May 15, 2023 Effective Cost Management for Manufacturing Success

To maximize operational efficiencies in an uncertain environment, cost management strategies and financial planning technology is key.

Manufacturing businesses today are faced with a variety of financial challenges. With consumers demanding high-quality products at lower prices, manufacturers are tasked with producing superior, yet affordable products all while ensuring their business doesn’t operate at a loss. At the same time, manufacturers are grappling with macroeconomic pressures including supply chain issues, material scarcities, labor shortages and environmental regulations, impacting their ability to meet customer demand while minding costs and revenue streams.

Implementing effective cost management strategies helps manufacturers strike a balance between managing costs and meeting production goals while maintaining profitability. Approaches, including keeping a close eye on expenditures, conducting frequent cost analysis, improving operational efficiencies, and strengthening inventory management, have become more critical than ever for manufacturers to remain competitive and maintain profitability. Critical to the success of these strategies, however, is having real-time visibility into the manufacturing process, including valuable data insights to identify areas where improvements can be made, and costs can be reduced. Only an efficient, well-equipped finance function can provide this.

Optimizing operations and cost using technology

By investing in automated cloud-based financial performance technology, the manufacturing business’s finance team is empowered with greater efficiency and decision making around cost management. Utilizing this technology, finance teams are able to create accurate budgets based on past performance and current trends in the data to forecast and better understand how the company’s financial performance aligns with their cash position. More importantly, these modern tools promote agile budgeting and forecasting essential for managing cost and operations in today’s constantly shifting economy. Finance leaders can quickly and easily run different scenarios based on fluctuations in the availability of, and/or cost of, materials through real-time data, and make necessary adjustments without compromising quality.

Some key benefits a financial performance management platform can provide manufacturers in today’s economy include:

Improved Cost Analysis: By running regular cost analyses, operations managers can identify trends and patterns in their expenses, helping them to pinpoint areas where costs are increasing and implement cost-saving measures. Doing this on a regular basis enables finance teams to quickly recognize which processes and systems are no longer serving the organization and allow them to make appropriate adjustments before unnecessary costs escalate.

Supply Chain Negotiation: As inflation skyrockets, the costs of goods become less predictable, not to mention supply chain hiccups that continue to delay scheduled deliveries. Any manufacturer can tell you about the money lost due to late deliveries of raw materials. By having operational planning information, budgets and forecasts all in one place, connected to outside workflows, manufacturers can negotiate with their suppliers to get the best possible prices for raw materials, components, and other inputs. Having this level of insight also allows manufacturing teams to establish partnerships with reliable suppliers to reduce costs and ensure a steady supply of materials.

Labor Cost Management: In a world where supply and demand forecasting is limited by global disruptions, it’s essential for manufacturers to effectively manage costs they can control. Labor is a significant, sometimes hidden, cost for manufacturing companies. Unlike other industries, manufacturing organizations are unable to offer benefits in exchange for a marginally lower salary (i.e., flexible working hours and remote work are hard to implement in manufacturing). Considering labor shortages, manufacturers need to be creative when it comes to managing costs and employee retention to ensure they are getting the most out of their workforce in productivity, efficiency, and utilization while also keeping them engaged through workplace culture, incentives, or upskilling to avoid turnover – an additional hefty cost that many businesses today are facing.

Financial performance management technology can assist in labor cost management by forecasting labor costs based on projected staffing levels, salaries, and benefits, enabling organizations to plan and budget for labor expenses effectively.

There are many costs that affect a manufacturing company’s balance sheet. From the hidden costs of labor, to facility operations, to the ever-rising costs of raw materials, unexpected and unplanned costs can hit manufacturers hard. In order for cost management strategies to be effective, manufacturers need to be proactive in their budgeting and planning processes.

Manufacturing companies need to have a tight process when tracking and managing costs – this includes a process for managing what personnel, production and material costs look like with current market challenges and future market possibilities, and the ability to do so without any surprises. With a comprehensive financial performance management solution, manufacturers can gain real-time insights into their operations and make necessary adjustments to remain profitable, competitive, and stable no matter what changes come their way.

About the Author:
Melissa Harrell Frey is senior solution marketing manager at Prophix. Prior to her time at Prophix, Melissa spent 11 years as a corporate controller at Educational Services of America.

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