Don't Cut Costs, Optimize Manufacturing Operations

Don't Cut Costs, Optimize Manufacturing Operations

A holistic approach to meeting customer demands builds a better business.

Manufacturing optimization once operated by a fairly straightforward, if narrow, definition: Cost reduction. And while for some manufacturers that equation may still be standard operating procedure, that's not the case among leading manufacturers, says the Hackett Group, a business advisory firm.

For those manufacturers, the definition has both shifted and expanded. Rather than simply reducing costs, optimization is about growing the business -- which requires both an improved understanding of the performance capabilities required by the customer and the total manufacturing costs needed to deliver those capabilities.

"The shift is occurring because competition is ever-evolving," says the Hackett Group's John Ferreira, co-author of the research report, "Balancing Act: How to Ensure Your Manufacturing Operations are Enabling Your Company's Growth Agenda."

Customers are demanding ever-decreasing costs to support them, Ferreira says. They want faster cycle times and more unique SKUs from their suppliers even as they provide less reliable demand patterns and smaller re-order quantities.

"This shift impacts the type of equipment deployed, planning and forecasting, and supply chain operating processes," he says. "We have found that organizations are beginning to place a greater emphasis on network flexibility and agility. Investing in these tends to increase costs slightly but allows for improved customer response and revenue attainment."

The Hackett Group report shared several best practices in use by best-in-class manufacturers to both lower costs and enhance a manufacturer's market position and potential revenue growth. They include:

  • Postponement strategies that push final product configuration to the latest possible point in the manufacturing process
  • Providing incentives for individual contributions to shared total cost of manufacturing metrics rather than incentives to, for example, reduce inventory at the cost of customer service
  • Placing manufacturing close to demand to shorten supply chains and provide quick response to demand changes.

General Mills' Holistic Perspective

General Mills is among the manufacturers that take a holistic view to optimizing their business. Indeed, the name of one program says it all: Holistic Margin Management. This companywide initiative uses productivity savings, mix management and product realization to generate funds to reinvest into sales-generating activities.

Cumulative savings from this initiative reached $2 billion between fiscal 2010 and 2014, with a cumulative goal of $4 billion by 2020. Specific actions taken to advance this program include burning byproduct oat hulls as an alternative source of energy in a milling plant, and re-engineering production, packaging and scheduling in one of its businesses.

Separate from its Holistic Margin Management is a second General Mills strategy called Continuous Improvement, which focuses on loss elimination. One example is the manufacturer's Ingredient Over-Usage Reduction Program, a 12-step process used to identify and remove losses associated with the process of converting raw materials to finished products.

"This focus on understanding and removing system waste has benefited product quality and reduced production costs while improving system capacity," says General Mills in its latest sustainability report.

Indeed many manufacturers have accrued similar multiple benefits from taking a lean or continuous improvement focus. Let's first be clear, however: Lean manufacturing is not a cost-reduction strategy. Lean at its core is about delivering customer value and minimizing waste along the way. In many instances, however, lowered costs are a byproduct of removing waste and optimizing value streams. Moreover, the right improvement programs and projects, be they rooted in lean thinking or not, have the potential to reduce costs. To cite specifics, the 2014 IndustryWeek Best Plants winners and finalists documented median savings of $6,694 per employee in a calendar year due to specific continuous improvement efforts. At the low end that translated to $206 per employee and at the high end it surged to more than $22,000 per employee.

Are your manufacturing optimization efforts serving you so well?

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