Updated: April 25, 2024
Ask ACE
Ask ACE: How do I stay profitable despite rising costs?
By Gary Hazard, GMH Consulting Engineering LLC
Q: I have little control over rising costs of goods sold. How do I stay profitable?
ACE advises: Costs always rise; your challenge is to remain competitive when they do. Shake up the status quo. Cut activities that do not contribute directly to revenue. Address these common causes of waste to fine-tune the rest.
1. Defects and errors: While quality is important, you also need to consider the cost of perfection. Your customer has already told you what it wants, and what it is willing to pay. Think twice before implementing redundant approvals to deliver unwanted perfection. Instead, challenge your employees.
Manufacturing workers are well-positioned to recommend process changes to reduce product defects. Managers have insights into process inefficiencies that higher-ups may miss. In the business office, repetitive work can be streamlined, standardized, or automated.
2. Waiting: Manufacturing bottlenecks have many causes, from old machines, to inefficient processes, to slow employees. In the business office inefficient inter-departmental communications may delay response time.
3. Inventory: Serve your customers, but do not manufacture product before it is required. If you do, you increase that period’s cost of goods sold — and reduce net profit. Likewise, you do not want to pay storage costs for product that you wait too long to sell.
4. Motion: If a manufacturing employee repeatedly crosses the plant floor to complete a task, change the layout. Move product in as linear a path as possible across the floor and out the door. Seat office employees near the resources they need.
After identifying the suspects, step back to consider how they affect your whole process. Much as alcohol and prescription narcotic interactions lead to disastrous results, negative interactions between key process variables result in costly inefficiencies. Address these interactions by identifying and quantifying the variables and assessing their impact on the full process. Then design and implement controls to optimize results, and financial performance.
Gary Hazard of GMH Consulting Engineering LLC has extensive experience in lean manufacturing, quantitative process analysis and process design. He can be reached at gary@gmhconsultingeng.com.
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