December 10, 2013 / benchmarking, Cost Management, LIT
In an ideal world, a fabricator wouldn’t list cost management as a challenge. If production is running smoothly, maintenance is under control, operators are trained, and customers are satisfied, then costs should be relatively stable. However, at a time when the industry hasn’t fully rebounded and uncertainty about market conditions remain, cost is a concern for even the most efficient industrial metal-cutting operations.
The question, then, becomes: How can today’s fabricators better manage their costs? When many companies are already “running lean,” what other measures can they take to keep costs under control or, better yet, save money?
Unfortunately, there are no “one size fits all” answers when it comes to cost management, but the LENOX Institute of Technology (LIT) was able to find a few strategies currently being used by industry leaders. Below are some of the ways top performers are approaching cost:
- Weigh long-term benefits against short-term costs. Whether a hard cost or an opportunity cost, fabricators should weigh their cost expenditures against the benefits or detriments of dollar-allocating decisions. Managers need to make sure they are not shortsighted by upfront costs and, instead, consider the long-term benefits. For example, would investing in a new piece of equipment improve productivity? Would it increase quality? Will it help reduce maintenance costs? This was certainly the case for O’Neal Steel. The company, featured in a white paper from LIT, found that spending $40 more per band saw blade saved the company about $600 a week—a total of $30,000 in annual savings.
- Focus on improving the order-to-cash cycle. An industry study from the Fabricators & Manufacturers Association International (FMA) says top-performing fabricators are focused on increasing the order-to-cash-cycle. The study, covered here by thefabricator.com, says that best-in-class companies are scrutinizing and improving every process in the order-to-cash cycle, including sales, quoting, engineering, customer communication, part flow, packaging, and delivery. According to the article, this shortens the cycle, which improves a host of financial metrics. When employees are able to process more jobs in less time, sales per employee increases and costs per job decreases, all of which outpaces downward pricing pressure from customers and rises earnings before interest, taxes, depreciation, and amortization (EBITDA).
- Set cost-cutting targets using external benchmarks. If your company is focused on reducing costs, make sure you are not setting arbitrary goals. According to a survey from Bain & Company, the problem with many cost-cutting initiatives is that they are based on internal benchmarks that ignore market trends. According to the consultancy, successful companies develop cost-cutting goals after taking into account what their competitors are doing. For example, cutting costs by 10 percent means nothing if all of your competitors are using new technologies that reduce costs by 30 percent. Managers need to make sure their cost-cutting goals are both realistic and relevant.
All three of these methods suggest that successful cost management in today’s marketplace requires managers to look at cost from a high level before implementing any initiatives. In other words, gone are the days of “quick fixes.” By taking the time to approach cost strategically, fabricators can make improvements that have a long-term—and more importantly, sustainable—impact on the bottom line.