturer, all you need to do is optimize your manufacturing costs suitably for outlook and future plans of your business.

Cost Analysis and Management

Expenditures are one of the most important branches of management that should be involved in a production activity. If the fixed and variable costs that we explained in detail in our article named “How to Calculate the Manufacturing Cost?” are managed correctly, it can lead to a significant improvement in the overall production costs of the business. The costs that are evaluated in the subject of fixed costs and should be spent periodically in order to continue the production actively regardless of the amount of production can be reduced to optimum levels after a good analysis. Energy expenditure is one of the most significant fixed costs. You can achieve a significant reduction in this important expenditure item by analyzing the total energy expenditure of your business and making the necessary improvements.

The items listed above outline some of the points you need to consider about reducing the manufacturing costs. Cost reduction strategies of manufacturing business may vary depending on their sector, period and type of business. It is possible for manufacturers who want to invest in future to do a comprehensive study on cost reduction strategies and to improve the operational efficiency by correcting the problems that cause cost increase in business.

Related Article: What Are the Methods of Production Cost Calculation?