May 18th, 2023
Looking to Cut Manufacturing Costs? First Weigh Risk vs Rewards
With all of the supply chain issues and labor shortages we have seen during the last few years, manufacturing costs have risen dramatically. While things are settling down in the supply chain for the most part, the higher costs of materials, components and labor seem like they are here to stay. Because of this, coupled with a slowing economy, door and window fabricators now seem focused on cost cutting. Cost cutting can have rewards but not without a degree of risk. So let’s examine the rewards versus risks associated with trying to cut costs.
The biggest advantage that cost cutting provides is the potential for improved margins. I use the word potential for a reason. The lower your cost to manufacture then the better your margins look, at least in the short term. Better margins can help you to grab additional market share by enabling you to better match competitive prices or offer discounts to potential customers. So, better margins can translate to improved profitability. However, if not undertaken prudently, cost-cutting measures can come back to bite you in the long run and actually have a negative impact upon profits.
So, what are the risks? The risks basically revolve around the methods that are used to cut costs.
1. Cutting jobs and letting go of people: The risk here is that qualified manpower in this industry is very difficult to find, so if you let go of your people when business is slower, you may find it difficult, if not impossible, to get someone back into those jobs when business picks back up. For this reason, I have seen companies offer employees voluntary reduction of hours or job reassignments as opposed to layoffs. I have also seen limited layoffs based upon job performance as companies want to keep their best employees, letting go of the ones that are not as reliable or productive.
2. Sourcing lower cost materials and/or components used in your fabrication process: Anytime you change a material or component in the fabrication process then you introduce an element of risk. Alternative materials and components must be thoroughly tested to ensure they both process and perform “equal to or better” than what you are currently using to maintain the quality and performance levels that your customers have come to expect. The processing characteristics are much easier to evaluate. Run the new material or component on the line and if it processes just as efficiently, versus your current material or component, then the manufacturing people are happy.
However, the second part of this equation is not so easy to do. How do you evaluate the performance of a substitute material short of building doors or windows, and waiting 20 or so years for the field results to play out? Sure, there are accelerated tests you can perform that are designed to mimic what happens in the field, assuming you have a laboratory equipped to do the necessary testing. These evaluations can be helpful but do not account for 100% of the possible field scenarios and levels of abuse that your fenestration products may be subjected to over the years. If the material in question is chemically equivalent to what you are now using then the risk is very low; but if it is a proprietary compound, with a formula unknown to the fabricator, then the risk is greater. When this is the case, you must weigh the cost savings of switching to a lower-cost material or component versus the potential for increased costs of warranty repairs and possible loss of market share, which may result if the alternative material or component does not perform as well as the incumbent.
3. Automate some or all of your manufacturing process, thereby improving efficiency while reducing the company’s reliance on the labor pool: The main risk here is that you are adding leverage to the company balance sheet by adding to the corporation’s debt. Monthly loan payments mean a greater break-even point so greater revenue levels may be necessary to support the higher level of debt. If the economy gets worse, you could find the company gasping for revenue to make those bank payments! This is not meant to undervalue the positive impact of adding automation. Many companies are in a position to do this with cash and do not have to go into debt. But not all. With that being said, improving production efficiency does not always have to mean automation. Sometimes it can begin with simple solutions.
You might be surprised about some of the simple things that are observed when customers ask me to evaluate their IG line asking for tips on how to improve efficiency. I encourage customers to have their employees wear pedometers during such an evaluation process to see how many steps they are taking during the fabrication process. By rearranging the locations of machines and raw material bins or using caster tables to slide (versus carry) glass across to the next workstation, manufacturing efficiencies can be significantly improved by cutting down on the number of actual steps that employees are taking during the day. At the same time fatigue is greatly reduced and safety is improved.
So, there you have it. Cost reduction is a hot topic today in the fenestration industry as door and window fabricators seek to maintain profitability in the face of increasing costs. Just be sure to weigh the possible risks versus returns so that cost reduction doesn’t cause a backfire down the road!
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