How do you analyze manufacturing costs with minimal risk?

1 Define your cost categories

The first step is to identify and classify your manufacturing costs into different categories, such as direct materials, direct labor, overhead, fixed, variable, and semi-variable. This will help you to track and allocate them more accurately and consistently across your products and processes. You can use standard costing methods, such as activity-based costing (ABC) or lean accounting, to assign costs based on the resources and activities involved in each stage of production.

2 Collect and verify your cost data

The next step is to collect and verify your cost data from various sources, such as invoices, receipts, payroll records, inventory reports, and production logs. You should ensure that your data is complete, reliable, and up-to-date, and that it reflects the actual costs incurred in your manufacturing operations. You should also check for any errors, discrepancies, or anomalies in your data, and correct them as soon as possible. You can use software tools, such as enterprise resource planning (ERP) or manufacturing execution systems (MES), to automate and integrate your data collection and verification processes.

3 Analyze your cost drivers

The third step is to analyze your cost drivers, which are the factors that influence or determine your manufacturing costs. For example, some common cost drivers are the volume and mix of products, the quality and availability of materials, the efficiency and skill of labor, the utilization and maintenance of equipment, and the level and type of overhead. You should identify and measure your cost drivers, and understand how they affect your cost behavior and performance. You can use tools, such as regression analysis, variance analysis, or value stream mapping, to quantify and visualize your cost drivers and their impacts.

4 Benchmark your cost performance

The fourth step is to benchmark your cost performance against your own historical data, your industry standards, or your competitors' data. This will help you to evaluate and compare your cost efficiency and effectiveness, and to identify your strengths and weaknesses. You should use relevant and realistic benchmarks, such as cost per unit, cost of goods sold (COGS), gross margin, or operating margin, and adjust them for any differences in product features, quality, or market conditions. You can use tools, such as benchmarking reports, dashboards, or scorecards, to monitor and communicate your cost performance.

5 Identify and prioritize your cost opportunities

The fifth step is to identify and prioritize your cost opportunities, which are the areas or actions where you can reduce or optimize your manufacturing costs. For example, some common cost opportunities are eliminating waste, improving quality, increasing productivity, streamlining processes, negotiating better prices, or switching to cheaper or greener alternatives. You should evaluate and rank your cost opportunities based on their potential savings, feasibility, and alignment with your strategic goals. You can use tools, such as cost-benefit analysis, return on investment (ROI) analysis, or Pareto analysis, to estimate and prioritize your cost opportunities.

6 Implement and review your cost actions

The final step is to implement and review your cost actions, which are the specific plans or measures that you take to realize your cost opportunities. For example, some common cost actions are implementing lean manufacturing, adopting six sigma, applying kaizen, outsourcing or insourcing, or investing in new technology or equipment. You should execute your cost actions with clear objectives, timelines, and responsibilities, and monitor and measure their results and outcomes. You should also review and revise your cost actions regularly, and incorporate feedback and learning into your continuous improvement process.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?