The number one challenge of Chinese suppliers, as revealed by a recent survey, is reducing manufacturing costs. Their costs keep rising, but price competition is stronger and stronger. So how can you reduce costs?
Traditional methods that often fail to control costs
Factory owners spend a lot of time trying to reduce manufacturing costs. Unfortunately, they tend to focus on only these three levers to keep their costs under control:
- Negotiating down material prices
- Limiting salary raises
- Pushing the employees to work hard, for long hours
These are actually NOT the main drivers of cost though…
Chinese factory owners are missing the major cost drivers in their own factories!
Here is how to reduce costs in a factory by 15-25% after one year of re-organization:
- Simplifying the flow of materials through different processes
- Improving the way each process step is conducted
The key is to eliminate as much waste as possible because waste, as you can see below, makes up quite a large proportion of manufacturing costs which can be reduced or eliminated fairly easily.
What is “Waste that can be eliminated easily”?
Taiichi Ohno, the father of the Toyota Production System, listed 7 types of waste that can be found in every factory. This has now been updated to ‘8 wastes‘ with the addition of ‘skills,’ too. To be specific, the underutilization of employee’s skills, knowledge, and talent.
Eliminating waste completely is virtually impossible. But a good part of it can be eliminated easily.
I listed the traditional 7 categories of waste below. All of them can be reduced by 50-90% within 1 year.
- Transportation: moving materials or products from one place to another, simply because the different steps of production are not side by side.
- Inventory: the company’s cash is tied up in inventory that sits still most of the time and that necessitates lots of warehousing space.
- Unnecessary motion: process steps that don’t add value to the product, such as walking to pick a bin of products.
- Waiting: operators who can’t work because they are waiting for materials or because their machine has broken down; products waiting for weeks in a queue.
- Over-processing: spending some time/energy that is not necessary during a process. (Maybe no work instructions exist, maybe they are not adequate, or maybe they are not respected).
- Over-production: producing more than current orders call for, “just in case”. It might stay in inventory for a long time and lose value.
- Defects: processing some material in a way that is not satisfactory. I already detailed the costs of defects before.
How to eliminate wastes from your organization? We’ve got you covered with this, too. First, watch the video below to learn how to do an 8 wastes analysis:
When you’re done with the video, download the template we use to do our analyses for free here.
Factory managers need to grasp some counter-intuitive concepts in order to get success
Is it cheaper to make 1 piece at a time, or 10,000 pieces at a time?
Everybody thinks “10,000 pieces at a time”. And they have been proven wrong by many studies. A fun simulation on this topic can be watched here on Youtube.
Here is a real example where this logic was taken to the extreme — with great success. It is described by the CEO of Freudenberg-NOK (a manufacturer of sealing components) in an excellent book called Becoming Lean: Inside Stories of U.S. Manufacturers.
Initially, they had several disconnected and distant processes. They moved progressively toward making 1 piece at a time. Here are the results:
These are impressive and very counter-intuitive results, aren’t they?
One-person cells, like in this example, are pretty rare. But they are not necessary for processing 1 piece at a time. Even the cell shown in “phase II” is vastly more efficient than what I see in 99% of Chinese factories.
Note: Switching to phase II or to phase I necessitates cross-trained operators who work on well-maintained and right-sized machines/equipment. It does not necessitate large capital investment, but a lot of training and new habits.
What happens when a good part of the waste is eliminated?
If prices are maintained constant, the profit margin will be much higher and we’ll still have reduced costs by 15-25%:
Prices don’t necessarily need to be reduced since customers will reap a lot of benefits: higher quality, shorter lead times, lower MOQs… Actually, sales typically go up in these situations!
How have you reduced manufacturing costs in factories? Have you got any experiences to share about waste-elimination initiatives that succeeded or failed? Let me know by leaving a comment.
Editor’s note: This post is a version of the 2013 post: How to reduce costs in a factory? The lean approach from QualityInspection.org which has been updated and repurposed for Sofeast readers.
Is it possible to get help to reduce your manufacturing costs from Sofeast?
Yes, this is something that we assist many clients with! Sofeast’s expert manufacturing engineers can help diagnose where waste is occurring and put in place measures to eliminate it.
In addition, we also troubleshoot areas such as defective products and production delays, too.
Our engineers usually use the proven 8D Problem Solving Process when tackling organizational problems, such as waste elimination:
Note: The 8D template has to be adapted in the medical industry, for example. The company needs to add a step (assessing the impact of the countermeasure/s on the safety and effectiveness of the device), as requested by ISO 13485.
How does our manufacturing troubleshooting solution work?
Firstly, you’re assigned one of our manufacturing experts with the most relevant experience in your field who visits the factory and observes the processes and situation live.
If the issue/s are well-known and the fix is pretty straightforward, our engineer can make suggestions and set up an action plan, and then we can provide technical guidance on how to apply the plan.
If the issue is relatively complex (e.g. several distinct problems to approach separately, or disagreement among the factory staff on what the issue really is), it usually makes sense to spend more time at the “plan” stage before going into the “do” and “check” stages.