Although recent developments in planning and Customer Relationship Management (CRM) have focused more on top-line benefits—growing revenue—the bottom line is still greatly dependent on controlling costs. Companies with a lower operational cost structure enjoy an obvious advantage in profitability, and the ability to adjust pricing to meet competitive pressures if necessary, to maintain or gain market share.

Costs are really just part of the scoreboard. When a company implements world-class operational processes, it improves multiple measurements simultaneously, including cost, lead times, inventory and customer service. This approach is superior to a pure cost reduction focus without associated business process change, which can negatively impact other operational measurements. Localized cost reduction efforts can often increase costs in other areas. Moving production overseas to an area with lower labor rates, for example, will increase costs for procurement, transportation, inventory and reduced flexibility, among others.

The relative cost of source/make/deliver, and therefore, the opportunities for cost reduction, will vary with the specific industry and the kind of products the manufacturer makes. Most manufactured products today have relatively little direct labor content, generally less than 20% and often less than 10%, whereas the material content of most products is more than one-half the cost-of-goods sold (COGS). The rest is “overhead.” Since most direct labor costs tend to be fixed, effective deployment of these resources can reduce unplanned manufacturing overtime, premium expediting and outsourcing, as well as dramatically reduce cycle times. Since material cost is the dominant cost, significant opportunities for reduction lie in analyzing current spending and devising effective sourcing strategies for material. Overhead reduction is always a fertile area for cost reduction, using automation to streamline the procurement, manufacturing and customer management processes.

Additionally, fulfillment costs have not received as much attention as it deserves; inventory cost, transportation, admin costs, electronic communications, and storage account for a significant part of the cost of doing business. Fortunately, improving customer service can also generate cost benefits at the same time. Improve business performance visibility Today’s fast-moving, ever-changing manufacturing environment demands faster responsiveness to changes in the market, product innovation and supply chain events. In this environment, ignorance is one of the greatest threats to a manufacturing company’s health and success. Executives and senior managers must understand how the enterprise is meeting strategic objectives. Middle-level managers need visibility into how they are performing against tactical objectives. Responsible individuals must be notified immediately when supply chain issues threaten the completion of objectives, so actions can be taken to ensure customer delivery and quality requirements continue to be met.