Manufacturing production is now recovering its momentum after plummeting sharply last year due to the COVID-19 pandemic. Around 33% of businesses report that their revenues have already returned to normal levels (prior to the current quarter). And 35% of companies expect their revenues to return to pre-COVID-19 levels by the end of this year. Although the manufacturing industry is getting back on the horse, there are many challenges that need to be addressed yet: supply chain disruptions, high raw material costs, attracting and retaining workforce, trade uncertainties, etc. Thus, cost reduction in the manufacturing industry remains a priority for many companies.
What are the main cost drivers manufacturers should pay attention to? How to optimize processes and operations to save resources? How to drive cost savings in manufacturing and logistics? What are common best practices? Here, you will discover top 5 cost saving ideas that work for many manufacturing companies around the world.
Major sources of expenditures in manufacturing and logistics
In manufacturing, cost saving has always been an objective. This means higher profit margins, more market share, and loyal customers. The first step to driving cost reduction in the manufacturing industry is to assess the current situation and determine major sources of expenditures.
In general, manufacturing costs consist of direct and indirect costs. Direct costs include expenditures on labor, materials, and equipment. Indirect costs are overhead expenses that do not come from raw materials or labor. They include maintenance costs, utility bills, salary of non-manufacturing staff, etc. Very often, it is very difficult to identify indirect costs and take control of them, because the old-fashioned approach to cost estimation doesn’t work in smart manufacturing.
Traditionally, manufacturers used to start analyzing costs after all processes are set and the product is designed. Now, companies opt for the Design-to-Cost (DTC) technique which implies assessing product’s cost when you still have the option and the time to make design changes to avoid wasting costs. It has been proven that this is one of the most effective cost reduction strategies in manufacturing. Around 70% of the manufacturing costs of a product can be determined at the design stage. The rest 30% of the costs make up production decisions like process planning and tool selection. To create a comprehensive analysis of main cost drivers at the design stage, you need to take into account the following items:
- Material specification
- Packaging, Shipping and Logistics
- Equipment costs
- Labor costs
- IT-related costs: technology specification, infrastructure costs, etc.
None of these factors can be analyzed in isolation. Every change has direct consequences for the cost and functionality of the rest of the design. Such changes can not be traced in traditional spreadsheets. Thus, it is important to apply software solutions that can detect dynamic interactions, compare design alternatives, and predict the impact and possible outcomes.
Best practices for cost reduction in the manufacturing industry
Make use of technologies across all stages of the supply chain
Industry 4.0 offers a smarter approach to manufacturing, including production, procurement, warehousing, inventory management, and logistics. Thanks to intelligent technologies like Big Data, AI&ML, RPA, computer vision, IoT, blockchain, etc., retailers, suppliers, and manufacturers can ensure greater visibility into operations, reduce costs, and drive better performance. Industry 4.0 technologies were already transforming manufacturers’ operations before the pandemic. In times of the pandemic, manufacturers have only increased their digital transformation initiatives. According to the Annual Manufacturing Report 2020, 87% of manufacturers believed the adoption of digital technologies was important for future prosperity and 89% said digital technologies would improve their inbound and outbound supply chain relationships.
The application of intelligent technologies in manufacturing are numerous. They can significantly improve worker efficiency, automate internal processes & operations, and thus significantly drive cost reduction in the manufacturing industry:
- Product line quality control: checking if the final look of the products corresponds to the required quality level.
- Inventory planning: predicticting the demand to solve the problem of under- or over-stocking.
- Warehouse management: getting information about the parcel: what it is called, who is a supplier, how much it costs, etc.; controlling the work of the conveyor belt and predicting when it is going to get blocked; detecting the arrival of packages and changing their delivery statuses; barcodes and text labels scanning; identifying defects on parcels; using autonomous vehicles and robots in warehouses.
- Logistics & transportation: real-time route optimization; tracking the location of goods during transportation; monitoring conditions under which the package is being transported.
- Equipment maintenance: predicting equipment failures, reducing the number of no-fault-found (NFF) cases, eliminating unexpected equipment downtime.
- Customer service: chatbots; predicting the delivery of the parcel to the customer; customized product recommendations.
- Simplified and accelerated decision-making: price optimization; comparing the performance of different sites; analyzing production plants; developing what-if scenarios; applying predictive models to figure out where to open a new factory, which company site should be relocated/closed, or whether introducing a new product, etc.
- Security: identifying fraudulent transactions, preventing credential abuse, accelerating fraud investigations, and automating anti-fraud processes.
Discover more on the topic:
- Big data and predictive analytics in supply chain: Success stories and tips
- Machine learning in supply chain: 8 use cases that will impress you
- Big Data in manufacturing made simple: Trends, tips, success stories
Ensure production chain visibility
To drive operational excellence, minimize disruption, and increase profitability, manufacturers require more transparency into their products (their origin, authenticity, location and condition) and production processes. If a manufacturing company has several factories scattered across different locations, it is essential that each factory has a real-time visibility into the whole production chain, its interdependent parts, and complex networks. This will help manufacturers plan in advance, react quickly to unforeseen events, and avoid unexpected costs. To establish true end-to-end visibility, all participants of the production chain must collaborate, share data, and make use of common systems.
Make use of good manufacturing practices
Сost reduction in the manufacturing industry can be achieved by simply adhering to the established industry best practices:
- Become compliant with international regulations and legislation: ISO 27001:2013, PCI DSS, ISO 9001:2015, GDPR, and HIPAA, etc.
- Opt for lean manufacturing to eliminate waste of resources, waste of time, or a waste of workspace.
- Maintain documentation on a regular basis.
- Audit your facilities to understand how much you can save on rent, utilities, insurance coverage, office supplies, etc.
- Renegotiate your contracts with suppliers to find more cost-effective options.
- Evaluate production processes to get rid of any operations that are excessively time-consuming or redundant.
- Improve employee retention by ensuring professional growth, good benefits, and decent compensation.
- Optimize your costs on energy by installing smart thermostats and sensors to manage your heating and cooling functions, investing in manufacturing equipment that is energy-efficient or using alternative sources of energy that come from the sun, wind, water, etc.
Improve IT-related costs
Manufacturers that invest in software development ensure the success, reliability, and scalability of their businesses in the long run. But those investments should be wise and sound. IT expenses include the development costs as well as IT infrastructure expenditures. To optimize your IT costs, it is better to plan your expenses ahead instead of cutting them down when you exceed the limits of your budget. Also, there are several well-known cost saving ideas many manufacturing companies find effective:
- Avoid shadow IT
- Reduce your tech debt
- Move from on-premise infrastructure to the cloud or opt for hybrid cloud
- Apply the DevSecOps approach and integrate security into all processes
- Virtualize servers by using containers
- Review your software licenses and decommission expensive software which you can do without or substitute
- Use open-source software
- Virtualize your databases
- Optimize your costs on cloud with DevOps:
- Reduce infrastructure usage in the areas where it can be reduced;
- Automate the CI/CD process and provisioning of IT infrastructure;
- Delete underutilized instances;
- Rightsize your workloads;
- Resize resources if they are not in use;
- Take advantage of autoscaling;
- Move infrequently accessed storage to cheaper tiers;
- Set alerts for crossing predetermined spend thresholds;
- Leverage spot instances for serverless and stuff that don’t require high availability;
- Invest in reserved instances;
- Consider hosting in a different region;
- Use on-demand instances for a demo purpose for example;
- Make use of discounts many cloud providers offer;
- Use cloud provider’s services instead of a home-grown solution which could be more resource-consuming.
5. Find a reliable technology partner
Partnering with a trusted offshore software development company is one of great IT cost reduction strategies for manufacturing companies. According to the Telegraph, companies can save up to 30% on operating costs by IT outsourcing. The Covid-19 crisis has proved that a remote working model is quite effective. So, many organizations are planning to increase their use of IT outsourcing. With a reliable partner by your side, you can avoid the recruitment headache, split all the risks, scale your team easily and develop your solution on time according to your budget.
How N-iX can help you drive cost reduction in the manufacturing industry
N-iX is an Eastern-European software development company that has experience working with business cases of different shapes and sizes. We have delivery offices in Ukraine, Poland, and Bulgaria. Here’s why you should opt for N-iX if you need to drive cost reduction in the manufacturing industry:
- N-iX is trusted in the global tech market: the company has been listed among the top software development providers by Clutch, in the Global Outsourcing 100 by IAOP for 5 consecutive years, recognized by GSA UK 2019 Awards, included in top software development companies by GoodFirms.co, and others.
- N-iX boasts an internal pool of 1,100+ experts.
- Our specialists have solid expertise in the most relevant tech stack including BI, Data Science, AI/Machine Learning, Computer Vision, etc.
- N-iX partners with Fortune 500 companies to help them generate and realize ideas for effective cost reduction in manufacturing and logistics.
- N-iX complies with international regulations and security norms, including ISO 27001:2013, PCI DSS, ISO 9001:2015, GDPR, and HIPAA, so your sensitive data will always be safe.
- N-iX is a certified AWS Advanced Consulting Partner, a Microsoft gold certified partner, a Google Cloud Platform Partner, an Opentext Services silver partner, and a SAP partner.
Featured case study
About the client:
Our client (under NDA) is a Global Fortune 100 multinational engineering and technology company based in Germany. The company operates through a complex network of over 440 subsidiaries and regional entities in over 60 countries worldwide.
To improve the logistics between warehouses in different countries, the client introduced an internal logistics platform. The platform is used by warehouse staff to efficiently allocate and manage goods and materials. However, after being in use in a few warehouses for several months, the platform turned out to have a lot of flaws and was unsuitable for further scaling.
Being a leading global supplier of technology and services, our client has many factories, warehouses, and suppliers, as well as a lot of raw materials and finished goods, which circulate among them. To define interdependencies and correlations between different facilities and ensure visibility into internal processes, the client required a comprehensive software solution for effective production chain management.
To ensure efficient production chain visibility, here at N-iX we are helping the client design a web-based application. The solution will give manufacturers, product suppliers, and decision makers a real-time picture of complex production chains within the company. It will help assess the current situation, estimate possible impact, plan inventory accordingly, predict possible disruptions in the future, and hence increase cost savings in manufacturing.
The development team at N-iX consists of Azure developers, BI engineers, front-end developers, a project manager, and a UI/UX designer. The project is under the PoC stage. Together with the client, our team is working on extending the logic of the solution to cover more use cases making it applicable to every participant of the production chain.
Another team at N-iX is collaborating with the client on optimizing and automating the warehousing and logistics processes with the help of AI, Ml, and computer vision. N-iX specialists work on a computer-vision solution for cameras installed in warehouses based on industrial optic sensors and lenses and Nivida Jetson devices. This solution will allow the client automatically detect arriving packages, scan barcodes, and change the delivery statuses of the boxes.
Also, our team is responsible for the development of the multiplatform CV mobile app. This product will help the client with object detection, package damage detection, and paperwork overload thanks to OCR and NLP for document processing.
N-iX specialists are also involved in improving supplier management processes. In the past, onboarding of a new supplier could take up to one week. Now, with the help of the mobile application and computer vision technology, the whole process is completed within one day. For each new supplier a new account is created with a set of customized labels. Then, with the help of ML, AI, and computer vision, the system is trained to recognize these labels. To ensure the more correct label recognition, our experts additionally take into account the data from the client’s SAP system where all info about parcels is stored. N-iX specialists analyze it and try to match it with the actual description on the label that industrial cameras catch when the parcel arrives. As a result, this helps minimize errors and reduce operational overhead.