In this article, we’ll cover:
· What Are Production Costs?
· 24 Ways to Reduce the Cost of Production
· Reduce the Costs of Production With NetSuite
· Production Cost Reduction FAQs
One of the most successful ways that manufacturers can improve their profitability and their business viability is by reducing the cost of production. Production costs are the all-in expenses it takes for a manufacturer to make goods and bring them to market. Because there are so many cost inputs at even the smallest of manufacturers, figuring out how to minimize spending can seem daunting. But through effective technology investments that deliver visibility and coordinated management centered on industry-proven best practices, such as lean manufacturing, manufacturers can lower their production costs. The following guide explores some of the most common ways to accomplish this goal.
What Are Production Costs?
Production costs, also known as the cost of production, refer to the total expenses incurred by a company to manufacture and bring a product or service to market. These costs are essential for management to understand as they directly impact the pricing, profitability and competitive positioning of the company’s offerings. Production costs can be broadly categorized into direct costs and indirect costs. Direct costs are those that can unquestionably be attributed to the production process, including raw materials and the labor involved in manufacturing. Indirect costs, or overhead costs, aren’t clearly tied to the production process but are necessary for operations, such as rent, utilities and administrative staff.
Understanding production costs is crucial for businesses as they strategize to minimize expenses and maximize efficiency. These costs are a key factor in determining the break-even point — the price point at which a product must be sold to cover its production costs. By analyzing and optimizing production costs, manufacturers can make informed decisions about pricing, investment in production technology and process improvements. This can lead to more competitive pricing for consumers and better margins for the company, ultimately affecting the business’s bottom line.
Key Takeaways
§ The cost of production in manufacturing includes all of the direct manufacturing costs, manufacturing overhead and indirect expenses necessary to bring goods to market.
§ Lean manufacturing principles that reduce waste across both materials and processes play a huge part in reducing production costs.
§ Manufacturers can also drive down production costs through optimized design of products and packaging geared toward reducing raw materials and labor needed for assembly, including standardizing on parts wherever possible.
§ Investing in automation and technology can help speed up production and offer visibility into processes, allowing manufacturers to continue to improve efficiency and reduce waste.
24 Ways to Reduce the Cost of Production
Because the cost of production includes such a variety of different cost inputs, there are many ways manufacturers can start bringing it down. However, since cost of production is a big-picture metric, companies must coordinate the simultaneous execution of myriad strategies over time in order to truly make a dent in production costs. This coordination serves as the basis of manufacturing cost management, which considers all of the levers described below to lower the cost of production and boost profitability.
1. Negotiate With Suppliers Effective supplier negotiation and strong supplier relationship management practices can yield tremendous savings on production costs, and manufacturers will build a more resilient supply chain in the process. Manufacturers can bring down costs by negotiating preferred contracts that guarantee certain volumes over time to lock in lower prices. They can also craft supplier contracts that guarantee exclusivity to certain suppliers in exchange for price breaks, or they can ink deals with a broader range of regional suppliers that could reduce distribution costs. Ultimately, there’s a lot of room for creativity and deal-making on this front to save money and reduce risks that could ultimately impinge on the bottom line. Read All 24 Ways to Reduce the Cost of Production Here.